Yellen’s Political Move to Sway the Election

Secretary Yellen has thrust herself into the middle of a campaign in a very inappropriate way …

Recently, she was standing on stage with the governor of Pennsylvania, campaigning for Kamala Harris, who was not even her president …?

Markets are already sensitive to political developments and Yellen’s actions could be interpreted as an indication of the administration’s campaign strategy.

Any perceived shift in the Treasury’s focus from maintaining economic stability to supporting political goals would cause major moves in the U.S. dollar, Treasury bonds and stocks.

Sure, enough Yellen made a notable change to its quarterly issuance schedule, introducing future guidance on what to expect? …

This is an unprecedented shift and one that is most likely politically motivated and intended for use in revealing a proactive and positive policy stance by the administration.

Could Coordinated Dollar Devaluation and Rate Cuts Shape the Election and Boost Markets

Absolutely … By projecting an image of fiscal responsibility and transparency, the administration could be trying to bolster confidence in its economic management.?

This could, in turn, influence voter perceptions, and we also have seen a shift in Fed policy sentiment with the media celebrating a victory over inflation and sentiment shift to more Fed rate cuts.?

This chart from creative planning and posted on X reveals a funds rate just above 4.25 at year end. With inflation still above the Fed target that will certainly keep stocks elevated.

Yellen Keeping Powell on a Tight Leash

Another sign of politics meets policy is that Yellen has been meeting with Powell WEEKLY on behalf of the Administration …?

Now I don’t think they are discussing summer activities and this is a sign that reduces the Fed’s independence and speaks to the degree of fiscal dominance we are in, meaning the administration is dictating Fed policy as well.?

We may be witnessing the foundation being built for an agreement among G-7 nations to weaken the dollar.?

Yellen is certainly the contractor for this project and something similar to the Plaza accord of 1985 would be ideal for a weaker dollar, higher stocks and yield curve control to hold interest rates down.?

A Bit of Context

By the early 1980s, the U.S. dollar had appreciated significantly, particularly against the Japanese yen … This strength was partly due to high interest rates in the U.S., which attracted foreign investment, and the U.S. government’s policy focus on reducing inflation, which had been rampant in the 1970s.

Sound Familiar??

The only major? difference from then to now is the ratio of debt to GDP was only 30% then. That difference is why the administration would also need to hold interest rates near? 2.5% to 3% during the process and potentially many years.

Here is a chart illustrating the USD (inverted), UST (inverted) and S&P 500 trends from 1985 when the Plaza Accord was signed to the ending of the Accord via signing of the Louvre Accord of 1987.

Notice the chart above and how the USD and UST yield moves started prior to the Accord and both collapsed by 50% with Stocks showing the greatest performance by tripling the move of USD and UST.?

Netx, think about what has been happening lately … Japan wants a weaker dollar, the US needs a weaker dollar and wants to boost manufacturing, which a weaker dollar facilitates.?

I see this as a very likely scenario and if the Treasury also enacts yield curve control by buying all USTs and holding rates near 2.5% … Stocks, and Commodities will soar higher.

This Policy Move Would Also lower the Debt to GDP?

As I have mentioned in the past, yield curve control worked very well in the 1940s when debt to GDP was above 120%.

The chart below illustrating Debt/GDP along with money supply (M2) from the 1985 – 1990 period shows the impact of lower rates and a lower dollar on money supply.

Notice above how M2 did not increase very much during the Plaza accord. This is critical to understand because it will give you confidence that this time is different …

?The administration will live with inflation well above interest rates because that will reduce debt to GDP and help them revive manufacturing by cheapening the dollar without interest rates rising.?

?Sorry for the longer than average post but this is a major point to consider to avoid getting blindsided with large positions on …

?Live and Trade With Passion My Friends,

?Bill Griffo