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Is the Fed Secretly Bailing Out a Major Bank?
Is the Fed Secretly Bailing Out a Major Bank?
Prettifying Toxic Waste
The promise of something for nothing is always an enticing proposition. Who doesn’t want roses without thorns, rainbows without rain, and salvation without repentance? So, too, who doesn’t want a few extra basis points of yield above the 10-year Treasury note at no added risk?
Thus, smart fellows go after it; pursuing financial innovation with unyielding devotion. The underlying philosophy, as we understand it, is that if risk is spread thin enough it magically disappears. In other words, the solution to pollution is dilution.
With this objective, new financial products are fabricated into existence. The risk free rewards of several extra basis points are then packaged up into debt instruments and sold off to pension funds and institutional investors. The search for yield demands it.
Yet as an economic expansion progresses, especially one that has been extended and distorted with the Fed’s cheap credit, these derived financial securities are polluted with more and more toxic waste. Spreading the risk ultimately pollutes the entire pool of liquidity.
At this moment in the business cycle, after a lengthy bull market in stocks and bonds, countless manifestations of the greater fool theory have bubbled up to the surface. Bonds with negative yields epitomize this. Buyers accept a guaranteed coupon loss with the hopes of scoring capital appreciation as yields fall. But when yields rise, it is game over.
German Bund futures contract, weekly. The recent blow-off and subsequent reversal illustrates the convexity effect on bond prices… [PT]
Of course, the greater fool theory extends much deeper and wider than negative yielding debt. It also extends to the polluted world of corporate debt…
…click on the above link to read the rest of the article…
The Federal Reserve is a Barbarous Relic
The Federal Reserve is a Barbarous Relic
The Sky is Falling
The man from the good place. “As I was going up the stair, I met a man who wasn’t there. He wasn’t there again today, Oh how I wish he’d go away!” [PT]
Ptolemy I Soter, in his history of the wars of Alexander the Great, related an episode from Alexander’s 334 BC compact with the Celts ‘who dwelt by the Ionian Gulf.’ According to Ptolemy’s account, which survives via quote by Arrian of Nicomedia some 450 years later, when Alexander asked the Celtic envoys what they feared most, they answered:
Today, at the risk of being called Chicken Little, we tug on a thread that weaves back to the ancient Celts. Our message is grave: The sky is falling. Though the implications are still unclear.
Various Celts – left: fearsome warriors; middle: fearsome warriors afraid of the sky falling on their heads; right: Cernunnos, fearsome Celtic horned god amid his collection of skulls. [PT]
The sky, for our purposes, is the debt based dollar reserve standard that has been in place for the past 48 years. If you recall, on August 15, 1971, President Nixon “temporarily” suspended convertibility of the dollar into gold. The dollar became wholly the fiat money of the Treasury.
At the G-10 Rome meeting held in late-1971, Treasury Secretary John Connally reduced the new dollar reserve standard to a bite-sized nugget for his European finance minister counterparts, stating:
Predictably, without the restraint of gold, the quantity of debt based money has increased seemingly without limits – and it is everyone’s massive problem. What’s more, over the past 30 years the Federal Reserve has obliged Washington with cheaper and cheaper credit.
…click on the above link to read the rest of the article…
How to Prepare as the Fed Scorches the Earth
How to Prepare as the Fed Scorches the Earth
Wildfire Surge
The hillsides are always brown in the land of fruits and nuts come autumn. After baking away all summer long in the hot sun, the dense sage and chaparral covering the coastal hillsides and canyons are dry and toasty. Though, before conditions get better, they must first get worse.
California is ablaze again… as every year. [PT]
High pressure systems form over the high-elevation deserts of the Great Basin, between the Sierra Nevada Mountains and the Rocky Mountains, each fall like clockwork. The pressure builds and forces the air to the south and west. The warm, dry winds of Santa Ana then race towards Southern California where they scorch the earth.
The winds howl from the east, across the inland deserts, where they funnel through the mountain passes and then blast across the LA Basin and out to the Pacific Ocean. As the winds conduit from high to low elevation they compress and rise in temperature at a rate of almost 30 degrees per mile of descent. What’s more, as the temperature of the air spikes upward, its relative humidity plunges downward below 10 percent.
The already brown and parched vegetative cover is further convection dried by the Santa Ana winds to form a giant tinderbox. Just one spark – from a downed power-line or a backfiring semi-truck – and the whole thing conflagrates into a blistering windblown wildfire. At last count, there were 13 active wildfires blazing across the state.
What pyromaniacs dream of… [PT]
…click on the above link to read the rest of the article…
Fiat Money Cannibalization in America
Fiat Money Cannibalization in America
An Odd Combination of Serenity and Panic
The United States, with untroubled ease, continued its approach toward catastrophe this week. The Federal Reserve cut the federal funds rate 25 basis points, thus furthering its program of mass money debasement. Yet, on the surface, all still remained in the superlative.
S&P 500 Index, weekly: serenely perched near all time highs, in permanently high plateau nirvana. [PT]
Stocks smiled down on investors from their perch upon what Irving Fischer once called “a permanently high plateau.” As of the market close on Thursday, the Dow Jones Industrial Average held above 27,000, the S&P 500 above 3,000, and the NASDAQ above 8,000. 401k accounts, to the delight of working stiffs of all ages, origins, and orientations, are swollen beyond expectations.
Below the surface, however, the overnight funding market was subject to much weeping and gnashing of teeth. Sometime between Monday night and Tuesday morning the overnight repurchase agreement (repo) rate hit 10 percent. Short-term liquidity markets essentially broke.
After several technical glitches, the Fed executed its first repo operation in a decade – $53 billion – to keep the interbank funding market flowing. Zero Hedge documented the chaos real time.
This was followed up with additional repo operations on Wednesday and Thursday – at $75 billion a pop, and both oversubscribed. Perhaps Fed repo operations will be a daily occurrence, at least until the Fed launches QE4.
US overnight repo rate – as Fed chair Jerome Powell remarked: “Funding pressures in money markets are elevated this week”. Evidently, nothing escapes his eagle eyes. [PT]
At the same time, the effective federal funds rate – the upper range limit of the federal funds rate – continues to push above the rate the Federal Reserve pays on excess reserves (IOER). In other words, the Fed’s primary tool for price fixing credit markets is not behaving according to plan. Greater Fed intervention will be needed to keep things in line.
…click on the above link to read the rest of the article…
Dead Meat in Jackson Hole
Dead Meat in Jackson Hole
The Pointlessness of Negative Yields
If there are any virtues of debt instruments with negative yields we have yet to realize them. Certainly, we understand that as bond yields fall, bond prices rise, and bond investors are rewarded with capital appreciation. But when capital is appreciating as a consequence of negative yields, we suspect there is something fundamentally wrong with the capital itself.
Not only is the stock of negative-yielding debt at a new record high of almost $17 trillion, lately there has been a big surge in corporate debt sporting negative yields-to-maturity. [PT]
Capital markets, as we have always understood them, are centered around lenders buying debt – such as a bond – at a yield that compensates for the risk of default over a contracted duration. The acceptance of negative yield is an abstraction that violates the form and function that capital markets are built on. In fact, negative interest rates undermine the foundational business model of banking in general.
How can banks lend money if they’re not compensated for the risk that some loans will go bad? And if banks can only lend money at a loss, why lend money at all? If there is no profit motive, what is the point?
There is currently about $17 trillion in combined government and corporate negative yielding debt in existence. The European Central Bank and the Bank of Japan, with policies of mass money debasement that far exceed those of the Federal Reserve, are the primary culprits. Their fake money and fake interest rates have produced fake capital markets.
In effect, Negative Interest Rate Policy (NIRP) destroys a commercial banks ability to build capital and offset losses. In other words, NIRP destroys commercial banks. By extension, NIRP via central banks leads to the implied nationalization of commercial banks.
…click on the above link to read the rest of the article…
Writing on the Wall
Writing on the Wall
Not Adding Up
One of the more disagreeable discrepancies of American life in the 21st century is the world according to Washington’s economic bureaus and the world as it actually is. In short, things don’t add up. What’s more, the propaganda is so far off the mark, it is downright insulting.
Coming down from the mountain with the latest data tablet… [PT]
The Bureau of Labor Statistics (BLS) reports an unemployment rate of just 3.7 percent. The BLS also reports price inflation, as measured by the consumer price index (CPI), of 1.8 percent. Yet big city streets are lined with tents and panhandlers grumble “that’s all” when you spare them a dollar.
In addition, good people of sound mind and honest intentions are racking up debt like never before. Mortgage debt recently topped $9.4 trillion. If you didn’t know, this eclipses the 2008 high of $9.3 trillion that was notched at the precise moment the credit market melted down.
Total American household debt, which includes mortgages and student loans, is about $14 trillion – roughly $1 trillion higher than in 2008. Credit card debt, which is over $1 trillion, is also above the 2008 peak. To be clear, these debt levels are not signs of economic strength; rather, they are signs of impending disaster. Moreover, they’re signs that American workers have been given a raw deal.
US CPI, “core” CPI and total consumer credit outstanding.
How is it that the economy has been growing for a full decade straight, but the average worker has seen no meaningful increase in his income? Have workers really been sprinting in place this entire time? How did they end up in this ridiculous situation?
US mortgage debt outstanding and real household wages (real hourly earnings of production and non-supervisory employees) [PT]
…click on the above link to read the rest of the article…
Getting to a Special State of Ugly
Getting to a Special State of Ugly
There are certain phrases – like “trust me” or “I got this” – that should immediately provoke one’s suspicion. When your slippery contractor tells you, “trust me, your kitchen renovation will be done before Christmas,” you should be wary. There’s no way it’ll be done until late spring.
Or when your incompetent client says, “I won’t be needing your services at this time, I got this.” You should expect a panicked phone call at 5pm on Friday. “This is way more than I can handle,” your client will say, “take care of it.”
On Monday, when the sky was falling, and there was much weeping and gnashing of teeth, the Chinese yuan weakened to above 7 per dollar for the first time in over a decade. This prompted U.S. Treasury Secretary Steven Mnuchin to waft out a suspicious phrase of his own. He called China a “currency manipulator.”
Mnuchin’s logic, as far as we can tell, is that China manipulated their currency because their central bank didn’t adequately intervene in foreign exchange markets to prop up the yuan. Conversely, direct intervention into markets, to maintain a centrally planned price that’s acceptable to Mnuchin, is not currency manipulation. Go figure!
On Tuesday, to restore confidence in the yuan, and refute accusations of being a malevolent currency manipulator, the People’s Bank of China (PBOC) announced a plan to price fix the yuan. Specifically, the PBOC will sell 30 billion yuan ($4.2 billion) of offshore bills in Hong Kong on August 14. This move is designed to drain liquidity offshore, thus strengthening the yuan against the dollar.
Why bother?
Cooperative Currency Debasement
The world, circa 2019, is a fabricated reality. Debt, piled upon debt, piled upon debt, ad infinitum, has erected a financial order that’s at perilous odds with the underlying economy. Central bankers attempt to manipulate fake money and fake foreign exchange rates to keep the debt pile from cascading down.
…click on the above link to read the rest of the article…
Realizing the Full Implications of the Forthcoming Catastrophe
Realizing the Full Implications of the Forthcoming Catastrophe
Delivering Tomorrow’s Curses
Roman poet Virgil penned these words in his epic, The Aeneid, roughly a generation before the birth of Jesus of Nazareth. They can be loosely translated to, “the descent to hell is easy.” Those who’ve traversed this passage can attest to the veracity of this axiom.
Virgil reading the Aeneid to Augustus, Octavia and Livia. Contrary to what one might think at first blush, Octavia didn’t fall asleep because she was bored by it – rather, when Virgil recited Book Six, she fainted (the veracity of this account is not undisputed, but it’s a good story anyway). A little side note: Virgil caught a fever while returning from to Rome from Greece and died in Brundisium in 19 BC. It was Virgil’s wish that the poem be burned, but Augustus ordered his literary executors to preserve it and publish it with as few editorial changes as possible. Thus Augustus rescued the Aeneid for posterity. [PT]
Though not apparent in the milieu of Virgil’s poem, for our purposes today, we will extend its application to the insidious progression of currency debasement. What short utterance more aptly characterizes the steady degradation, as currently practiced by today’s church of state?
On Thursday, for example, the House acted with untroubled ease to further America’s descent to hell. With little resistance, federal spending was increased and the debt ceiling was suspended for two years. Having delivered tomorrow’s curses, the nation’s Representatives can skip town without missing a moment of summer recess.
As you can see, the allure of getting something for nothing is far too enticing for even the most honest politician to pass up. And with an endless supply of fake money behind you, why stick your neck out and get clobbered? The public debt encumbered is already well beyond honest repayment. But that’s a problem for tomorrow; not today.
…click on the above link to read the rest of the article…
Feeling the Heat of a Civilization on the Downside
Feeling the Heat of a Civilization on the Downside
An Epic Folly for the Ages
Today we begin with a list. A partial list. And in no particular order…
Angela Merkel. Donald Tusk. Mario Draghi. Donald Trump. Jerome Powell. Shinzo Abe. Haruhiko Kuroda. Theresa May. Boris Johnson. Mark Carney. Xi Jinping. Emmanuel Macron. Vladimir Putin. Justin Trudeau. Juan Trump. And many, many more…
Politicians and bureaucrats of the modern age of statism and central planning… fighting a rearguard action doomed to fail. [PT]
These central planners – though they may not know it – are facing a no-win situation. They have extrapolated the past and are attempting to preserve the status quo into the future. Yet their efforts to perpetuate the upward growth curve of their countries and unions are useless against the relentless turn of history.
The political, financial, economic, and social foundations that have been in place over the last 75 years – and perhaps, over the last 220 years – are breaking down. And no policy directive, no interest rate adjustment, no trade tariff, no five year plan, no extraordinary measures, no green new deal, and no technocratic prevarication is going to stop it. Big Government doesn’t stand a chance.
The entire apparatus, from social welfare programs to a ridiculously complex capital structure, is based on perpetual growth. But growth, as we are all presently discovering, is ephemeral. The rapid creation of fake money by central planners may be able to forestall the downside that follows a mega-growth cycle. But it cannot avert it.
Still, the central planners are doing anything and everything to resist the downside. They are taking emergency actions. They are employing extreme currency debasement. They are slapping price controls across the economic landscape. They are starting wars. They are harnessing populism. They are doing all of these – and more.
…click on the above link to read the rest of the article…
Why Fed Chair Powell is a Laughingstock
Why Fed Chair Powell is a Laughingstock
Fake Work
Clarity. Simplicity. Elegance. These fundamentals are all in short supply. But are they in high demand? As far as we can tell, hardly a soul among us gives much of a rip about any of them. Instead, nearly everyone wants things to be more muddled, more complicated, and more crude with each passing day. That’s where the high demand is.
One can always meet the perils of overweening bureaucracy with pretend happiness… [PT]
For example, executing and delivering work in accordance with the terms and conditions of a professional services contract these days is utterly dreadful. The real work is secondary to fake work, trivialities, and minutia. Superfluous paperwork and an encumbrance of mandatory web-based tools are immense time and capital sucks.
While each T & C may have been developed for one good reason or another, over time, they’ve piled up into something that’s an unworkable mess. But like tax law, or local zoning codes, they must be followed with arduous rigor.
Crushing futility… [PT]
What’s more, many livelihoods depend on all the fake work that’s now built into what should be a simple contract. Auditors, contract administrators, accountants, MBAs, spreadsheet jockeys, risk managers, and many other fake professionals, run about with rank importance. What would happen to these plate spinners if the fake work disappeared?
Without all the unnecessary rigmarole, the unemployment rate would quadruple overnight. Hence, like fake money, fake work is piled on by the boatload to stimulate the need for more fake work. And like a handshake agreement – or sound money – the return to an era of greater clarity, simplicity, and elegance is mere wishful thinking.
Plotted Dots
…click on the above link to read the rest of the article…
Why a Chernobyl-like Financial Disaster is Inescapable
Why a Chernobyl-like Financial Disaster is Inescapable
In the early morning hours of April 26, 1986 – roughly 33 years ago – things went horribly wrong in the town of Pripyat, in northern Soviet Ukraine. Reactor No. 4 at the V. I. Lenin Nuclear Power Plant, also known as the Chernobyl Nuclear Power Plant, was overwhelmed by an uncontrolled reaction. There was no stopping it.
Chernobyl after the explosion (left) and today (right), encased in a steel sarcophagus. [PT]
Two initial explosions blew the top off the reactor. Once exposed, plumes of fission matter were wafted into the atmosphere by an open-air graphite fire. Before long, this radioactive material precipitated onto Western Europe and the Western USSR.
Nine days later the fire was finally contained. But not before an estimated 400 times more radioactive material was released than from the atomic bombing of Hiroshima and Nagasaki. Twenty-eight firemen and operators died from acute radiation syndrome in the following days and months.
A discovery channel documentary on the Chernobyl disaster [PT]
What exactly caused the Chernobyl disaster is still a matter of disagreement. The first official explanation of the accident was later acknowledged to be erroneous. But there is agreement on the fact that the nuclear disaster would not have happened when it did if the workers had played hooky and gone fishing.
Instead, an ill-planned late-night safety test to simulate a power-failure set in motion the very chain reaction that led to the disaster. During the experiment, the emergency safety and power-regulating systems were both intentionally turned off. Then the operators attempted to boost the reactor output; a violation of the approved test procedure. Soon after, all control was lost…
A Moment of Silence
Most accounts we’ve come across assign equal blame to human error and reactor design flaws. The shortsighted engineers failed to idiot proof the nuclear power plant for the operators. The operators succeeded at being idiots. Should we expect anything different?
…click on the above link to read the rest of the article…
As the Madness Turns
As the Madness Turns
A Growing Gap
The first quarter of 2019 is over and done. But before we say good riddance. Some reflection is in order. To this we offer two discrete metrics. Gross domestic product and government debt.
US nominal GDP vs total federal debt (in millions of USD) – government debt has exceeded total economic output for the first time in Q4 2012 and since then its relative growth trajectory has increased – and it seems the gap is set to widen further. [PT]
GDP for the quarter, as estimated by the March 29 update to the New York Fed’s GDP Nowcast, grew at an annualized rate of 1.3 percent. For perspective, annualized GDP growth of 1.3 percent is akin to getting a 1.3 percent annual raise. Ask any working stiff, and they’ll tell you… a 1.3 percent raise is effectively nothing.
By comparison, the U.S. budget deficit for fiscal year 2019 is estimated to hit roughly $1.1 trillion. This amounts to an approximate 5 percent increase of the current $22.2 trillion national debt. In other words, government debt is increasing about 3.85 times faster than nominal GDP, which is about $21 trillion.
These two metrics offer a rough perspective on the state of the economy. Deficit spending is grossly outpacing economic growth. Heavy treatments of fiscal stimulus are being applied. Yet the economy’s practically running in place. In short, the state of the economy is not well.
A case of restricted maneuverability… [PT]
And as the economy slows and then slips into reverse later this year, and as Washington then applies more fiscal stimulus, these two metrics will move even further towards madness. What’s more, the Fed is gearing up to promote this greater state of madness in any and every way possible…
…click on the above link to read the rest of the article…
How to Escape Like Willie Boy
How to Escape Like Willie Boy
A Gentle Nudge
The America we thought we knew – the country we learned about in grade school – vanished long ago. In truth, it was gone well before we stepped foot in our first classroom. But America’s myths and legends remain.
The Wild Bunch… where are their stetsons? Contrary to myth, cowboys rarely sported a stetson. They wore bowler hats instead. The stetson only became available in 1865 and wasn’t really considered fashionable before the turn of the century. [Myth buster PT]
The myth that America makes the world safe for democracy. The legend that the role of free press in America is to hold government accountable. The myth that the U.S. Constitution is the supreme law of the land. The legend that the Fed maintains stable prices. And on and on…
Preserving America’s myths and legends has become risky business in the 21st century. Risky in the sense that it propels America towards a great geopolitical conflict. So, too, it puts hardworking Americans – and an army of shirkers – in the crosshairs of an epic financial crackup.
How to save and invest for a tomorrow that is far different from today is an extraordinary challenge. We can’t say for certain. But we venture a guess that buying and holding an S&P 500 index fund over the next 30 years won’t cut it.
The bull market in American stocks is running out of steam. The economy, propped up by a 50 year debt binge, is beyond unsound. When the credit cycle turns, and the illusion of prosperity vanishes, the hopes and dreams of millions of people will be crushed.
Yet with a little imagination and resourcefulness, you can still plot an escape route for preserving and transferring your wealth across the great divide. What follows is a gentle nudge down this path.
SPY monthly – better give it a pass at this juncture [PT]
…click on the above link to read the rest of the article…
Extrapolating The Recent Past Can Be Hazardous To Your Wealth
Extrapolating The Recent Past Can Be Hazardous To Your Wealth
“Those who cannot remember the past are condemned to repeat it,” remarked George Santayana over 100 years ago. These words, as strung together in this sequence, certainly sound good. But how to render them to actionable advice is less certain.
George Santayana – purveyor of eminently quotable wise words by the wagon-load, but what shall one do with them in practice? [PT]
Aren’t some facets of the past – like the floppy disk – not worth remembering? And aren’t others – like a first taste of romance – worth repeating… if only it were possible?
Where investing is concerned, remembering the past – and discerning what to make of it – can actually be a handicap. Where does the past begin? How does it influence the future? How does one invest one’s capital accordingly?
These are today’s questions. What follows, with purpose and intent, is an attempt to scratch out an answer. Where to begin?
Many investment gurus in the early 1980s were predicting the future while projecting the past. After a decade of raging price inflation, the popular dogma was to pack one’s portfolio with gold coins, fine art, and antiques. This was the proven, surefire way to preserve hard earned wealth.
The United States, remember, was just a year or two away from going full Weimar Republic circa 1921-23. The dollar was going to quickly turn to hyper-inflationary ash, like conifer trees in a California wildfire. Everyone just knew it. You could darn near count down the days.
Right On The Money
Conventional wisdom, when it comes to the economy, markets, and investing, eventually leads to trouble. While everyone is busy watching the status quo unfold with Swiss watch like precision, the conditions that first brought this state of affairs to fruition subtly changes. Yet almost no one takes notice.
…click on the above link to read the rest of the article…
Why Government Control Is Overrated
Why Government Control Is Overrated
There is much confusion from Republicans and Democrats about what’s torturing the American landscape. Middle American red state towns have slipped into a self-induced opioid coma. Wealthy blue state cities along the east and west coasts are rotting from the inside out.
Both parties, nonetheless, are committed to big government, and big deficit spending, to bring about the new paradise. But do the President and Congress believe that more of the problem – big government – is somehow the solution to the nation’s ails?
As far as we can tell, this is the wrong question to ask. The real question is a question of control. That is the government’s desire to attain complete control over people, places, and things. To have complete control over your life, your property, your wealth, and your future earnings. That’s what they’re after; much more than MAGA. Their track record proves it.
At best, control is about eliminating uncertainty. That, somehow, perfect order can be delivered to the world through some sort of advanced social engineering and planning. That with perfect order, equal results, regardless of inequal effort or inequal merit, will be heaped upon the populace.
That a world without risk, with perfect certainty, with equal benefits for all, will be a better world. That roaming about in a world of complete control, where outcomes are predetermined, and lethargy’s rewarded, is a privilege to be bestowed by politicians and agency officials. Here at the Economic Prism we have some reservations…
An Unthinkable Alternative
Complete control and the elimination of uncertainty is a desirable objective when managing an aquaculture system. With some experience and diligence, system outputs can be forecasted with greater than 95 percent accuracy. But when it comes to managing an economy, complete control and the elimination of uncertainty is an utter disaster.
…click on the above link to read the rest of the article…
