Less Negative is Positive

"A negative times a negative equals a positive."
--Jaime Escalante (Stand and Deliver)

Negative interest rate policies (NIRP) enacted by central banks across the globe in the middle of last decade spawned a mountain of negative interest-bearing debt. It was hard to imagine who was buying it although, in reality, central banks themselves were hoovering much of it up as part of their quantitative easing (QE) programs.

The worm has turned dramatically as inflation has picked up and CBs are now raising rates. After hitting a peak of about $17 trillion in 2020, negative yielding debt has plummeted to less than $2 trillion. Most of that decline has come since the beginning of 2022.

As NIRP debt declines, it seems likely that broken conventional discounting processes get repaired.

Central banks become extra big losers as NIRP reverses. They bought $trillions of negative yielding bonds that have now been pounded as rates rise and bond prices fall. Many CBs are approaching the broke point on paper.

While these institutions can simply print more money out of thin air to rectify their upside down balance sheets, this would create quite the paradox of creating more money in an inflationary environment.

Euro Energy Bailout

Here I am in silence
It's a game I have to play
You and I in silence
With nothing else to say
--Information Society

On the back of yesterday's post, headlines this morning find euro bureaucrats committing to massive bailouts of consumers and producers as they face virtual margin calls as energy prices spiral higher.

These bailouts are forms of stimulus--subsidies that work against efforts to reign in higher prices.

Still wrapping my head around how this spills over to the US. The obvious consequence is an even strong USD vs the euro.

Jackson's Hole

"You're the disease, and I'm the cure."
--Marion Cobretti (Cobra)

The much-awaited Jackson Hole speech from Fed chair Powell is now in the books. Personally, I always chuckle when Fed heads wax about economic problems that always seem to be exogenous, and the Fed's heroic role in taming them.

The topic this time around is, of course, inflation. Powell suggests that the Fed must draw upon 3 lessons learned. One is that the Fed must take on responsibility for delivering low and stable inflation. The obvious question is why should the Fed be responsible for delivering any rate of inflation at all? Moreover, if the Fed is responsible for delivering low inflation, then how did we get to this state of high inflation in the first place?

The second lesson learned related to 'inflation expectations.' Powell asserts that "if the public expects that inflation will remain low and stable over time, then, absent major shocks, it likely will. I found that statement particularly rich. It suggests that a major goal of 'fighting inflation' is persuasion--persuading the public that inflation is low. 

Never mind the decades of easy money compliments of the Fed.

The third lesson is that the Fed must keep at it until the job is done. That is, keep monetary policy restrictive until "inflation is down to the low and stable levels that were the norm until the spring of last year. But monetary policy was extraordinarily 'unrestrictive' for more than a decade before the spring of last year. 

If that prolonged period of easy money didn't unduly elevate the public's inflation expectations, then how will the Fed 'keeping at it' with restrictive monetary policy do the opposite?

Powell once again markets the Fed as the cure rather than the disease it is.

Inflation Reduction Act

I bought a novel, some perfume
A fortune all for you
But it's not my conscience
That hates to be untrue
I asked of my reflection,
"Tell me what is there to do?"
--Squeeze

As we've discussed, leftists are rarely honest with their rhetoric. They label things largely contrary of their actual effects.

Cast in point: the proposed Inflation Reduction Act. 

As Ron Paul discusses, the bill does the opposite. It increases government spending by hundreds of billions of dollars. It takes resources out of the hands of private citizens and puts them into the hands of bureaucrats.

Not only does this increase the risk of capital misallocation, but it must be funded. To the extent that citizens are taxed, it reduces economic resources available to people during an era of high price inflation and slowing economic activity.

It is a universal truth that slow economic activity motivates easier central bank monetary policy (read: inflation).

To the extent that taxes won't cover the spending, then those funds must either be a) borrowed, which taxes future incomes, or b) printed (the reason why inflation is called the 'invisible tax').

There is little doubt that the Inflation Reduction Act will ultimately result in more inflation, not less.

Undercover Hero?

My beacon's been moved
Under moon and star
Where am I to go
Now that I've gone too far?
--Golden Earring

I enjoy reading Tom Luongo's work. Thought provoking--even when his general premise is wrongheaded. 

In this recent piece, for example, Luongo gives the Fed entirely too much credit, arguing that the central bank is essentially the 'good guy'--battling inflation wrought by irresponsible fiscal policies that sent money to people in boxes during CV19. 

He fails to mention the Fed's long history of bailing out markets (and policymakers) when markets break, or of the central bank's $9 trillion of balance sheet assets purchased with money created at the click of a mouse. Because, as Friedman observed, inflation is always a creature of monetary policy, arguing that the Fed is somehow not the Dr Frankenstein that created our present monster seems a bit naive.

However, Luongo does make an interesting point toward the end of his article. He notes (correctly) that the Davos/World Economic Forum crowd would like to put an end to commercial banking, and put all monetary power in the hands of central banks--perhaps even in a one world central bank with digital currency-producing capacity.

He then suggests that, in the United States (and perhaps elsewhere), the Fed represents the interests of those commercial banks. As such, the Fed is motivated to break the EU-centric Davos/WEF threat to US commercial banks by raising rates, pounding the euro, and perhaps even driving the EU toward dissolution.

There's lots of holes in that argument--including the Fed's 'institutional obligations' both domestic and abroad--but interesting to ponder the 'undercover hero' thesis nonetheless.

Zero Coherence

Maybe someday
Saved by zero
I'll be more together
--The Fixx

Earlier today the European Central Bank (ECB) raised its deposit rate 50 basis point to...zero. The ECB's deposit rate had been in negative territory since 2014, meaning that depositors essentially paid to keep their money in the central bank's vault.

This is also the first interest rate increase by the ECB since 2011.

Needless to say, monetary policy in Europe has been off the rails for quite some time.

To demonstrate that it hasn't suddenly been transformed into an institution with coherence, the ECB unleashed a blizzard of acronym-heavy programs, such as Transmissions Protection Mechanisms (TPI), designed to selectively buy bonds of struggling EU countries (e.g., Italy) to keep sovereign debt from imploding.

Thus, we have a central bank raising interest rates while continuing easy money policy using a quantitative easing (QE) transmission mechanism.

The ECB truly makes the Fed look smart.

On the QT

It happened one summer
It happened one time
It happened forever
For a short time
--Motels

Bank of America (BAC) analyst and former Fed staffer who has a good track record of predicting Fed policy shifts forecasts that the central bank's current quantitative tightening (QT) will be ended much sooner than expected. He thinks QT will cease in early 2023 with about $1 trillion in asset rolled off the Fed's balance sheet.

While consistent with what these pages have been suggesting, I'll pick the under on both. Sooner than early 2023 and less than $ trillion unwound.

position in BAC

Yen Destruction

One day you feel quite stable
The next you're coming off the wall
But I think that you should warn me
If you start heading for a fall
--Saga

When leverage + money printing start going way wrong, the billiard balls begin careening around the table. One never knows where the blow ups will occur.

This time around, Japan is becoming an epicenter. Faced with unrelenting Bank of Japan (BOJ) intervention, the yen has been getting pounded and sits at 20+ yr lows. 

Now, with the 10 yr Japanese government bond (JGB) yield hitting the upper band tag in the BOJ's yield curve control program, the BOJ has bought about 1.5 trillion yen's worth of JGBs. If the pace continues through end of month, the BOJ will have purchased about 10 trillion yen's worth of bonds.

To put that in perspective, that would be the equivalent of the Fed doing more than $300 billion of QE when adjusted for GDP.

It is hard not to envision outright monetary collapse if the BOJ does not take its foot off the gas soon.

What that means for financial systems worldwide, as integrated as they are, is anyone's guess.

Another High

First class and fancy free
She's high society
She's got the best of everything
--Tal Bachman

CPI prints another 40 yr high at 8.6%.

Gold up on the news as perhaps central banker's chronic incompetence is beginning to sink in w investors.

position in gold

Falling FAANG Forecast

I see the bad moon rising
I see trouble on the way
I see earthquakes and lightning
I see bad times today
--Creedence Clearwater Rivival

Couple of interesting charts. First (Chart 3) presents a ratio of resource vs biotech ETFs alongside the yield on the German 5 yr bund since 2010. The relationship is readily apparent. Lower yields favor biotech ETFs (a proxy for speculative risk taking in 'tech') relative to price of resource ETFs (a proxy for inflation and conservative positioning in 'stuff' stocks). 

Now, as rates climb higher, the ratio is moving in favor of resource ETFs. Note that the ratio has lots of room to move higher, as suggested by the previous peak in 2010-2011.

The second chart plots central bank liquidity (presumably the aggregate assets on central bank balance sheets mostly due to asset buying programs associated with quantitative easing) alongside the market cap of the FAANG+ group which, due to their immense size can be seen as proxies for the overall market--particularly the tech side. This can be seen a slightly different take on this important chart.

The relationship could not be more obvious. The trillion$ of money printed out of thin air to fund central banks asset purchases has goosed stock prices higher.

With central banks now signaling a reversal of QE programs as they address surging prices of goods and services, the ramifications of doing so are ominous for stocks--particularly those of the speculative FAANG variety.

Dot Matrix

"Whatever you're thinking, rethink it."
--Phil Broker (Homefront)

The Federal Reserve Open Market Committee (FOMC) announced that it will raise the fed funds rate target to the 0.25-0.50% range. It also indicated that it plans to begin reduction of the $9 trillion of balance sheet assets amassed during it various QE campaigns 'at a coming meeting.'

The lone dissenter was 'hawk' James Bullard who preferred a 50 bip increase in the fed funds rate instead of the 25 bip bump announced.

The Fed's 'dot plot,' which indicates current FOMC member forecasts of where the fed funds rate is headed suggests that Fed heads foresee higher rates in 2022-2024 than previously expected. However, longer run rates are seen as unchanged or slightly lower than previously forecast.

The dots suggest a couple of things. Several rate hikes this year--six of them if they are 25 bps each. Then a relatively benign longer run.

The FOMC also forecast price inflation of 4.1% by end of 2022.

Given the Fed's previous track record, don't be surprised if all if its guesses here are way off.

Monetary Cease Fire

It's 2 am, the fear is gone
I'm still sitting here, the gun still warm
Maybe my connection is tired of taking chances
--Golden Earring

Last week the Fed made a final bond purchase before shutting down its fourth round of QE operations. 

During the most recent round of QE, which was instigated during the CV19 panic, the Fed has added an additional $5 trillion to its balance sheet--on top of the roughly $4 trillion from the previous QE junkets.

As shown above, QE programs by the Fed and other central banks around the world have lit a fire under asset prices. Any attempt to unwind QE balance sheet assets has led to lower prices.

This begs questions about the durability of this monetary cease fire. What will the Fed do with those $trillions on its balance sheet? And how long will it be until QE5 fires up?

Financial System Warfare

"Dude, we're on the grid!"
--Riley Poole (National Treasure)

Over the past month we've witnessed countries using the financial system to suppress behavior that they don't like. First it was the Canadian government freezing bank accounts and funding sources of citizen CV19 protestors and their allies. 

Then there has been the international response to the Ukraine situation. The US, EU, and other state entities have levied an array of financially-oriented sanctions on Russia to the point where it seems nearly impossible for people inside Russia to engage in external economic transactions. Even inside Russia, those sanctions have wrought chaos--sovereign debt downgrades, plunging stock markets, a cratering Ruble among them.

What should be clear is that modern financial systems, whose digital configurations are far easier to manipulate than in the past, are being used as geopolitical tools of warfare. Armed with these tools, governments can target either their own citizens (e.g., Canada) or remote citizenry (e.g., Russia).

This lesson is unlikely to be lost on at least two groups. One group involves countries with, shall we say, invasive aspirations. In anticipation of where escalating geopolitical tensions might head, Russia began decoupling its monetary and financial system from the international grid several years ago. For example, it substantially cut its US dollar reserves and increased its gold holdings. Consequently, the present barrage of financial system sanctions, while difficult to handle, has not completely incapacitated a more independent Russian financial system.

Given its aspirations to take control of neighboring Taiwan, China will undoubtedly prepare for a similar barrage before physically moving across a border (if/when). Any belligerent, for that matter, will need to decouple its financial system to the point where it will be able to survive the monetary salvos.

The second group involves citizens at large. The issue is captured in a question: Knowing that a government can, at its discretion, freeze or confiscate digital bank accounts as well as block digital financial transactions of any citizen, do you really want to have all of your financial resources on the grid?

The more people wake up to the specter of government-waged financial warfare, the more likely they will begin re-positioning for greater financial sovereignty. 

This re-positioning to combat geopolitical financial warfare seems likely to include gold.

position in gold

Stagflation and Gold

You're calling my name
But I gotta make it clear
I can't say, baby
Where I'll be in a year
--Aerosmith

Stagflation is a period of economic malaise the combines stagnant economic growth with rising prices. The last major period of stagflation in the US occurred in the 1970s. Some will recall those gas lines.

Chatter about pending stagflation is getting louder.

Here is an interesting analysis that considers gold in a prospective stagflationary environment. The basic thesis is that, in a stagflationary environment, gold is one of the last commodities bought. As inflation picks up, businesses and speculators first buy consumable commodities that they need (e.g., oil, ags, base metals). 

However, as business prospects dim (the 'stag' part) and there is still worry about inflation, buyers turn to gold.

What about Bitcoin as an alternative to gold? As proposed in the piece, Bitcoin is likely to benefit more from 'risk on' environments with ample central bank money printing. In 'risk off' situations with tighter monetary policy, then the focus turns to gold.

We've certainly seen Bitcoin bid higher over the past few years of gargantuan central bank money printing. More recently, we've seen 'usable' commodities bid to the moon while gold has languished.

All of this is consistent with the above propositions, and suggests that gold's time is approaching.

This is an interesting thesis--one that I might put to work.

position in gold  

De-FANGed?

Dark in the city
Night is a wire
Steam in the subway
Earth is afire
--Duran Duran

Like markets as a whole, the FANG complex has run up alongside central bank balance sheets.

However, in early 2022 this group has sold off hard (above graph precedes the decline), presumably in anticipation of a hawkish Fed. 

Because of their huge market caps, FANG stock weakness is beginning to weigh heavily on the major indexes. The NASDAQ is down more than 10% thus far in January and is poised for its worst annual start since the 2008 credit crisis. 

It's easy to imagine how this situation could snowball. If it does, then prepare for the Fed, beholden to stock market performance, to begin backing off their hawkish stance.

As always.

Important Chart

There's a room where the lights won't find you
Holding hands while the walls come tumbling down
When they do, I'll be right behind you
--Tears for Fears

Have been looking for an updated version of this chart for a while. Finally found one courtesy of maven Stephanie Pomboy.

The chart continues to tell an important, if not THE, story behind the huge rise in stock prices (as well as other asset prices) since the 2008 credit crisis.

The graph plots balance sheet assets of the Federal Reserve alongside the S&P 500 Index (SPX) from 2009 thru the end of 2021. The correlation between the two series is unmistakable. Increases in the Fed's balance sheet, which has more than quadrupled in size since 2009, correspond to increases in overall stock prices.

What has caused the Fed's balance sheet to increase so dramatically? The primary driver has become known as 'quantitative easing' (QE)--a program designed to, among other things, stimulate economic activity after major calamities such as the 2008 credit collapse. 

When conducting QE operations, the Fed purchases securities (mostly Treasury and agency bonds) from financial institutions that deal in those securities. For instance, the Fed might observe $100 million in Treasuries sitting in J.P. Morgan's (JPM) inventory, and then buy them all by placing a credit of $100 million with JPM in exchange for the bonds. The $100 million in Treasuries is added to the Fed's balance sheet.

Where does the Fed get the $100 million to buy those bonds from JPM? Out of thin air, baby. It creates the money with a few clicks of a mouse. 

The freshly minted cash now in the hands of financial institutions can be used to fund everyday operations, including trading and speculation in financial securities. As implied by the above graph, a sizable fraction of this cash has gone into stocks over the past decade or so.

It should be noted that the relationship works in reverse as well. When the Fed has halted QE operations over the past decade, stocks generally move sideways along with the value of the Fed's balance sheet assets. And, although you have to squint to see it, on the rare occasion that the Fed has attempted to unwind (read: sell) assets from its balance sheet (which has the effect of removing some of that magically printed money from the financial system), stock prices have fallen.

The only time this relationship did not hold was 2018-2019. Despite Fed efforts to curtail QE and even unwind balance sheet assets during this period, stock prices continued to rise. However, as indicated by Stephanie on the graph, this period also corresponds to a time of tax cuts and deregulation that was favorable for stocks. Stated differently, the bullish backdrop essentially overpowered the bearish forces of Fed actions on stock prices.

The relationship quickly got back on track in early 2020 when the Fed embarked on a gargantuan QE program in response to the onset of COVID-19. The Fed's balance sheet has more than doubled since then to over $8 trillion. The value of the SPX has commensurately doubled as well. 

Moving forward, the relationship between QE and stock prices has important policy implications. As inflationary pressures grow, the Fed may be tempted to curtail or perhaps even reverse its bond-buying practices. Although doing so would relieve inflationary pressures that the Fed itself helped to create, stopping or reversing QE is likely to put downward pressure on stock prices. Any policy that tanks the stock market promises to be politically distasteful.

Whatever the Fed and other central banks who have engaged in QE decide to do from here to address the inflation that they themselves brought about, you can bet that they are looking at the same chart we are...

no positions

Crack-Up Boom

"It's just money. It's made up--pieces of paper with pictures on it so we don't have to kill each other just to get something to eat."
--John Tuld (Margin Call)

Ludwig von Mises coined (!) the term 'crack up boom' to refer to people swapping out of money and into real goods out of fear that purchasing power was being destroyed by ever increasing monetary creation--either through expansion of bank credit or through monetization of debt. 

As supply of money ever increases, demand for money (i.e., desire to hold cash rather than spend it) collapses. People buy stuff even if they don't need it because anything tangible is better than holding cash which is deemed worthless.

Mises witnessed this phenomenon first-hand during the marquee hyperinflation of the 20th century in 1920s Weimar Germany. He saw children playing house with piles of worthless currency, and men pushing around infamous 'wheelbarrow wallets.'

Ron Paul wonders whether we're on the verge of another crack-up boom. Trillion$ in new money have been created with no end in sight. Inflation measures are printing multi-decade highs. Asset prices have followed suit.

He thinks that re-kindling the spirit of liberty would stop progress of a crack-up boom. Why? Because liberty-minded people do not tolerate massive government spending nor central bank intervention in financial (and social) affairs).

That's a worthy cause to pursue.

Inflation and Stocks

Hundred dollar car note
Two hundred rent
I get a check on Friday
But it's already spent
--Huey Lewis & the News

Some believe that if Big Inflation cometh, stocks will get creamed. Surging prices will drive folks to spend less. Simple ECON 101.

Lower demand for goods and services should be bad for stocks.

A counterargument is that Big Inflation occurs when people get nervous about the value of their dollars sitting idle, so they put them to work today assuming that they can buy more today (i.e., goods, services, AND stocks) than tomorrow. The psychology feeds on itself, creating, in its ugliest form a reinforcing cycle of higher prices and money printing that feeds it.

Although producers are hurt on the input side with higher costs, they can offset them at least partially by raising prices, thereby preserving profit margins to some degree. To the extent that producers own tangible assets, these are also likely to appreciate in value as inflationary pressures rise--giving a boost to book value at least in nominal terms.

In this scenario, stocks are likely to rise. Perhaps not to a degree that completely compensates for purchasing power decline, but at least to serve as a partial hedge that preserves wealth (note Kyle Bass estimates perhaps 85% coverage).

Historical analysis supports this thesis. Weimar Germany, Venezuela, Zimbabwe. Equities tended to rocket in the local currency--even if they didn't keep pace with exchange against more stable currencies (and gold).

One thing seems increasingly clear. In Big Inflation environments, stocks are likely to be a better place to be than cash.

It also seems that, in the current market environment where the CPI is starting to print some big numbers, stocks seem unfazed--like they want to go higher.

position in gold

Dollars to Dust

It slips away
And all your money won't another minute buy
--Kansas

The Coinage Act of 1792 established the US dollar as the the standard unit of money in the United States. For nearly a century and a half, the value of the US dollar remained relatively constant.

1800 $1 PCGS F12 CAC

That all changed in 1913 with the passage of the Federal Reserve Act. The act instituted the Federal Reserve as the central bank of the United States. Since the Fed was created, the value of the dollar has consistently declined.

From the above graph, observe that the USD has been so debased that it is impossible to detect just where on the purchasing power scale we are vs 1913. 

Cause and effect. The Fed and inflation. Dollars to dust.  

Premeditated Destruction

There's a room where the light won't find you

Holding hands while the walls come tumbling down

When they do, I'll be right behind you

--Tears for Fears

Since the beginning of the pandemic, reasoned minds worldwide have been disturbed by how events have unfolded, and by the illogical nature of policy response. Personally, I theorized about an initially random but increasingly organized movement among various factions to advance their interests as authoritarians inevitably perceive that crisis presents opportunity.

Here is an alternative theory proposed by a German analyst. I am going to list key aspects of his theory below.

The pandemic and associated events over the past 18 months were not random or accidental but planned.

The master planners consist of a complex of large IT companies (discretionary power over huge data pool), global asset managers (raw financial power), and various policymakers (state power).

This is a plan hatched out of desperation to combat threats to the complex that have been many years in the making. 

The central threat to the complex stems from increasingly futile efforts of central bankers to inflate money supplies through evermore credit creation. With interest rates now effectively at the 'zero bound' since the 2008 credit collapse, the complex have lost the primary tool for advancing (read: funding) their interests.

Because driving interest rates negative to keep the wheels on the wagon would be socially unacceptable to the people at large, the complex requires a strategy that people would accept. Their solution: create a new system using a veil of economic and social chaos.

The system involves digital currency controlled by central banking authority. No more paper money. All money would be digital. Such a system provides power over money creation, surveillance over all monetary transactions; control over what money can purchase; where and with whom money can be spent, and the times that govern purchase; power to set and collect taxes; the power to impose fines; ability to distribute funds to whomever is deemed worthy. 

Such a system is seen by the complex as necessary to keep their interests (both economic and social) alive.

Under 'normal' conditions, the disenfranchisement that such a system would create would make it subject to huge pushback by the general populace.

Therefore, under the textbook authoritarian assumption about the crisis-opportunity relationship, the complex has determined that the most likely way that their the new system can be implemented is by a premeditated series of events that create economic and social chaos.

Enter CV19. Years of prior discussion and scenario planning informed the complex that a health crisis presented the best opportunity for creating fear and submission necessary for widespread acceptance of the new digital control system. Beginning late 2019, the complex began to implement the plan.

The plan's essence has been to implement policy responses to the pandemic that disturb economic and social fabrics in a manner that gradually escalates to the point of rupture. When the system collapses, people will beg for a policy solution like the digital currency and control system.

The author is careful to note influential role of the World Economic Forum (WEF) in the complex's preparation and execution of the plan. The WEF has 'trained' nearly all leaders of the complex, and has populated the ranks with thousands more like minds set on the goal of premeditated destruction.

On an optimistic note, the author suggests that the complex's plan is destined to fail. The 'deadly virus' narrative is already collapsing, leading to increasingly illogical arguments for pandemic countermeasures that even half wits are waking up to. Protests and pushback are growing.

Put differently, the complex's plan depends on chronic ignorance among a great majority of the world's people. But in order to advance its plan, the complex must resort to increasingly absurd measures certain to alert multitudes to the crimes being committed.

Truth will win. Evil will lose.