Rabobank: There We Have It – A Reflated Reflation Trade

By Michael Every of Rabobank

Merrie Melodies

Just like that, all was well with the world again: bond yields up; equities up; commodities mainly up; and the dollar mainly down. What a merry market melody! This was despite a confusing barrage of Fed-speak which, as the headlines initially came in, had me thinking of ‘Elmer Fed’, and a silly little man in a deerstalker hat with a shotgun saying: “Be vewy, vewy quiet. I’m hunting 2% infwation and wo unempwoyment with high asset pwices and wo ineqwality. Huh-uh-uh-uh-uh-uh-uh-uh.

What else is one to make of headlines such as:


“If you wait too long to taper and your imbalances worsen, you may find yourself needing to take extra steps down the line.”; “It’s unrealistic to expect the US dollar to be the world’s reserve currency permanently.”; “It would be significantly healthier to make a change to asset purchases sooner rather than later”; and “The Fed’s overnight repo rate adjustment is mostly a technical problem.” (As it jumped to $765bn overnight.)


“This is a volatile environment, and there is upside risk to inflation.”; “We’re in a scenario where bubbles could form, which is part of a larger debate”; “The Fed should set up a taper that may be altered if necessary.”; “Markets are assuming the Fed won’t lift rates with tapering.”; “I don’t see how interest rates in the US could get substantially higher than they are in Europe and Japan”;  and “I am not concerned about fiscal dominance, the Fed will continue to be independent.” (As Powell, Yellen, and Gensler all get called to a meeting at the White House.)


“The Fed reverse repo rate facility is operating perfectly.”; “It wouldn’t be a problem if reverse repo usage grew much more.”; “Following the FOMC meeting, there was no minor taper tantrum.”; “The average inflation target is not based on any methodology.”; “The economy has not sufficiently recovered for stimulus to be removed.”; “The economy is improving at a rapid pace and has rebounded faster than expected, with a very positive medium-term outlook.”; “Inflation is still struggling with disinflationary factors that have existed for a long time.”; and “The Fed has the tools to not just raise the balance sheet when required, but also to get it back down to appropriate levels when the Fed doesn’t need to support the economy as much.”

But why quibble over calls for tapering; support for a reverse-repo spike that has many worrying about another potential Fed policy error; questioning the dollar’s hegemonic status(!); the implied threat that US rates may rise while QE is still ongoing(!); that US rates cannot rise above those of the Eurozone and Japan, where they are negative; the conflicting messages on how good this recovery is with how disinflation is still entrenched; and the idea that the Fed’s balance sheet could ever actually decline again, let alone stop growing. Just listen to this merry melody –  


The Fed will do everything possible to help the economy recover for as long as it takes.”

There we have it – a reflated reflation trade. Until the next time reality, the Fed’s own errors, and/or the markets escalate matters, requiring more Fed-speak to micromanage it. (Notably, Powell testifies to Congress today on the Covid-19 response and the economy.)

Yet in the end poor old Elmer Fed is going to take a beating. Recall the 1951 classic “Rabbit Fire”, where after arguing over whether it is rabbit or duck season, we find out it is actually Elmer season; and Bugs and Daffy are stalking in the deerstalkers with shotguns, turn to the screen and say: “Be vewy, vewy quiet. We’re hunting Elmers. Huh-uh-uh-uh-uh-uh-uh-uh.”?

Or think of 1950’s “Rabbit of Seville” from the 5.30 mark onwards, where Elmer runs towards a fleeing Bugs with an axe; Bugs returns with a larger axe, sending Elmer fleeing; Elmer returns with a pistol; Bugs with a shotgun; Elmer with a cannon; Bugs with a larger cannon; Elmer with one that belongs on a battleship;…then Bugs brings a bunch of flowers; then an engagement ring; and Elmer returns in a wedding dress, and the couple marry; Bugs pulls his new bride up flights of stairs by the hand; opens a door leading nowhere….and drops Elmer from a great height.  

Meanwhile, in the weal world things are not so merry, and there is more disharmony than melody:

Progress on a bipartisan infrastructure bill now perhaps just 1/10 the size of what the White House proposed in its twin-stimulus proposals is perhaps closer to emerging – to what fate remains unclear;
The US National Security Advisor says the Nord Stream 2 pipeline represents a danger to Europe’s energy security, and that the Russian firms building it are still going to be sanctioned, after having widely been seen to earlier give it a de facto green light to avoid a row with Germany. Some whispers are that this is a response to yesterday’s FT interview with possible next CDU leader (and Chancellor?) Laschet, which reiterated he has zero interest in recognising geopolitical realities and still wants ‘Wandel durch handel’;
The US is apparently considering a ban on all polysilicon coming from China, which is required to make solar panels. Such is the scale of Chinese production (50% of the global total) it is unclear how any other source could replace it, which is problematic with huge green fiscal stimulus still being floated – until one joins the dots that this implies a major supply-chain shift towards Made in America;
The EU is going to sharply reduce the amount of British TV that can be shown now the UK is no longer “European”. This is of course pure services and cultural protectionism, and while British TV isn’t what it used to be, one wishes the EU well with its local substitutes: Doctor Who > Médecin Quoi?; The Crown > A recreation of the criminal trial of Nicolas Sarkozy?; Downton Abbey > A dramatization of Yanis Varoufakis’ memoir, ‘Adults in the Room’? But not to worry, says the UK government. Lots more viewers can be found in Asia, as it aims to join the CPTPP; and in that part of the world
China has banned its banks from any transactions related to crypto activity. Who next and when?

That’s not all folks, by any means, but it will have to do for today.   

Tyler Durden
Tue, 06/22/2021 – 09:15

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