Zoltan Pozsar has been near the apex of the global monetary system for well over a decade. He is one of the elite pointy-heads to whom Federal Reserve Governors, Regional Fed Bank Presidents, US Treasurers, the IMF, and global banking officials have turned for granular analysis of every component of the financial system. A 2021 Money Markets Conference abstract of his CV may be seen at the following link:
In the wake of a very recent Pozsar market commentary, Bloomberg and ZeroHedge both rushed to publish a news story, but I don’t have access behind Bloomberg’s paywall, so I’m quoting from ZH while providing both headlines and links, as follows:
Zoltan Pozsar on Why the Fed Needs to Spark a Market Crash to Bring Down Inflation
Shocker From Fed Repo Oracle Zoltan [Pozsar]: Powell Must Crash The Market
…[I]n a startling note from one of the most respected Wall Street strategists, repo market guru and former NY Fed official, Zoltan Pozsar… [is] suggesting that “We need a Volcker moment… a Volcker moment, where Vol stands for “vol” – as in volatility.” In other words, Pozsar writes that the Fed needs to crash the market to contain stocks…
As Rabobank’s Michael Every writes today summarizing the Fed’s predicament, "more worrying is that [the FOMC] were non-committal about what the Fed will do at its March meeting because the Fed has no idea what to do. All its choices are bad…
Rabobank’s Fed-watcher Philip Marey expands on this… Although the flexible average inflation targeting (FAIT) strategy was reaffirmed at the January meeting, it has caused the Fed to fall far behind the curve. Policy rates are at the zero bound and the Fed is still buying assets when GDP growth is 6.9%, CPI inflation is 7.5% and unemployment is 4.0%. Is this rational monetary policy or are the lunatics running the asylum? There is no need to wait until 2024; the Fed’s groupthink has produced another failed strategy that should be terminated immediately.”
But it’s Pozsar who summarizes the dilemma facing Powell best:
The FOMC has one big problem: inflation. There are two ways to slow inflation: by hiking short-term interest rates or by forcing long-term interest rates higher. Historically, the Fed used rate hikes to engineer recessions that generated the slack needed to keep inflation in check (“opportunistic disinflation”). With the Fed’s “updated dual mandate” of inclusive low unemployment and the political imperative of redistribution through firmer wage growth at the bottom of the income distribution, the Fed aiming to slow inflation via a recession is unimaginable. Hikes today then are meant to slow inflation without a recession…
…which is not something that the Fed has ever managed to [achieve] before. [Emphasis added.]
Unfortunately (or fortunately), I did not read the above-linked piece until after the markets closed today. Otherwise, I might have gone ahead and locked in some losses before they have a chance to get much worse.
Just kidding, but the market did experience a pretty big selloff today, extending its recent downward trend. The indices fell from -1.78% to -2.88%, while the VIX shot higher by 15.73%, as follows:
Dow Jones -622.24
S&P 500 -94.75
VIX +3.82 28.11
If Zoltan Pozsar and his peers are expressing overt skepticism of the Fed’s ability to tame the inflation tiger without pulling the rug out from under the bond and equity markets, it seems to me that my portfolio is likely at risk.
Before long, one may reasonably assume that hedge funds, family offices, wealth advisors, and pension fund managers will beging de-risking their portfolios in earnest. When there are more sellers than buyers, look out below.
On the other hand, Mike “Mish” Shedlock is confident that the Fed cannot possibly hike rates as fast or as far as what the markets expect. He has published a post with charts showing the limits to which the Fed has been able go in tightening cycles over the last 4 decades at the following link:
How Much Will the Fed Hike? 40 Years of History Shows the Brick Walls
How many hikes will the Fed get in? The market expects far too many.
For background on Zoltan’s analytical skills, you can review one of Pozsar’s old explanatory flowchart PowerPoint presentations created as an Appendix for the Federal Reserve (in the form of a 161-page PowerPoint slide deck) at the following link:
How the Financial System Works
- A Map of Money Flows in the Global Financial Ecosystem -
An Appendix to the paper “Shadow Banking: The Money View” (Pozsar, 2014)
1. The Heirarchy of Money.
2. The Hierarchy of Access.
3. The Hierarchy of Uses.
4. The Dealer Eco-System.
1. The Hierarchy of Money.
5. The Macro Perspective.
6. Policy Implications.
The above-linked slide deck on Money Flows was an appendix to Pozsar’s 2014 US Treasury white paper on shadow banking risk entitled
Shadow Banking: The Money View
(Pozsar, 2014), a PDF copy of which may be reviewed for context at the following link: