What are you making of these these wild Gyrations that we were Witnessing last week in particular we Expect those sort of sudden swings on Equity markets but not certainly on uh Government-backed especially u.s Government-backed debt markets Well you know the violence of the move Was uh really breathtaking And it took the market by surprise uh There was some great analysis that was Out on the On the terminal last week that showed That the volatility of the five-year Treasury and that was where we really Did see kind of the most abrupt Large moves in that five-year center of The curve That that the volatility was at the Lowest since the 1960s So if it was a coiled spring ready to Just Pop with any little bit of news that Suggested that inflation was going to be More than transitory And we are indeed starting to get Signals that that could be the case Well danielle i mean where would the Inflation a come from and Uh b the other part of all this is how Much was the bond market looking at this 1.9 Trillion dollar relief package which is In the senate
And looking at it from a binary Perspective i.e it's far too much or It's fought Or it's or it's too little or just about Right here in some senses and What what did you make of this debate Too and how it really impacts what's Going on With treasuries So the stimulus is only one part of the Equation that is driving the The inflation overheating narrative uh No more did some good work recently that Showed that this next 1.9 trillion Uh that they're going to probably see Around 20 cents on the dollar of Stimulus Flow into the economy a disproportionate Amount of what is being spent By the us government is being saved and That's one of the reasons that larry Summers came out against this he wants More Targeted relief but the other part of The equation Is the fact that you have empty Containers shipping back to shanghai You have freight and shipping costs at The highest they've been in years You've got input costs at the highest They've been in In 12 years and supplier delivery times Stretched out to the longest Since including one month of post covet
Since the late 1970s If you speak to any manufacturer here in The united states They are really suffering under a margin Squeeze right now and Hoping that they can pass these prices On through to the end Buyer so again it's not just the Stimulus that's driving this inflation Narrative It's also the fact that that in the Producer pipeline we're seeing Major sources of rising prices and you Still have to figure We're going to have a little bit more Demand here because we had texas Where i am the ninth largest economy in The world Uh by the size of its gdp a lot of it Got hit So you've got more even more demand for Copper and steel and lumber coming up In the coming months that suggests this Will be beyond Transitory in nature That's right commodities up about 60 Percent uh across the board from a year Ago The thing is danielle there is a Disconnect between What the market thinks about inflation And what the fed thinks about Inflation what's causing this i mean Hasn't the fed been clear
Well the fed has been very clear i don't Know that the fed Is necessarily prepared for what it's Asking for If you look at the gap between where the Core pce Where the the fed's favorite inflation Metric has been for the past few years It is so far off of trend that for the Fed to satisfy Its new mandate of average inflation Targeting saying we're going to let Inflation run hot As long as we can bring it back up to Trend that could take years And i do not think that the fed policy Makers are prepared For what the bond vigilantes will do if You see truly a sustained rise In in in inflation that does start to Bleed through We're seeing it in record high auto Prices record high home prices here In the united states it is feeding Through to the consumer And the container situation that i was Describing earlier Is actually its own source of food Inflation And that's the that's the most difficult Kind of inflation for households to Shoulder of course Front end close to zero longer term Searching prompting some to say that
Perhaps it is time for the fat to do the Twist Operation twist that is your thoughts on That Well it does seem to make sense and There is enough steepness in the yield Curve to draw a parallel between the Last time that the fed launched Operation twist when i was still on the Inside and where we are today There's tremendous pressure at the short End of the yield curve Banks are running up against limits they Don't want to take any more deposits In and at the same time you're going to Have money market funds here in the United states that are starving for Collateral While all of this liquidity is flooding Into the system the fed does have A tool that can address this but they Could also As you say twist the curve they could Sell Short end and buy at the long end but i Will say with lael brainard On on the headlines as much as she's Been in the past few days Her idea of yield curve control has Always been the next step for the fed to Take And that only goes out to the two year So we're talking about a complete Right turn a complete 90 degree turn in
Terms of fed discourse What they're going to be talking about At this march 16th meeting In washington dc for them to flip to a Twist Narrative we do have what three more Days before fed blackout before this Next fomc And of course powell's on tap this Thursday I don't know how much of the price Action was dictated to by market Structures for instance bond traders Have been saying for years that Liquidity is there in of course the World's biggest bond market except When you really need it and we perhaps Saw a Lack of liquidity which led to what Happened and could this be repeated and Is it a stark reminder of what happens Overall should the fed dial back It is we we've definitely seen a seizing Up in the bond market when the fed Attempted quantitative easing when the Fed attempted to shrink the size of its Balance sheet Normalize the fed funds rate we also by The way as you're as you're likely aware We also saw a complete seizure at the Long end of the curve the long bond In overnight asian trading before the Fed came In with their massive bailout package
Last march where there were actually Times in the middle of the night in Asian trading That you could not trade the long bond Extraordinary Activities extraordinary events in this 21 trillion dollar market that is Supposed to be the Deepest and most liquid in in On planet earth and again we got a huge Reminder of that Last week pay very close close attention To the mov e Move index uh that you can follow on the Terminal i follow it The most closely because bond volatility Becoming unhinged Is typically followed by these these Liquidity deserts That make so make for such volatile Trading in the bond market Danielle bubble bubble toil and trouble We heard From my chinese bank regulator warning About a bubble in Overseas markets the likes of the us Your thoughts on that Well we're certainly seeing how Interconnected uh Different risky asset markets are and There is something to be said given the Fact that we have seen Technology stocks underperform the Broader indices for six months now
We are seeing momentum dissipate as well Such that you might start to say well This is more than just a rotation trade There might be fear seeping into the Market given that valuations are in the 99th percentile Historically speaking so at some point You have to think that markets will try And correct But again this is going to be butting up Against The will of fed policymakers who are Trying to allow inflation to run Hot they're they're trying in a way if You think about world war ii And fighting a war on two fronts that's What the fed is doing right now and Trying to control the narrative on one End As well as on the other while there is So much disruption going on And and signs that these bubbles are Starting to erupt Not just in the united states but around The world
