The Outsider Perspective Issue 404 | The Beltway Outsiders

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Good Friday Morning! Except to Canada. Ontario Premier Doug Ford made a request of Canadians this week: “Folks, don’t be pooping on the beach. It’s as simple as that.” Apparently, beachgoers in Ontario are allegedly taking tents to the beach, digging holes in the sand, and pooping in these holes in the tent. Canadians in Ontario are litterbox trained.

Doug Ford then added, “I have no proof that people are pooping in the park per se, but it’s pretty bad if they are.” I hate to tell Mr. Ford this, but given the Streisand effect, if this wasn’t a problem before, now that he’s told everyone this idea, it will soon become a problem.

We can add this to the list of reasons to invade Canada.

This week, I’m going to discuss the market upheaval earlier in the week, touch on why that happened, where the US economy is, and what happens next—links to follow.

Quick Hits:

The New Yorker published a wide-ranging interview with Nancy Pelosi this week, and it reads as nothing less than a victory lap for what she did to Biden. They did what I haven’t seen anyone do on Pelosi: press her on what happened with Biden stepping aside. She gave this answer: “Then Pelosi dropped her calculated reserve. “I’ve never been that impressed with his political operation,” she admitted. “They won the White House. Bravo. But my concern was: this ain’t happening, and we have to make a decision for this to happen. The President has to make the decision for that to happen. People were calling. I never called one person. I kept true to my word. Any conversation I had, it was just going to be with him. I never made one call. They said I was burning up the lines, I was talking to Chuck [Schumer]. I didn’t talk to Chuck at all.” Take this interview as a sign that the incoming memoirs of the Biden White House will be brutal.
We’ve finally gotten a flood of polling in on Trump vs Harris. Harris finally overtook Trump in the RealClearPolitics average this week, leading him by 0.5 points. At this point in 2020, Biden was leading by 6.4 points, and Clinton by 7.2 points in 2016. The difference between those years and now? Trump was sitting at 40-42% polling levels. He’s sitting at 47-48% now. Harris climbing in the polls matches what I think is going to happen: she’s boosted in the polls through the convention, and then the real sprint starts after Labor Day. Harris wants to ride the magical honeymoon carpet ride from now until November. That seems impossible, given the insanity of this race so far, but we’ll see. The press is eager to help her.

Where you can find me this week

Please subscribe, rate, and review my podcast on iTunes, Spotify, or Google Play — the reviews help listeners, and readers like you find me in the algorithms. Make sure to sign up for the Conservative Institute’s daily newsletter.

The American Economy Shows Signs Of A Cold – Conservative Institute

Harris Picks Walz And Antisemites Reject Shapiro – Conservative Institute

Will The Real Kamala Harris Please Stand Up? – Conservative Institute

Volatility Returns To Markets – Downturn Is Unlikely

This week kicked off with a meltdown in financial markets. Japan logged the worst day since 1987’s Black Monday crash, erasing 12.4% of its value, and the numbers weren’t much better in the United States on Monday. And then, as quickly as it went down, things rebounded to end the week.

What happened?

Two things: 1) The Japan Carry Trade, and 2) Investors are repricing US markets based on how sustainable the current path is.

The Yen (Japan) Carry Trade

What is the yen carry trade? Put in simple terms, it’s “borrowing the currency where interest rates are low and investing it in a place where interest rates are high.”

Japan’s central bank has had extremely low interest rates for a very long time. In fact, Japan had not only low interest rates but negative interest rates. They ran with negative interest rates from 2014 until March of this year. They were the first central bank to try this strategy, and it arguably hasn’t worked to achieve their ends.

What traders did was borrow money in Japan’s yen, locking in essentially interest-free cash, convert it into dollars, and invest in the United States. With US interest rates at multi-decade highs, it was easy money. But you could get even larger returns if you used that money to invest in high-flying stocks.

The exact numbers are hazy, but Deutsche Bank estimated that approximately $20 trillion is involved in the yen carry trade.

What changed? Japan ended its negative interest rate policy in March of this year. Then, surprising markets, Japan hiked interest rates from zero to 0.25% at the end of July. That immediately caused some roiling in markets, but it was largely controlled. The meltdown in Japanese markets and in the US and European markets on Monday was a result of a global margin call.

That interest rate hike caused someone, or many people, to quickly liquidate their stocks/bonds/investments and pay back those loans to deal with higher interest rates, and the yen getting stronger against the US dollar.

In a few days, JPMorgan estimates between 50-75% of the carry trade has unwound. In other words, trillions of dollars had to shift around the globe quickly.

How much more is there to go? Will this continue? That’s harder to say. Michael A. Gayed, who called this scenario going down, thinks the unwinding of the carry trade could lead to a more significant credit event. If he’s right, this would be larger than the 08 crash.

In a bid to smooth things over, the Bank of Japan resisted talk of more rate increases to keep markets from getting choppier. The problem is that they can’t sit there forever—they need to tackle their own inflation. The Federal Reserve is in a tight spot, too. They want to cut interest rates, which would impact the carry trade as well.

Somewhat suspiciously, effectively, every major trading platform on the market was unavailable for traders during the peak moment of the downturn. Things slowly returned service, but the impact of all the major platforms going down at once raises some red flags. It’s one of those things that Congress should investigate.

Behind the scenes, the central banks of Japan and the United States are likely working much more closely to monitor this situation now. Neither can remain where they are and must change policy soon. How this plays out is anyone’s guess. For now, though, markets are back to normal.

US Economic Data Turns Sour – Or Maybe It Doesn’t?

Adding to tensions is a question of the health of the US economy. The August Jobs report suggested serious weakness, with employment only measuring 114,000 versus an expected 140,000.

That number triggered the “Sahm rule,” which measures unemployment versus employment. If there’s a jump over a three-month moving average, it should be a sign that you’ve entered recession territory.

If these things are true, it suggests the economy is weakening. The problem is that it’s unclear if it is true. For starters, while the government claims that Hurricane Beryl had no impact on hiring numbers, it seems certain that the storm did impact things. You can trace rises in unemployment payments and other factors to that storm.

The weekly jobless claims numbers this week seemed to bear that out when they went down. That suggests that the surge in jobless claims was due to the hurricane and less to growing problems in the broader economy.

However, the impacts of the yen carry trade and the economic data in the United States have shifted the underlying assumptions. Both Goldman Sachs and JPMorgan raised their recession odds to 25% and 35%, respectively.

Nick Timiraos, the Fed Whisperer, suggested this week that the Federal Reserve was more likely to consider a 50-basis-point rate cut in September instead of the expected 25 basis points. While Powell and other Fed members suggested they could stay the course with current rates, the events of last week have likely locked in a rate cut.

Whether the yen carry trade triggers a more significant credit event is unknown. But it did end the Federal Reserve’s fight against inflation. In the coming months, I look for the Fed to balance its rate cuts with Japan’s rate increases. Nearly every other major central bank has cut rates in the last two months. The Fed will likely be the last to cut, but they will cut.

The Fed is more scared of a recession than inflation. I’m expecting a 25 basis point cut in September. If they do anything larger than that, it suggests much larger problems in the economy.

If you’re Kamala Harris watching all of this, you’re hoping Janet Yellen and Jerome Powell can keep things together for a few months. If the US descends into a recession (in everything but name, because the NBER won’t declare a recession this year) during the election, they will end up staring at a brutal electoral path reminiscent of 2008 McCain/Republicans.

That’s not a great place to be when general election early voting starts in 28 days.

Links of the week

Lawmakers Hope China Doesn’t Make a Move on Taiwan During U.S. Election Chaos: “Any time there’s doubts about who’s in charge of America, it raises alarm,” Sen. Marco Rubio, the top Republican on the Senate Intelligence panel, told NOTUS. – NOTUS

How Did Planned Parenthood Become One of the Country’s Largest Suppliers of Testosterone? When she was a teenager, Cristina Hineman started testosterone after a 30-minute consult at Planned Parenthood. She’s now suing them. ‘I regretted everything.’ – Jennifer Block, The Free Press

America Is Ready for a Jewish Veep. The Democrats Aren’t – Josh Shapiro is the most qualified person to help the Dems win. There was only one problem. – Batya Ungar-Sargon, The Free Press

Pro-Israel group struggling to gain permit to rally at DNC — while pro-Palestinian groups got green light: The City of Chicago has been sitting on a request from the Israeli American Council to hold a solidarity march during the Democratic National Convention – Jewish Insider

How Terrorist-State Propaganda Became the Norm for U.S. Audiences – Commentary Magazine

How Generic Can Kamala Harris Be? The Vice-President has answered few direct questions since becoming the presumptive nominee. This is probably good for her campaign, but not for voters. – Jay Caspian Kang, New Yorker

Harris Campaign Said Walz ‘Chaired Veterans Affairs.’ He Did Not – RealClearPolitics

Walz in 2010 said plan to curb Social Security, increase retirement age was ‘very similar’ to his approach: The Harris campaign told Fox News Digital that Walz ‘does not support raising the retirement age’ – Fox News

Tim Walz Falsely Claimed He Served in Afghanistan. When a Local Vet Called Him Out, His Office Did Nothing: Walz launched his first congressional campaign as ‘a veteran of Operation Enduring Freedom’ – Washington Free Beacon

Tim Walz Promoted Media Misrepresentations of His Military Service in 2006 Run: Incident adds to pattern of deceptiveness around Walz’s military service – Washington Free Beacon