The Era of Policy Ineptitude

Sometimes it’s challenging to bring a unified daily thesis on these pages given what feels like a consistent flow of cross cutting policy shifts and private sector dynamics at any given point in time. But there are other days, where it seems far clearer. Yesterday showed policy ineptitude across the board.

The day of course started with the Treasury announcement of increased buybacks. In and of itself, a relatively small move in the context of a huge market. More important was it showed the administration blinking with yields at these levels and starting to scramble to do something about it. By this morning, most of the benefit was to gold, as both the stock and bond pops significantly reversed.

Not to be outdone, Warsh delivered minutes that were on the margin less hawkish than many expected. 2yr rates fell on the release. So much for all that rhetoric of being the ghost of Volcker. Instead it seems the committee is happy to wring hands and keep collecting information rather than doing much in the short-term.

And finally of course there is Hormuz, where for all the talk of a “perfect” corridor that is delivering 15-20mln bbl/d of oil supply each night, oil prices seem to go up damn near every day. Medium term prices - say the Dec26s Brent contract we keep an eye on here - are at highs of the post-war period. All the bullshit in the world it seems isn’t resolving the 8-10mln bbl/d in reduced supply from mideast producers and the physical markets are waking up to reality.

So what do we make of all of this together? In short, its pretty fucking incompetent. Bessent wants lower yields and higher stocks and instead is just juicing gold. The Fed wants inflation at target, but will do nothing about it. And the President wants lower oil prices and thinks posts to his elite 100k/mo platform will create barrels out of thin air.

While these feel like normative statements, from a trading markets perspective, it’s important to simply keep in mind the consequences of incompetence, not whether it’s a good thing or not. And there the picture continues to favor many of the themes we discuss here - gold, oil, less so bonds, and even less so stocks which increasingly look like they can’t be juiced higher despite constant admin efforts.

A Look At The Numbers

Bessent’s blink at the bond market yesterday ginned up about 6bps of relief on benchmark 10yr yields, but that has largely reversed by this morning, highlighting the minimal impact in the market.

The move in stocks was even less impressive, pretty swiftly reversing. If this is all intended to surge asset prices that matters to savers, they aren’t doing a good job of it, in part because stocks are already pricing in extraordinary outcomes.

It seems the only winner from the Bessent nonsense was the goldbugs who enjoyed a 4% pop on the day, highlighting that any incremental easing efforts out of Treasury may well just flow into hard assets rather than benefiting the real economy.

The Fed minutes also came out yesterday and given Mr. Warsh’s circumspect pressers these days take on greater importance. Most informed readers took the minutes as a bit more dovish than expected (here and here), particularly in light of the weaker jobs data that has come since. The short-rate markets concurred, booking a modest drop in 2yr yields on the news. It seems wait and see is increasingly becoming the consensus.

Finally we turn to oil which has quietly returned to daily rallies despite the rhetorical spin that everything is perfect coming out of 1600 Pennsylvania Avenue. The curve has increasingly flattened in recent weeks as the long-end has risen. It seems the market is starting to question whether this all gets resolved soon.

At this point Dec 26 oil is back to nearly its highest level since the war began and creeping higher every day. It seems Bessent is running out of room selling out there as those involved in the physical market start to realize that there just aren’t enough barrels coming relative to demand ahead.

Bottom Line

Typically when policymakers outline their goals and align their rhetoric they push toward those aims. Draghi says whatever it takes and then follows through. Bernanke makes clear liquidity will be abundant and it is. Trump & Biden say stimmies are coming and the check is in the mail.

What’s going on now is more insidious than past policy efforts. First the administration is consistently making claims inconsistent with reality for efforts with macro consequences like the Iran war. Second policymakers are stating goals with little intention to follow through. And third, they are running into challenges with marginal effort limiting their minimal efforts.

While historically it has made most sense to trade markets on expectations that it’s best to follow policy makers wishes (when not fully priced in), these days it seems the exact opposite is true.