Authored by Wolf Richter via WolfStreet.com,

Didn’t miss a beat.

The sixth month of the QE-Unwind ended on March 31, which is reflected in the Fed’s balance sheet, released this week, for the week ending April 4. The QE-Unwind appears to be on automatic pilot, clicking along at the pace that accelerated in January, despite the sporadic stock market sell-offs since early February.

During the years of QE, the Fed acquired a total of $3.4 trillion in Treasury securities and mortgage-backed securities. The MBS are backed by mortgages that are guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. Now the Fed is shedding those securities at a rate that accelerates every quarter until it reaches its maximum pace of up to $50 billion a month in Q4 2018.

By the end of the year, this plan would shrink the balances of Treasuries and MBS by up to $420 billion. In 2019, and going forward, up to $600 billion would come off the balance sheet per year, until the Fed deems the balance sheet to be sufficiently “normalized” — or until something big falls apart, whichever comes first.

For Q1, the scheduled pace was up to $20 billion a month. So for March, we’re looking for a reduction of $12 billion in Treasuries and $8 billion in MBS.

“Rolling off” Treasury securities

On today’s balance sheet, there are $2,413 billion in Treasuries, down $11 billion from February 28 ($2,424 billion). In total, since the beginning of the QE-Unwind, the balance of Treasuries has dropped by $53 billion, to hit the lowest level since July 16, 2014:

The stair-step movement in the chart above is a result of how the Fed sheds securities. It does not sell them but allows them to “roll off” when they mature, which is mid-month and at the end of the month. In March, no Treasuries on the Fed’s balance sheet matured mid-month. But at the end of March, $31 billion matured.

So the Fed replaced $19 billion of the maturing Treasuries with new ones directly via its special arrangement with the Treasury Department that cuts out Wall Street. Those $19 billion were “rolled over.” But it did not replace $11 billion of maturing Treasuries. Hence, they “rolled off.” The blue arrow in the chart above shows the March 31 roll-off.

Allowing MBS to “roll off”

For March, the plan calls for $8 billion in MBS to roll off.

But residential MBS are different. Holders receive principal payments continuously as the underlying mortgages are paid down or are paid off. Thus, the principal shrinks. At maturity, what’s left over is paid off. To keep the MBS balance steady, the New York Fed’s Open Market Operations (OMO) continually buys MBS.

Settlement of those trades occurs two to three months later, which is when the Fed books the trades. This time lag causes weekly fluctuations on the Fed’s balance sheet in the range of $10 billion to $20 billion. It also delays when MBS that have been allowed to “roll off” disappear from the balance sheet [my detailed explanation is here].

Given the jagged line on the chart, we’re looking for lower highs and lower lows. Today’s balance sheet reflects MBS that matured somewhere around December and January. In December, $4 billion in MBS were supposed to roll off per month; in January, the rate was scheduled to accelerate to $8 billion.

The chart below shows the lower highs and lower lows over the past few months. At the low in late October and early November, the Fed held $1,770.5 billion in MBS. This marked the starting point. The low in early March was $1,760. Today’s balance sheet shows $1,754.4 billion. From low to low over the past month, the balance dropped by $5.6 billion, reflecting trades somewhere around December and January. In total, the balance of MBS shrank by about $16 billion:

The overall balance sheet too

The QE-Unwind only relates to Treasuries and MBS, which dropped $53 billion and $16 billion respectively since the beginning of the QE-Unwind, for a combined decline of $69 billion.

Total assets on the Fed’s balance sheet dropped by $74 billion from $4,460 billion at the outset of the QE-Unwind to $4,386 billion on today’s balance sheet. This is the lowest since July 9, 2014:

The balance sheet also reflects the Fed’s other roles that may impact its assets and liabilities. It acts as the bank of the US government, and the Treasury Department keeps its cash balances on deposit at the Fed. It also holds “Foreign Official Deposits” by other central banks and government entities. But these and other activities have nothing to do with QE or the QE-Unwind.

It will let them rip.

Despite the sporadic sell-offs in the stock market, the QE-Unwind proceeded on plan, and I expect this to continue. It looks very unlikely that the Fed will try to stop a sell-off by altering its QE-Unwind routine. The Fed is targeting “elevated” asset prices. Sell-offs are part of the process, and the Fed will let them rip.

However, if credit freezes up as it did during the Financial Crisis – when fears arose that even big companies might have a hard time making payroll – all bets will be off, and the Fed will step in as lender of last resort. But that scenario is not yet on the horizon. So the QE-Unwind will be allowed to do its magic, which is to undo part of what years of QE have wrought.

Interest rates “may go higher and faster than people expect,” explained Jamie Dimon. The Fed may have to “sell more securities,” and “as all asset prices adjust to a new and maybe not-so-positive environment,” there’s “a risk that volatile and declining markets can lead to market panic.”Read…  “When the Next Crisis Begins…” JPMorgan CEO Jamie Dimon

Authored by David Stockman via Contra Corner blog,

With his China Trade Wars tweet yesterday, the Donald has proved once again that he has an uncanny ability to get to the heart of matters….even if by sheer accident!

Yet he’s right. The trade war was “lost many years ago” and it’s the reason Flyover America has rallied to his bluster and bombast on imports and the nefarious practices of furin guberments:

We are not in a trade war with China, that war was lost many years ago by the foolish, or incompetent, people who represented the U.S. Now we have a Trade Deficit of $500 Billion a year, with Intellectual Property Theft of another $300 Billion. We cannot let this continue!

But, alas, the “foolish or incompetent people” skewered in the Donald’s 7:22 AM tweet are not some defunct Commerce Department or USTR officials from bygone times.

Nope, it’s not pointy-head trade bureaucrats at all. The actual culprits are the “low interest” men and women resident in the Eccles Building, who over the past three decades have transformed the Fed into a Bubble Finance machine and the main street economy into a hollowed out tower of debt.

In a manner of speaking, free money has trumped free trade. And that means what is aborning is not your grandfather’s garden variety trade war; it’s the abiding revenge of bad money – a debilitating affliction that cannot be bargained away by cooler heads among professional trade negotiators as the dip buyers are so foolishly betting again today.

The truth is, the Red Ponzi is an absolute freak of economic nature that has laid waste to much of the US industrial economy. But the dark secret unbeknownst to the Donald, and the Wall Street/Washington establishment alike, is that the China monster was enabled, fostered and feed by the US central bank’s pursuit of an upside-down monetary policy after 1987.

The turning point came when Mr. Deng concluded that Mao had been wrong about the source of state power: Rather than emanating from the barrel of a gun, as the Great Helmsman had insisted, Deng Xiaoping ordered a 60% depreciation of the yuan, thereby recognizing the far greater efficacy of the credit power that issued from the end of the central bank’s printing press.

Then and there the die was cast. Faced with world history’s greatest mercantilist export campaign and the draining of China’s vast rice paddies of tens of millions of cheap workers to fill Mr. Deng shiny new export factories, the US economy required one thing above all: Namely, a systematic deflation of its bloated price, wage and cost structure; high interest rates to dampen consumption and encourage savings; and sustained supra-historical levels of investment in plant, equipment and technology to equip American workers with an insuperable edge in tools and labor productivity.

Needless to say, Greenspanian money-pumping, soaring debt and wealth effects driven financialization were not merely the opposite of what a regime of sound money would have generated; they were the kiss of death for jobs, prosperity and hope in Flyover America, as the chart below so dramatically illustrates.

Folks, this chart is not the fruit of Adam Smith’s unseen hand of free trade going about the work of the economic gods. China’s monthly exports to the US of just $490 million in November 1987 did not explode by98X over the next 30 years to $48.2 billion in November 2017 owing to comparative advantage!

Indeed, the chart below would not have happened in 10,000 years under a regime of sound money and honest price discovery in the capital markets. To the contrary, China’s initial advantage in cheap labor would have led to a large inflow of reserve assets (e.g. gold) to China and a large outflow from the US, causing wage and cost inflation in China and deflation in the US.

Stated differently, when coupled with sound money, the free market is not suicidal. Instead, current account imbalances get settled via the movement of true reserve assets. That settlement process, in turn, causes domestic interest rates to fall and credit to expand in the case of  inflows, and the opposite to occur in the case of persistent trade deficits and reserve asset outflows.

At length, domestic prices, costs and wages clear at sustainable levels and current accounts remain in reasonable equilibrium among trading partners over the longer run. By contrast, the purple peak in the upper right hand of the chart below represents a 17% compound annual rate of growth for thirty years running; it’s the work of free money, not the free market.

Nevertheless, the so-called “free traders” of the mainstream media are out in force today lamenting the Donald’s purported economic ignorance. When it comes to cardinal intellectual error, however, we are not sure which is worse as between the Donald’s 17th century mercantilism or a bit of undiluted tommyrot we heard this morning from CNBC’s in-house Wall Street shill, Steve Liesman.

Not to worry about giant trade deficits or a 98X growth in imports from China, he opined, because it’s actually a sign of success.

“When we get wealthier we buy everything made here and then add some more from abroad”.

Not so fast, we’d say. Liesman was talking about the kind of transient paper wealth that is measured by multiplying billions of equity shares by their fantastically inflated prices. As we have learned twice already this century, however, that kind of wealth can plunge by 50% or more in a relative heartbeat when the Fed’s serial financial bubbles finally collapse under their own weight.

The truth of the matter, of course, is that the above chart for China is not an aberration; it’s only the poster child for the underlying economic rot that has been induced by bad money. As we will demonstrate in the balance of this series, the chart below for total US trade (including both goods and services) has been enabled by a central bank driven monetary inflation that has nothing to do with sustainable wealth at all.

In a word, the Fed printed—so they printed. We are referring to virtually every other major central bank in the world, and the mercantilist disease that has spread to all four corners of the planet.

Under this baleful regime, statist rulers and politicians everywhere have empowered their central banks to swap the resources of their lands (the petro-states and resource countries) and the sweat of their workers brows (China, India and like EMs) for US dollar liabilities (US treasury debt and GSEs) in a misguided and futile effort to protect their export based prosperity.

In the middle term, of course, this enabled the US to pull off one of the greatest heists in economic history. We issued debt in fantastic abundance and traded it for their goods and services. Since 1980 this heist has accumulated to $12.5 trillion of consecutive current account deficits; and when you inflate those historic dollars to present purchasing power, the total is more like $19 trillion.

That’s right. The US has essentially borrowed the entirety of its current GDP from the rest of the world in order to temporarily live high on the hog.

Needless to say, this doesn’t bother the Liesman’s of the world one bit because today’s Wall Street casino is basically ahistoric and agnostic when it comes to the fundamentals of sound money and finance. In their benighted Keynesian framework, the central bank is always making the future better and stock prices are therefore always going higher—and that’s all that matters. Period.

So, apparently, even 30 years of going to hell in a hand-basket on the current account is of small moment, and if noted at all, it gives rise to entirely asinine rationalizations like the Liesman gem quoted above.

Of course, the latter belongs to the same category of pettifoggery as they perennial sell-side claim that any sharp drop in the stock market is a welcome purge of weak hands; or the astounding statement today by St. Louis Fed president, James Bullard , that no more interest hikes are needed because the Fed is already at the “neutral rate”.

That’s right. At today’s 1.62%, the Fed funds rate is negative after LTM inflation of 2.2%. Then again, if we can have giant, consecutive current account deficits forever, why not negative real interest rates in perpetuity, too?

The point, however, goes far beyond the truth of Herb Stein’s famous observation that unsustainable trends tend to stop. In this case, in fact, it appears that the economics of stopping unsustainable trade deficits are getting some help from America’s most unlikely politician, who saw the resulting hurt in Rust Belt America and proceeded to rub it raw via endless recitation of his long-standing “bad trade deals” trope.

Now that the Donald is attempting to dose the patient with his protectionist patent medicine, however, something more than the unsustainability of $19 trillion in current account deficits is coming to the fore. Namely, the futility of tit-for-tat tariffs in a global context where the underlying economic foundation has been everywhere deformed.

That deformation is obvious enough on the US side of the equation. Real median household income has not increased by one dime since 1999, and at barely 0.25% per year since 1989 shortly after the Greenspan era of Bubble Finance incepted.

In part 2, we will address how the Fed’s destructive pursuit of 2.00% inflation has fostered this lamentable outcome, and how its transformation of the equity and other capital markets into gambling arenas has generated rampant financial engineering in the C-suites of corporate America and the effective de-capitalization of main street.

But the ultimate deformation lies in the Red Ponzi, which is inherently an economic powder keg looking for a match.

In fact, as a freakish product of 30 years of bad money it is the very opposite of the preposterous Wall Street/Washington presumption that it’s just another really big economy that overdid the “growth” thing; and which is now looking to Beijing’s firm hand to effect a smooth transition. That is, an orderly migration from a manufacturing, export and fixed investment boom-land to a pleasant new regime of shopping, motoring, and mass consumption.

Would that it could. But China is not a $12 trillion growth miracle with transition challenges; it is a quasi-totalitarian nation gone mad digging, building, borrowing, spending and speculating in a magnitude that has no historical parallel.

So doing, it has fashioned itself into an incendiary volcano of unpayable debt and wasteful, crazy-ass overinvestment in everything. It cannot be slowed, stabilized or transitioned by edicts and new plans from the comrades in Beijing. It is the greatest economic trainwreck in human history barreling toward a bridgeless chasm.

And that’s what makes Wall Street’s current assumption that the Donald’s trade war is nothing to sweat about so stunningly insensible.

Indeed, the notion that today’s dueling tariffs will be compromised out in some grand global crony capitalist style settlement is not only dead wrong; it’s completely oblivious to the rotting economic foundations that got us here.

Stated differently, the burned out industrial precincts of Pennsylvania, Ohio, Michigan, Wisconsin and Iowa may well have chosen the Donald to huff and puff about trade deficits, but in so doing they have also brought into the line of fire the entire bad money regime that underlies the unsustainable globalist order.

If China goes down hard the global economy cannot avoid a thundering financial and macroeconomic dislocation. And not just because China accounts for 17% of the world’s $80 trillion of GDP or that it has been the planet’s growth engine most of this century.

As we have indicated, China is the rotten epicenter of the world’s three decade long plunge into an immense central bank fostered monetary fraud and credit explosion that has deformed and destabilized the very warp and woof of the global economy.

As further indicated above, China’s financial madness has gone to an unfathomable extreme because in the early 1990s a desperate oligarchy of despots who ruled with machine guns discovered a better means to stay in power. That is, the printing press in the basement of the PBOC—-and just in the nick of time (for them).

Print they did. Buying in dollars, euros and other currencies hand-over-fist in order to peg their own money and lubricate Mr. Deng’s export factories, the PBOC expanded its balance sheet from $40 billion to $4 trillionduring the course of a mere two decades.

That’s 100X and there is nothing like that in the history of central banking—–nor even in economists’ most febrile imagings about its possibilities.

The PBOC’s red hot printing press, in turn, emitted high-powered credit fuel. In the mid-1990s China had about $500 billion of public and private credit outstanding—hardly 1.0X its rickety GDP. Today that number is $40 trillion or even more.

Yet nothing in this economic world (or the next) can grow at 80X in only 20 years and live to tell about it. Most especially, not in a system built on a tissue of top-down edicts, illusions, lies and impossibilities, and which sports not even a semblance of financial discipline, political accountability or free public speech.

To wit, China is a witches brew of Keynes and Lenin. It’s the financial tempest which will slam the world’s great bloated edifice of central bank fostered faux prosperity.

So the right approach to the horrible danger now at hand is not to dissect the dueling tariff lists to guess which tit will be traded for what tat.

Instead, it is time to recognize that the Red Suzerains of Beijing have built a Potemkin Village. But since they actually believe it’s real, they do not have even a passing acquaintanceship with the requisites and routines of a real capitalist economy.

Ever since the aging oligarch(s) who run China were delivered from Mao’s hideous dystopia by Mr. Deng’s chance discovery of printing press prosperity, they have lived in an ever expanding bubble that is so economically unreal that it would make the Truman Show envious. Any rulers with even a modicum of economic literacy would have recognized long ago that the Chinese economy is booby-trapped everywhere with waste, excess and unsustainability.

Here is but one example. Somewhere near Shanghai some credit-crazed developers built a replica of the Pentagon on 100 acres of land. This was not intended as a build-to-lease deal with the  PLA (People’s Liberation Army); its a shopping mall that apparently has no tenants and no customers!

Projects like the above—–and China is crawling with them—–are a screaming marker of an economic doomsday machine. They bespoke an inherently unsustainable and unstable simulacrum of capitalism where the purpose of credit is to fund state mandated GDP quota’s, not finance efficient investments with calculable risks and returns.

Accordingly, the outward forms of capitalism are belied by the substance of statist control and central planning. For example, there is no legitimate banking system in China—just giant state bureaus which are effectively run by party operatives.

Their modus operandi amounts to parceling out quotas for national GDP and credit growth from the top, and then water-falling them down a vast chain of command to the counties, townships and villages below. There have never been any legitimate financial prices in China—all interest rates and FX rates have been pegged and regulated to the decimal point; nor has there ever been any honest financial accounting either—-loans have been perpetual options to extend and pretend.

And, needless to say, there is no system of financial discipline based on contract law. China’s GDP has grown by $11 trillion dollars during this century alone——-that is, there has been a boom across the land that makes the California gold rush appear pastoral by comparison.

Yet in all that frenzied prospecting there have been almost no mistakes, busted camps, empty pans or even personal bankruptcies.  When something has occasionally gone wrong with an “investment” the prospectors have gathered in noisy crowds on the streets and pounded their pans for relief—-a courtesy that the regime has invariably granted.

Indeed, the Red Ponzi makes Wall Street look like an ethical improvement society. Developers there built an entire $50 billion replica of Manhattan Island near the port city of Tianjin—– complete with its own Rockefeller Center and Twin Towers—– but have neglected to tell investors that no one lives there. Not even bankers!

Stated differently, even at the peak of recent financial bubbles in London, NYC, Miami or Houston  they did not build such monuments to sheer economic waste and capital destruction. But just consider the case of China’s mammoth steel industry.

It grew from about 70 million tons of production in the early 1990s to 832 million tons in 2017. Beyond that, the capacity build-out behind the chart below tells the full story.

To wit, Beijing’s tsunami of cheap credit enabled China’s state-owned steel companies to build new capacity at an even more fevered pace than the breakneck growth of annual production. Consequently, annual crude steel capacity now stands at nearly 1.3 billion tons, and nearly all of that capacity—-about 65% of the world total—— was built in the last ten years.

Needless to say, it’s a sheer impossibility to expand efficiently the heaviest of heavy industries by 17X in a quarter century.

This means that China’s aberrationally massive steel industry expansion created a significant increment of demand for its own products.

That is, demand for plate, structural and other steel shapes that go into blast furnaces, BOF works, rolling mills, fabrication plants, iron ore loading and storage facilities, as well as into plate and other steel products for shipyards where new bulk carriers were built and into the massive equipment and infrastructure used at the iron ore mines and ports.

That is to say, the Chinese steel industry has been chasing its own tail, but the merry-go-round has now stopped, and with the completion of the Mr. Xi’s coronation last fall the last burst of Potemkin construction is being ground to a halt. 

The fact is, China will be lucky to have 500 million tons of true sell-through demand—-that is, on-going domestic demand for sheet steel to go into cars and appliances and for rebar and structural steel to be used in replacement construction once the current one-time building binge finally expires. That’s just 40% of its massive capacity investment.

And it is also evident that it will not be in a position to dump its massive surplus on the rest of the world. Indeed, that threat is at the very heart of the Donald’s incipient trade war, which started with the 25% steel tariffs a few weeks ago.

What the trade war really means is that China has upwards of a half-billion tons of excess capacity that will crush prices and profits, but, more importantly, that the one-time steel demand for steel industry CapEx is over and done. And that means shipyards and mining equipment, too.

These are not simply gee whiz comparisons. It took the fastidious Japanese nearly five decades to erect the world’s leading 120 million ton steel industry on the back of tens of thousands of step-by-step engineering and operational improvements. China created the same tonnage each and every year after the financial crisis, but it was all based just on a great field of dreams exercise in pell mell expansion. Efficiency, longevity and steel-making technique were hardly an afterthought.

Nor is its own tail the only loss of market demand. Even more  fantastic than steel has been the growth of China’s auto production capacity. In 1994, China produced about 1.4 million units of what were bare bones communist era cars and trucks. Last year it produced more than 29 million mostly western style vehicles or 21X more.

And, yes, that wasn’t the half of it. China has gone nuts building auto plants and distribution infrastructure. It is currently estimated to have upwards of 35 million units of vehicle production capacity. But  demand has actually rolled over this year and will continue heading lower after temporary government tax gimmicks—– that are simply pulling forward future sales—–expire.

The more important point, however, is that as the China credit Ponzi grinds to a halt, it will not be building new auto capacity for years to come. It is now drowning in excess capacity, and as prices and profits plunge in the years ahead the auto industry CapEx spigot will be slammed shut, too.

Needless to say, this not only means that consumption of structural steel and rebar for new auto plants will plunge. It also will result in a drastic reduction in demand for the sophisticated German machine tools and automation equipment needed to actually build cars.

Stated differently, the CapEx depression which has been underway for several years in China, Australia, Brazil and much of the EM will ricochet across the global economy. Cheap credit and mispriced capital are truly the father of a thousand economic sins.

China’s construction infrastructure, for example, is grotesquely overbuilt—— from cement kilns, to construction equipment manufacturers and distributors, to sand and gravel movers, to construction site vendors of every stripe.

For crying out loud, in three recent years China used more cement than did the United States during the entire 20th century!

That is not indicative of a just a giddy boom; its evidence of a system that has gone mad digging, hauling, staging and constructing because there was unlimited credit available to finance the outpouring of China’s runaway construction machine.

The same is true for its machinery, solar and aluminum industries—to say nothing of 70 million empty luxury apartments and vast stretches of over-built highways, fast rail, airports, shopping mails and new cities.

In short, the flip-side of the China’s giant credit bubble is the most massive malinvesment of real economic resources—-labor, raw materials and capital goods—ever known.

In effect, the country-side pig sties have been piled high with copper inventories and the urban neighborhoods have been covered with glass, cement and rebar erections that can’t possibly earn an economic return. Yet all of these assets have become “collateral” for even more “loans” under the Chinese Ponzi.

China has been on a wild tear heading straight for the economic edge of the planet—-that is, monetary Terra Incognito—based on the circular principle of borrowing, building and borrowing. In essence, it is a giant re-hypothecation scheme where every man’s “debt” become the next man’s “asset”.

Thus, local government’s have meager incomes, but vastly bloated debts based on the collateral of stupendously over-valued inventories of land—-valuations which were established by earlier debt financed sales to developers.

Likewise, coal mine entrepreneurs face not only collapsing prices and revenues, but also soaring double digit interest rates on shadow banking loans collateralized by over-valued coal reserves. Shipyards have empty order books, but vast debts collateralized by soon to be idle construction bays. Speculators have collateralized massive stock piles of copper and iron ore at prices that are on the way to becoming ancient history.

So China is indeed the greatest Ponzi scheme in recorded history. And it is that house of cards that the Donald has now frontally attacked.

More hideous still, it is that house of cards that the robo-machines brought with malice aforethought this afternoon, reversing the Dow’s overnight drop by nearly 750 points.

Bad money has rarely been so insouciant; the revenge never so certain.

White House Chief of Staff John Kelly threatened to quit in late March after a blow up with Trump in a meeting in the Oval Office, reports Axios.

Kelly was reportedly heard muttering about quitting as he stormed back to his office after the March 28 argument – however sources say it wasn’t related to the firing of former Secretary of Veterans Affairs David Shulkin which happened the same day.

A senior administration official said that calling it a threat was “probably too strong, it was more venting frustration.” Kelly often says he doesn’t have to be there and didn’t seek the job originally. –Axios

Details (via Axios):

• Kelly packed up some personal belongings, though I’m told that wasn’t necessarily because he was walking out.
• He was fired up enough that colleagues got allies to call in to calm him down.
• At one point DHS Secretary Kirstjen Nielsen — perhaps the person in the administration he trusts most — came over to talk him off the ledge.

Meanwhile, President Trump has reportedly been sidestepping Kelly of late – telling one confidant that he’s “tired of being told no” by Kelly, and has instead opted to simply not include his Chief of Staff in various matters, according to CBS News, citing a person who was not authorized to publicly discuss private conversations and spoke on condition of anonymity.

When President Donald Trump made a congratulatory phone call to Russian leader Vladimir Putin, White House chief of staff John Kelly wasn’t on the line. When Mr. Trump tapped John Bolton to be his next national security adviser, Kelly wasn’t in the room.

And when Mr. Trump spent a Mar-a-Lago weekend stewing over immigration and trade, Kelly wasn’t in sight.

Kelly, once empowered to bring order to a turbulent West Wing, has receded from view, his clout diminished, his word less trusted by staff and his guidance less tolerated by an increasingly go-it-alone president. –CBS News

Kelly had made it a practice for months to listen in on many of the president’s calls – particularly with world leaders. He also reportedly advocated against the hiring of John Bolton.

“It’s not tenable for Kelly to remain in this position so weakened,” said Chris Whipple, author of “Gatekeepers,” a history of modern White House chiefs of staff. “More than any of his predecessors, Donald Trump needs an empowered chief of staff to tell him what he does not want to hear. Trump wants to run the White House like the 26th floor of Trump Tower, and it’s simply not going to work.”

In December we reported that President Trump had been calling White House aides to his private residence in the evening where he would give them new assignments – asking them not to tell Kelly.

“John has been successful at putting in place a stronger chain of command in the White House, requiring people to go through him to get to the Oval Office,” said Leon Panetta, a White House chief of staff under President Bill Clinton who worked with Mr. Kelly, a four-star Marine general, in the Department of Defense. “The problem has always been whether or not the president is going to accept better discipline in the way he operates. He’s been less successful at that.” –WSJ

“This is all just inevitable,” said one person close to Mr. Trump. “It’s not that Mr. Kelly is wrong—we all know he’s terribly competent.”

Meanwhile, frustrated friends of the President have also reportedly gotten around Kelly’s “do not call” list by calling Melania Trump in order to pass messages to her husband, according to two people familiar with the matter.

“[S]ince she arrived in the White House from New York in the summer, the first lady has taken on a more central role as a political adviser to the president.”

“If I don’t want to wait 24 hours for a call from the president, getting to Melania is much easier,” one person said. –WSJ

Melania Trump’s office issued a harsh rebuke to the Wall St. Journal, stating “This is more fake news and these are more anonymous sources peddling things that just aren’t true. The First Lady is focused on her own work in the East Wing.” 

Trump’s Twitter feed is still off limits to Kelly, who’s been rolling his eyes at questions over potential diplomatic quagmires such as the time he called North Korean leader Kim Jong Un “short and fat.” Asked about the incident, Kelly shrugged it off – saying “Believe it or not – I don’t follow the tweets,” adding that he has advised White House staff to do the same. “We develop policy in the normal traditional staff way.”

As one White House official told the WSJ, despite what appears to be an equilibrium between Kelly and Trump, they may never see eye to eye. “Kelly is too much of a general, and Trump is too much Trump,” adding that Trump continues to hold Mr. Kelly in high regard – often praising him during public appearances.

Meanwhile in March, Kelly  was reportedly so furious over the way the press was covering Secretary of State Rex Tillerson’s Tuesday firing that he shouted at the television on Air Force One as the President and his staff took off for California, according to Politico.

Accounts of Kelly’s involvement in Tillerson’s ouster have varied. While some reports describe Kelly only telling Tillerson to watch Trump’s twitter account “over the next few days,” others have said it was a much more direct conversation in which the Secretary of State was given a heads up. In that version, Tillerson implored Kelly to hold off on any decisions until he returned to the U.S. on Monday.

Tillerson, meanwhile, would only say that he received a “lunchtime call” from Trump during the President’s flight to California, and a separate call from Kelly – both after Trump’s tweet.

Kelly’s consternation over the press coverage came on the heels of former Trump staff secretary Rob Porter’s ouster in February after the Daily Mail published accounts from his two ex-wives accusing him of domestic abuse. Kelly took fire for not getting rid of Porter earler, after it emerged that the FBI had alerted the White House several times in 2017 that the allegations were holding up Porter’s security clearance.  When the allegations against Porter began to fly, Kelly put out a statement calling Porter a “man of true integrity and honor,” and “a trusted professional.”

With Trump playing musical chairs in the West Wing seemingly every other week, one has to wonder exactly how much longer Kelly will last.