Loss of confidence in the Fed is an inch away and almost certainly Dollar-negative

Today we get Canada’s CPI and the Philly Fed non-manufacturing index, almost sure to be grim (as was the manufacturing last week, deep into contraction).

In the absence of interesting hard data, especially from the US, analysts can look around for perspective. Bloomberg reports a Goldman analyst has now said what we have been saying for months—the asset correlations are badly out of sync. He said “Everything is weird,” adding that historical correlations between bonds, equities and gold are “thrown out the window.” See the chart. This is just for the recent period—the sub-head tells it all—"risk-off week morphs into everything higher.”

And it’s more long-lasting than just October. Reuters columnist McGeever points out that “The recent surge in gold, cryptocurrencies and stocks to record highs has sparked claims that the U.S. ‘debasement trade’ is in full swing, but the bond and the foreign exchange markets tell a very different story.”

The debasement trade means looming tariff-induced inflation will drive the dollar down. It’s a term invented at JP Morgan as far back as last fall, when it warned that the election outcome (a sweep by the Plubs) would drive gold up.

“Fast forward to today, and debasement doomsayers are pointing to increased U.S. government borrowing and rising public debt projections as well as the resumption of Federal Reserve interest rate cuts at a time when inflation is about to enter its sixth consecutive year above the Fed's 2% target.

“But if we were primarily dealing with debasement fears, the dollar and U.S. bonds would be tumbling and Treasury yields would be spiking - and this isn't happening.” Yields are way down, even TIPS.

Investors may dislike the dollar, but they still like the economy and the stock market. “… given how markets are actually behaving, what we may truly be seeing is a mix of central bank diversification, private sector portfolio reallocations, or simply momentum-driven buying.

“Ultimately then, we may be reaching peak ‘debasement trade’. Like other popular terms this year, such as the infamous "TACO" (Trump Always Chickens Out) trade – the "debasement trade" is essentially a simple narrative that can help investors make sense of an increasingly logic-defying world.

“Even though the $4 trillion global crypto market and $28 trillion gold market may be emitting dollar debasement warnings, the $28 trillion Treasury market and nearly $10 trillion-a-day currency market are not. If you want a simple answer to what's happening in today's financial world, keep looking.”

We can hope for a dam to break soon. On Friday we get the delayed Sept CPI and the Fed rate cut meeting is next week. CPI is likely to be +0.4% m/m for 3.1% in the headline and 0.3% for core for 3.1%. A year ago, headline was 2.4% and core was 3.3%, so if you are looking at only core, it appears to be improving. This is a snare and a delusion because core excludes food and energy costs. Perception of inflation is heavily influenced by grocery prices. 

It is possible inflation on Friday is acceptable, i.e., not scary, and we continue on the peculiar strong dollar path, disregarding the rate cut next week. Or inflation can appear worse and scary, so that investors see the Fed rate cut as wrong and not in keeping with the Fed mandate… therefore a function of being arm-twisted by Trump. Loss of confidence in the Fed is an inch away and almost certainly dollar-negative.

Inflation Watch: We get the Sept CPI on Friday, so a proliferation of debates about the “real” number. The Washington Post: “Trump says he brought inflation down. The White House also said that inflation is at 2.3 percent, which would be well below the official inflation figures that appear in headlines every month.” See the WaPo chart.

The statistical trickery is to annualize a monthly or some other smaller-term number. The ending outcome is valid only if the rate of change is exactly the same for the entire period. “The White House achieved a 2.3 percent estimate of inflation by looking at how much the consumer price index changed between January and August — and assuming that trend will continue through the rest of the year.” Ah, low we are brought by our assumptions. Annualization is the wrong methodology. In fact, accurate annualization would deliver 4.2%.

Forecast: Even given the confusing landscape, the dollar firmness makes no sense. The dollar “should” be weaker, on rate cuts, government shutdown, excessive deficit, and not least, a reckless and incompetent leader. But the charts can’t be brushed aside. We recommend staying out. When the dam breaks, and everyone thinks it will, the dollar should crash. But most analysts have been saying that for months and have been mostly wrong.

Fun Tidbit: Betting that Trump will TACO has been a profitable exercise. Bloomberg studied Polymarket data and found it shows “wagers against Trump taking action would have yielded returns similar to the S&P 500. And gambling that he'll actually follow through was a losing proposition.”

Weird Tidbit: If anyone understands the $20 billion Argentine peso/dollar swap that TreasSec Bessent signed yesterday, they’re not telling. Bloomberg reports the peso has improved a little on the swap story, but is still in the midst of a sell-off. “Currency traders in Argentina estimated that the US sold over $200 million on Friday in peso transactions, building on other interventions from previous days. The peso is down 6% so far in October and more than 40% so far this year, the worst in emerging markets over both periods.” By the way, Bessent now says he wants to double it to $40 billion.

The US initiative comes six days before a critical local election in Buenos Aires that had been looking bad for Milei. It’s not clear getting the US behind him is going to change the vote.

This is the only bailout since Mexico in 1982, revised in 1989. Then it was $1 billion plus pressure on international institutions. Mexico did pay it all back. The 1989 fix that allowed the full payback was the Brady Plan that entailed reducing the face amount of the debt owed. Commercial banks took the hit, exchanging their non-paying bonds for new bonds with less face value.

US banks are quaking in their boots. They are being asked to come up with that second $20 billion. Fearing Trump’s nefarious retaliations, they may get stuck with Argentine bonds. The WSJ reports “Banks are looking for assets or guarantees from the U.S. that would back a private-sector loan to support Argentine President Javier Milei.”

If you want more of the sordid story, check out the Council on Foreign Relations. One interesting fact: China already did a swap line with Argentina, whose reserves are now about one-third in yuan.

How it works: technically, Argentina deposits $20 billion worth of pesos with the US Treasury. In return, the US Treasury gives Argentina a $20 billion deposit in US dollars (it may be a line of credit instead of a deposit but the Treasury is not telling). They each pay interest to the other and at the end of the deal, they each return the other’s money at the original exchange rate.

And there’s the rub. When we did currency swaps during the 2008-09 financial crisis with folks like the Swiss, there was no problem using the original exchange rate. We follow Argentina only out of the corner of one eye, but the peso has always been a one-way street. See the chart, which is monthly! When a currency devalues from 9.42/USD on 9/1/15 to 1474.50 as of 9/30/25, that’s hundreds of percentage points in ten years. That “original exchange rate” is a fable in this case.

Argentina does pay back but in most cases, it’s largely using the proceeds of a new bailout to cover the previous one. It has a long history of defaults—9 times since 1816. It got the terms changed in 2005 and 2010, which is almost certainly what will happen this time.  To be fair, Argentina did repay $4 billion in January this year but remains the IMF’s biggest borrower—and keeps going back for more. Argentina has hit the IMF twenty times. Argentina owes the IMF $57 billion as of this month…  

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