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Much has been said in recent days about the death of the Phillips Curve, which was officially cast into the funeral pyre last week when the Fed unveiled its new approach to monetary policy, which puts more emphasis on shortfalls in employment and less weight on the fear that low unemployment could spark higher inflation.

The WSJ also piled on, with the newspaper’s economic commentator Greg Ip writing that “the revamp of its monetary policy framework, the Federal Reserve has subtly but clearly shifted its priorities away from inflation to employment…. Central  banks  have  long  operated  on  the  assumption  that  there  is  a  trade-off  between employment and inflation. As the unemployment rate drops below some “natural” level, inflation starts to rise, a relationship dubbed the Phillips curve. That means unemployment could be  both  too  high  or  too  low.  The Fed in its old operating  principles thus sought to minimize “deviations” of unemployment from this natural level. In practice, this meant the Fed had to both estimate the natural rate and raise interest rates if actual unemployment threatened to fall below it. The new framework replaces “deviations” with “shortfalls,” implying  unemployment can be too high but never too low.”

And just to make sure that the relationship between unemployment and inflation is never again shown in an official Fed slideshow, last week Fed vice chair Richard Clarida delivered a remarkable speech in which he admitted that the Fed’s new Average Inflation Targeting framework, was “a robust evolution in the Federal Reserve’s policy framework and, to me reflects the reality that econometric models of maximum employment, while essential inputs to monetary policy, can be and have been wrong.”

This may be the first time in years when the Fed has admitted that canonical models it had followed for decades were wrong, leading to catastrophic results (such as the ill-fated rate hikes of 2015-2018, which as we noted last week may have cost Hillary Clinton the 2016 election).

And yet, maybe there is more here than meets the eye: just over a year ago we asked the most obvious question – perhaps it was not the Phillips curve that was dead but “the way the government measures inflation is (purposefully) wrong.”

What if maybe, just maybe, the Phillips curve is alive and well but the way the government measures inflation is (purposefully) wrong

— zerohedge (@zerohedge) July 12, 2019

We were not the only ones to question the Fed’s desire to quickly shove the Phillips Curve into the dustbin of history (while ignoring the real elephant in the room – flawed inflation measurements and a CPI and PCE print that have been gamed for political purposes since the 1980s): in a note today, SocGen’s cuddly permabear Albert Edwards writes that “it is totally wrong to believe that the Phillips Curve is dead, dormant or even flattened” instead noting that “there was simply more slack in the labor market than the Fed’s estimates of NAIRU at 5% supposed” something we also said for much of the past decade when we pointed out the 100 million or so people out of the labor force after every single jobs report.

Indeed, as Edwards continues, if one simply measures unemployment correctly “and the relationship still fits perfectly (right-hand chart below).”

“So”, the increasingly angry SocGen strategist fumes, “for the Fed to consign NAIRU to the dustbin of economic history just because of its own failure to consider that discouraged workers were holding down wages seems a total nonsense. But even using the simple U3 unemployment rate and looking at the rate at which companies were  increasing  wages,  I  simply  cannot  see  any  breakdown  in  the  normal  Phillips  Curve  relationship (see chart below).”

Here, Albert takes a slight detour into the implications of the Fed’s new policy review, which as Clarida and more recently Brainard said would have meant the Fed would not have launched the 2015-2018 tightening cycle at all, and writes that the “howls  of  protests  about  Fed  tightening  in  the  last  cycle  were  really  about the direction not the absolute level of interest rates. The Fed was tightening policy but from an extremely accommodative stance. It was taking its foot off the accelerator but not tapping the brakes. Monetary policy was not as loose as previously but was certainly not  tight.  This  is  a  key  and  important  difference.  A  tight  monetary  policy  would  have  slowed growth relative to trend growth. A return to neutral would not.”

To justify this point, the SocGen strategist shows the June 2019 dot plot when the Fed Funds were at 2.5%, and when this rate was only considered “long-term ‘neutral’ (right-hand column) by the Fed policy committee (see below, of course this 2.5% neutral long-term rate is just an informed ‘guess’).  “

In any case, after  having  been  criticized  for  “merely  taking  its  foot  off  the  gas  pedal” and viewing its own actions as potentially resulting in the Trump presidency,  Edwards writes that the  Fed  has  responded “by putting the car into cruise control at top speed (see charts below). Repeating Greg Ip’s point, in the new Fed regime unemployment can be too high but never too low. What could possibly go wrong?”

Well, as the events in the past 10 years which have culminated with record wealth and income inequality, record asset prices at the expense of virtually no real wage growth, and a political picture that is more polarized than ever and results in almost daily riots and shootings across America,  a lot.

But what makes me Edwards especially sad “and indeed angry is not just that the Fed has resorted to virtue signalling to justify  its new maximum employment policy by deliberately placing this in the context of closing unemployment inequality among racial and social minorities (the overwhelming majority of economists would consider that reducing employment inequality has nothing to do with the blunt tools of monetary policy)” but even worse “the extreme monetary largesse the Fed has now embarked on in pursuit of its utopian ideals will merely exacerbate still further the massive wealth inequality that their policies of recent decades have already caused, with rampant financial and asset price inflation making the 1% even richer and thereby worsening rather than healing social division.” As Edwards snidely remarks, “If  the  process  of  achieving  maximum  possible  employment  and  reducing  racial  and  social  disparities in unemployment were achievable without a car crash I would be all for it.” 

And then, Edwards concludes, “when the next inevitable financial market bust comes, the necessary (again!) aggressive bailouts of Wall Street at the expense of Main Street will further stick in the craw of the very people who the Fed claim it is trying to help. The unintended consequences of the Fed’s new more aggressive policies seem destined to make inequality worse not better”, something which Rabobank already observed one week ago at the risk of being expelled from the “establishment” club where everyone only says nice things about the Fed. For those who missed it, here is what Rabobank’s Philip Marey bravely said, risking his job and career by telling the truth:

It took the Fed six years to describe symmetry of the inflation target in the Statement on Longer-Run Goals. While not completely irrelevant, it is the wrong kind of symmetry to focus on. While the Fed’s step to make the inflation target ‘more’ symmetric may benefit the wages of the average American somewhere beyond 2022, it does not really address the deeper problem with the role the Fed is playing in the US economy. It could be argued that the Fed’s policies have become part of the problem, instead of the solution. At least this should be a topic for debate in the FOMC, instead of talking a whole year about whether to use an average or not.

The much deeper problem for the US economy is the asymmetric impact of Fed policies on households and businesses. The Fed’s monetary and regulatory policies have contributed to a form of capitalism where the rewards are going to the 1% and the risks are borne by the 99%. The current crisis response has made it painfully clear again that the Fed’s policies benefit high income individuals and large corporations, while small businesses and low income individuals bear the burden. While the Fed likes to see itself as part of the solution to America’s economic problems, it should ask itself whether it is also part of these problems.

And Yet, as Edwards reads comments of Fed members, particularly on Twitter (especially those of one Neel Kashkari), “they  apparently cannot conceive they are part of the problem”, instead “they ooze overconfidence and arrogance and have learnt nothing from the disastrous outcomes of their repeated excessively easy money policies to goose the financial markets and economy.” 

Edwards leaves the last word on the unintended consequences of the Fed’s disastrous actions to the late, great Paul Volker “who must be turning in his grave.” He wrote in 2018 shortly before his death:

“The real danger comes from encouraging or inadvertently tolerating rising inflation and its close cousin  of extreme speculation and risk-taking, in effect standing by while bubbles and excesses threaten  financial markets. Ironically, the “easy money,” striving for a “little inflation” as a means of forestalling deflation, could, in the end, be what brings it about.”

To this all we can add is that none of this is at all “ironic”: we have reached the part in the endgame where the Fed is willing to sacrifice the living standards of the lower and middle classes (why else is the Fed begging Congress to launch Universal Basic Income and handout checks to America’s middle class – it knows well that without this, the next major riot to take place will be at the Marriner Eccles building) just so it can inflate away the corporate and sovereign debt that the top 1% needs gone so it can perpetuate the corrupt crony-capitalist, neo-feudal system that the US currently lives under.

US equity market crashed most since March today (Nasdaq down 6% at its worst and The Dow down over 1000pts at its nadir)…

The S&P 500’s longest streak of intraday all-time-highs since 1998 is now over…

Biggeset sell programs since June…

Source: Bloomberg

The Dow is back in the red YTD and Small Caps are back at one-month lows…

Source: Bloomberg

And VIX exploded to its highest since June…

Newly-minted options gurus suddenly flipped from gorging on calls to panic-buying puts…

Source: Bloomberg

As FANGs were fucked…

Source: Bloomberg

Apple cooked…

AAPL is once again smaller than the entire Russell 2000…

Source: Bloomberg

And Tesla twatted (into a bear market from the highs)…

We suspect this is the scene in more than a few home offices this evening:

But hey, don’t worry, CNBC had some words of advice sprinkled in throughout the session:

“…today’s pullback is a drop in the bucket”

“…what we’ve been waiting for – a healthy pause that refreshes”

“…the damage today is really not as bad as it looks”

– Bob Pisani

The Fed’s speakers didn’t help:

• 1215ET *BOSTIC: WE SHOULD BE CONCERNED ABOUT THE RISK OF ASSET BUBBLES

• 1340ET *EVANS: “I MARVEL” AT STOCK MARKET RISE DESPITE UNCERTAINTY

Are they trying to send a signal to the markets?

Credit was weaker but has been signaling an end to the exuberant bounce for over a month…

Source: Bloomberg

It appears bonds were right after all…

Source: Bloomberg

Bonds were bid with 10Y Yields plunging back to 60bps…

Source: Bloomberg

The Dollar managed to hold gains today but was very uninterested in the chaos underway in stocks…

Source: Bloomberg

Cryptos were also dumped today with Bitcoin extending its slide…

Source: Bloomberg

And Ethereum was clubbed back below $400…

Source: Bloomberg

Nothing escaped the selling (apart from bonds of course) as gold was hit (but tried to bounce back)…

And silver was hit harder…

Oil also tanked, but tried to bounce back…

And another high-flyer – Lumber – was chopped…

Source: Bloomberg

And finally, don’t say you weren’t warned that time was up…

Source: Bloomberg

As Sven Henrich points out:

“September 3rd marked the top in 1929 following a furious rally fueled by wild optimism, excessive retail speculative behavior and markets disconnecting far above the fundamentals of the economy.”

More to come?

Source: Bloomberg

Did China’s “Batwoman” just sicken the world’s newest “Batman”?

The actor reportedly sickened with COVID-19 on the set of the new “Batman” movie – officially titled “The Batman” – is none other than start Robert Pattinson himself, according to Vanity Fair. The actor tested positive, prompting Warner Bros to suspend filming in the United Kingdom.

The unidentified person is “isolating in accordance with established protocols,” Warner Bros. said in a statement. “Filming is temporarily paused.”

According to Bloomberg, the suspension is “a sign of the challenges facing Hollywood as more shows and movies attempt to resume production.” The pandemic brought the industry to a grinding halt in March, and many projects are still on hold.

The key tentpole for WB was supposed to be a key litmus test for Hollywood, as studios re-start production on their biggest projects. WarnerBros has already pushed back its release date until Oct. 2021, from June, since producers say it needs another 3 months to finish filming.

Very few blockbusters have resumed filming since the pandemic went global in March. “Jurassic World: Dominion” was the first major movie to restart, and has been filming at Pinewood Studios in the UK since July as Universal Pictures takes steps to ensure a coronavirus-free environment.

For those who didn’t closely follow the “conspiracy theories” about COVID-19 originating in a Wuhan laboratory, the “Batwoman” is a scientist who has studied coronaviruses for years at the Wuhan Institute of Viroloy, the Biosafety Level 4 lab that’s been flagged by US intelligence as the possible source of SARS-CoV-2, a narrative that the mainstream media typically goes out of its way to label as “unequivocally false”,

Once could argue that in this outfit, she looks a little like Batman villain “Mr. Freeze”.

The Department of Justice will is preparing to slap Google with an antitrust case over the next several weeks, according to the New York Times – which insists, based on five sources, that Attorney General Bill Barr “overruled career lawyers who said they needed more time to build a strong case against one of the world’s wealthiest, most formidable technology companies.”

The Times is suggesting, based on leaks, that Barr is rushing the case for political purposes and the charges are premature.

The Google case could also give Mr. Trump and Mr. Barr an election-season achievement on an issue that both Democrats and Republicans see as a major problem: the influence of the biggest tech companies over consumers and the possibility that their business practices have stifled new competitors and hobbled legacy industries like telecom and media. -NYT

Some 40 lawyers working on a DOJ antitrust inquiry into Google parent Alphabet were reportedly told to wrap up their work by the end of this month, according to three of the five leakers, who we’re guessing are part of the 40-lawyer team – as “most of the 40-odd lawyers who had been working on the investigation opposed the deadline.” Others said they would not sign the complaint, while several left the case over the summer.

Some argued this summer in a memo that ran hundreds of pages that they could bring a strong case but needed more time, according to people who described the document. Disagreement persisted among the team over how broad the complaint should be and what Google could do to resolve the problems the government uncovered. The lawyers viewed the deadline as arbitrary.

While there were disagreements about tactics, career lawyers also expressed concerns that Mr. Barr wanted to announce the case in September to take credit for action against a powerful tech company under the Trump administration.

But Mr. Barr felt that the department had moved too slowly and that the deadline was not unreasonable, according to a senior Justice Department official. –NYT

Barr has shown a “deep interest” in the Google investigation, requesting regular briefings on the DOJ case, and “taking thick binders of information about it on trips and vacations and returning with ideas and notes.”

The Times notes that antitrust action against Google has bipartisan support from a coalition of 50 states and territories, though Democrats and Republican state attorneys general conducting their own investigations are split on how to move forward.

Republicans have accused Democrats of slow-walking the work in order to bring charges under a potential Biden administration, while Democrats have accused Republicans of wanting Trump to receive credit – a disagreement which could limit the number of states participating in prosecuting the Silicon Valley giant.

When the Justice Department opened its inquiry into Alphabet in June 2019, career lawyers in the antitrust division were eager to take part. Some within the division described it as the case of the century, on par with the breakup of Standard Oil after the Gilded Age. It also offered a chance for the United States to catch up to European regulators who had been aggressive watchdogs of the technology sector.

Alphabet was an obvious antitrust target. Through YouTube, Google search, Google Maps and a suite of online advertising products, consumers interact with the company nearly every time they search for information, watch a video, hail a ride, order delivery in an app or see an ad online. Alphabet then improves its products based on the information it gleans from every user interaction, making its technology even more dominant. –NYT

According to the report, Google controls roughly 90% of web searches worldwide, and has been accused of unfair practices because its search and browsing tools are standard on phones with its Android operating system. They also dominate online advertising – capturing about 1/3 of every dollar spent.

Three people familiar with the case say the DOJ has compiled “powerful evidence of anticompetitive practices.”

Read the rest of the report here.