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Expectations Can Drive Inflation

Inflation expectations appear to be solidly on the rise and that spells big problems for the financial system. For years the central banks across the world have claimed deflation has driven or allowed their QE policies to remain. This is central to their ability to stimulate. The moment inflation begins to take root or becomes apparent much of their flexibility in policy is lost. The 2% inflation target central banks have deemed optimum is not valid. This argument is becoming harder to make since many people now feel so much money pouring into the financial system is beginning to move inflation higher.
Up until now, the law of diminishing returns has required larger and larger amounts of stimulus to be thrown at the financial system each time the economy begins to turn down. The continued appointment of dovish and easy money advocates to positions in high finance does little to reinforce confidence in the fiat currencies on which we rely. The rising value and interest in precious metals and cryptocurrencies such as bitcoin stand as evidence investors are seeking alternatives to the fiat currencies issued by nations and central banks.

At Some Point Inflation Will Raise Its Ugly Head

In the past, I have put forth the idea that inflation could rule the day even if central banks are unable to keep the wheels on the bus and the economy collapses. This powerful force of inflation coupled with slow economic growth is known as stagflation. Like inflation, it can devastate those improperly invested when it moves onto play. It is important to remember the cost of all commodities, goods, and services do not move and the same rate or even necessarily in the same direction.

…click on the above link to read the rest of the article…

Update on the Fed’s QE

December 14, 2020

Update on the Fed’s QE

No Wonder the Cry Babies on Wall Street are clamoring for more. Five SPVs, already on ice, will expire on December 31.

The Fed released details today of its corporate-bond purchases in November ($215 minuscule millions) and corporate-bond ETF purchases in November (zilch). Last time it bought any ETFs had been on July 23. It released details about its other activities in its Special Purpose Vehicles (SPVs), which are essentially on ice. Five of them will expire on December 31, including the SPV that handles the corporate bond purchases.

The Fed unwound its “repo” positions in early July down to zero, and more recently most its “central bank liquidity swaps.” Its purchases of residential mortgage-backed securities (MBS) have been in a holding pattern since mid-September. What it is still buying at a steady clip are Treasury securities, thereby monetizing part of the debt the government is adding monthly to its gigantic pile.

The net effect is that its total assets have edged up just 1.0% since June 24, with a dip in the middle, after exploding higher in the prior three months. This is the Fed’s tool to bail out asset holders during each crisis, and enrich them when there is no crisis:

There is now clamoring among the crybabies on Wall Street that the Fed should increase its asset purchases, and they’re pressuring the Fed to announce a big increase at the next meeting, because, I mean, how else are markets going to keep on going up?

In terms of 2020: Total assets on the Fed’s balance sheet for the week ended December 9 rose by $20 billion from the prior week to $7.243 trillion, but were down a smidgen from the peak on November 18, having gone essentially nowhere over the past five months:

…click on the above link to read the rest of the article…

Are we in a ‘New Normal’?

December 8, 2020

Are we in a ‘New Normal’?

The past two years have been especially brutal to so-called equity ‘bears’. Against all odds, and despite all the shocks, global capital markets—if not the real economy they are supposed to represent—have continued to climb to new heights. After the onset of the coronavirus catastrophe, the relentless rise of the asset markets, particularly in the U.S., has completely baffled many.

But it should not. We are in the midst of an asset market mania—perhaps the biggest of all time.

All the while we have been warning about the possibility of collapse of the world economy, beginning in March 2017, when we issued our first-ever warning of global crash. Then we wrote:

The crisis of 2007 – 2008 reversed the trend of financial globalization, which has undermined global growth. The pull-back in financial globalization has been masked by central bank-induced liquidity and continuous stimulus from governments which have created an artificial recovery and pushed different asset valuations to unsustainable levels. This implies that we live in a “central bankers’ bubble”.

We have noted in several times this year how central banks and especially the Federal Reserve (or the “Fed”) has been acting as the ‘de facto’ market-loss back-stopper, successfully pushing asset markets to new heights. However, it is obvious that the central bankers are only following the script they had written before. This is no ‘New Normal’.

So, let’s take a tour of the bailouts over the past 11 years.

Starting with a bang

In the depths of the Global Financial Crisis at the end of 2008, standard monetary policy tools became ineffective. After slashing the Fed funds rate below one percent in October 2008, the Federal Open Market Committee (FOMC) decided that more drastic action was needed.

…click on the above link to read the rest of the article…

Dalio- The United States Is At A Tipping Point That Could Lead To Revolution Or Civil War

December 2, 2020

Dalio: The United States Is At A Tipping Point That Could Lead To Revolution Or Civil War

It was almost exactly ten years ago that we first predicted that the Fed’s “moronic” QE which has sparked an unprecedented class, income and wealth divide, “positions US society one step closer to civil war if not worse.” This prompted Time magazine to mock our forecast, although we doubt the author, currently at Bloomberg where pretty much every financial op-ed writer eventually ends up, is laughing today after an almost identical assessment of the current situation, if ten years delayed, was published by a far more “respected” by the likes of Time commentator, Ray Dalio.

In the latest installment of his ongoing series on the changing world order published on his LinkedIn page, Dalio finally turned to ground zero in what will be the conflict of the 21st century – class and power struggles – and mused if the U.S. is at a tipping point that could move it from what he says is “manageable” tension to a full-blown revolution.

“People and politicians are now at each other’s throats to a degree greater than at any time in my 71 years,” Dalio wrote noting that disorder is rising in a number of countries. “How the U.S. handles its disorder will have profound implications for Americans, others around the world, and most economies and markets.”

“It is in this stage when there are bad financial conditions and intensifying conflict,” wrote Dalio. “Classically this stage comes after periods of great excesses in spending and debt and the widening of wealth and political gaps and before there are revolutions and civil wars. United States is at a tipping point in which it could go from manageable internal tension to revolution and/or civil war.”

…click on the above link to read the rest of the article…

What the Great Reset Architects Don’t Want You To Understand About Economics

October 24, 2020

What the Great Reset Architects Don’t Want You To Understand About Economics

It shouldn’t come as a surprise that the Vice President of the World Bank Carmen Reinhardt recently warned on October 15 that a new financial disaster looms ominously over the horizon with a vast sovereign default and a corporate debt default. Just in the past 6 months of bailouts unleashed by the blowout of the system induced by the Coronavirus lockdown, Reinhardt noted that the U.S. Federal Reserve created $3.4 Trillion out of thin air while it took 40 years to create $14 Trillion. Meanwhile panicking economists are screaming in tandem that banks across Trans Atlantic must unleash ever more hyperinflationary quantitative easing which threatens to turn our money into toilet paper while at the same time acquiescing to infinite lockdowns in response to a disease which has the fatality levels of a common flu.

The fact of the oncoming collapse itself should not be a surprise- especially when one is reminded of the $1.5 quadrillion of derivatives which has taken over a world economy which generates a mere $80 trillion/year in measurable goods and trade. These nebulous bets on insurance on bets on collateralized debts known as derivatives didn’t even exist a few decades ago, and the fact is that no matter what the Federal Reserve and European Central Bank have attempted to do to stop a new rupture of this overextended casino bubble of an economy in recent months, nothing has worked. Zero to negative percent interest rates haven’t worked, opening overnight repo loans of $100 billion/night to failing banks hasn’t worked- nor has $4.5 trillion of bailout unleashed since March 2020. No matter what these financial wizards try to do, things just keep getting worse. Rather than acknowledge what is actually happening, scapegoats have been selected to shift the blame away from reality to the point that the current crisis is actually being blamed on the Coronavirus!

…click on the above link to read the rest of the article…

Fed Assets Eke Out New Record for First Time Since June 10. But Repos, Dollar Liquidity Swaps, SPVs Mothballed

October 24, 2020

Fed Assets Eke Out New Record for First Time Since June 10. But Repos, Dollar Liquidity Swaps, SPVs Mothballed

Only Treasury securities and mortgage-backed securities (MBS) are still active.

The Fed has now reduced to zero or to near-zero or essentially mothballed and thrown the towel in on three of its five QE and bailout strategies: repos, dollar liquidity swap lines, and special purpose vehicles (SPVs). It has maintained its activity in Treasury securities and mortgage backed securities (MBS).

Total assets on the Fed’s balance sheet for the week ended October 21, released this afternoon, rose by $26 billion from the prior week, to $7.177 trillion, for the first time edging past the June 10 high of $7.168 trillion:

Repurchase Agreements (Repos) remained at zero:

Central-bank liquidity-swaps dropped to near-zero.

The Fed’s “dollar liquidity swap lines” by which it provided dollars to a select group of other central banks, fell out of use and are down to just $7.6 billion, a mere rounding error on the Fed’s $7 trillion balance sheet, from a peak of $448 billion in early May:

SPVs inching lower for months, now at $196 billion, mostly mothballed.

The Fed loans to the SPVs. The Treasury Department provides the equity capital. The amounts reflected in each of those SPVs is the sum of those loans from the Fed and the equity capital from the Treasury Department. But the Fed has barely lent to them, and most of the amounts you see is the equity capital from the Treasury, much of it unused, and these SPVs have now been mothballed.

Even the SPV that holds corporate bonds and bond ETFs (Corporate Credit Facilities or CCF) has been mothballed. The Fed bought its last ETF in July and only added minuscule amounts of bonds in August and September.

…click on the above link to read the rest of the article…

Weekly Commentary: Summer of 2020

September 7, 2020

Weekly Commentary: Summer of 2020

QE fundamentally changed finance. What commenced at the Federal Reserve with a post-mortgage finance Bubble, $1 TN Treasury buying operation morphed into open-ended purchases of Treasuries, MBS, corporate bonds and even corporate ETFs holding high-yield “junk” bonds. Markets assume it’s only a matter of time before the Federal Reserve adds equities to its buy list.

For years now, Treasury bonds (and agency securities) have traded at elevated prices – low yields – in anticipation of an inevitable resumption of QE operations/securities purchases. Conventional analysis has focused on persistent disinflationary pressures as the primary explanation for historically depressed bond yields. While not unreasonable, such analysis downplays the prevailing role played by exceptionally low Federal Reserve interest-rates coupled with latent (and escalating) financial fragility. Meanwhile, near zero short-term rates and historically low Treasury and agency securities yields have spurred a desperate search for yields, significantly inflating the demand and pricing for corporate Credit.

The Fed’s COVID crisis leap into corporate debt has wielded further profound impacts on corporate Credit – yields, prices and issuance.

September 2 – Financial Times (Joe Rennison): “Companies have raised more debt in the US bond market this year than ever before… A $2bn bond from Japanese bank Mizuho and a $2.5bn deal from junk-rated hospital operator Tenet Healthcare helped nudge overall US corporate bond issuance to $1.919tn so far this year, surpassing the previous annual record of $1.916tn set in 2017, according to… Refinitiv. The surge marks a dramatic revival for the market since the coronavirus-induced rout in March, when prices slumped and yields soared… ‘There has been a phenomenal amount of issuance,’ said Peter Tchir, chief macro strategist at Academy Securities… ‘It’s been the busiest summer I have ever seen. It’s felt like we have been setting issuance records month after month.’”
…click on the above link to read the rest of the article…

Blain’s Morning Porridge – 21st August 2020 – John Law’s MMT revisited

August 21, 2020

Blain’s Morning Porridge – 21st August 2020 – John Law’s MMT revisited

“Earlier today apparently a woman rang the BBC and said she had heard that there was a hurricane on the way. Well if you are watching, don’t worry, there isn’t.”

It’s blowing a full hooley out there this morning, which is very bad news for my olive trees as the storm is shaking the ripening fruit off. Shame. It’s the first time our little olive grove has produced what looked likely to become full-sized olives. I was going to add them to Dirty Martinis. Meanwhile, mink farms are being wiped out by coronavirus which is proving 100% fatal to the well-dressed ferrets. Interesting, but what does it mean…?

It’s Friday, which means I am allowed to go off on something of a tangent – so let’s not worry about how long this tech rally continues, the rising tensions in Europe, Apple spending $17bln on stock buybacks, China vs US, or the US election.

What’s got me worried this morning is the headline in the FT: UK Public Debt tops £2 trillion for first time on Covid Spending Boom.

Should we worry or should we not? (Clue: the first one…)

Let me ask the question: how long can governments continue to spend their way out of the Coronavirus crisis? The bills for long-term furlough programmes and sectoral bailouts and support, increased social services as unemployment rises, and the urgent need for health spending are going to come due at some point. Is it going to be a problem, and if yes, how big?

Government debt is rocketing higher – but does it matter? Conventional thinking, based on Reinhart and Rogoff, is when debt/GDP exceeds 77% there will a significant slowdown in growth.

…click on the above link to read the rest of the article…

The Fed is Determined to Prove the QTM Right

August 4, 2020

The Fed is Determined to Prove the QTM Right

Milton Friedman famously said, “Inflation was always and everywhere a monetary phenomenon.” But Friedman didn’t live through the QE years here in the U.S. and blatantly ignored the twenty plus years of Japanese deflation despite QE and insane levels of money printing during the latter years of his life.

Because Friedman, like a lot of modern economists, adhered strictly to the Quantity Theory of Money (QTM).

And as an Austrian economics kinda guy I somewhat agree with the QTM. I agree with Ludwig von Mises on this, as you would expect. So, how do we square the QTM with the evidence that QE in all of its guises has resulted in deflation, as expressed by the general price level, where ever it has been tried?

Martin Armstrong ask this question all the time and is openly hostile to the QTM. And his arguments have some merit, because, as he rightly points out the QTM only looks at the supply side of the money equation.

It cares not about the demand side. He’s right about that. What he’s wrong about is that the Austrians, like von Mises, haven’t considered this either.

Demand for money is just as important as the supply of it. And during a crisis, the demand side of the equation for any particular currency may, in fact, be more important.

This is what the Fed has struggled with for the past twelve years. The demand for the U.S. dollar has far outstripped the increase in supply, causing a far lower aggregate price rise than anticipated by the QTM.

…click on the above link to read the rest of the article…

Curing COVID-19 Won’t Cure the Economy

June 23, 2020

Curing COVID-19 Won’t Cure the Economy

We have been making the case for weeks that we aren’t heading for a quick recovery. We’ve reported on the number of people of small business owners who don’t think they’ll survive, the increasing number of over-leveraged zombie companies, and the tsunami of defaults and bankruptcies on the horizon. Yes, we have seen some economic numbers that are better than expected, but it’s all a function of a Federal Reserve-induced sugar high. The ugly truth is that given the amount of stimulus that the Federal Reserve and the US government have pumped into the economy, unwinding it all will be mission impossible. All of this certainly raises serious questions about the possibility of a “v-shaped” recovery.

We’re not alone in making this case. In the following article recently published at the Mises Wire, economist Brendan Brown provides some additional arguments and asserts that even if COVID-19 disappeared today, the economy isn’t going back to “normal.”

The opinions expressed are those of Brendan Brown and for your consideration. They do not necessarily reflect those of Peter Schiff or SchiffGold.

Speculative frenzy in the midst of recession is not a new phenomenon. Yet the extent of the “madness” this time might well beat records in the small sample size available from the history laboratory. The combination of extreme monetary radicalism and a receding supply shock has proved to be a potent toxic, impairing mental processes in ways described by the behavioral finance theorists. The pandemic stock “bubble” and resumed hectic demand for risky credit paper provide illustrations.

…click on the above link to read the rest of the article…

After the Fed Punts, the ECB Throws Another Hail Mary

June 18, 2020

After the Fed Punts, the ECB Throws Another Hail Mary

Last week FOMC Chair Jerome Powell and company did, essentially nothing, at their June meeting. They held interest rates at 0.25%, did not expand QE nor did they indicate any changes.

This wasn’t what the market wanted, as the bond were pushing the Fed to take rates negative and further open up the liquidity spigots.

Rates would be lower for longer and central bank swap lines would remain open. Other than that, the Fed didn’t give the markets what it wanted.

There were plenty of dollars in the system. That dynamic immediately changed after the FOMC meeting.

By punting the Fed put the ball back in the hands of the ECB who had been enjoying the dynamic of a weaker dollar to alleviate offshore dollar liquidity concerns.

It didn’t hurt that political instability here in the U.S. is at a high not seen since the 1860’s.

The stronger euro was assisting the ECB in selling their balance sheet expansion.

The ECB then announced it’s latest TLTRO-3 Auction for this quarter. The total amount of the auction was a stunning $1.3 trillion, which broke down into $550 billion in new lending and $760 billion in rollovers.

And it means the total TLTRO outstanding balance is already at all-time high levels and nothing has been solved yet.

But, as Goldman Sachs through Zerohedge points out, these loans were at incredibly generous rates:

Given improved terms (-1% for YR1 until June 2021, and -0.5% for YR2-3 if lending benchmarks criteria are met) starting with this auction, banks were expected to repay some outstanding TLTRO-II early to refinance at cheaper rates. Taken together, this still leaves some €550bn of net new take-up.

This gives banks the great incentive to get paid to borrow in euros and get the yield spread against other currencies like the dollar or the Japanese yen.

The size of this issuance is your proof that there simply aren’t enough dollars out there to soak up demand or banks wouldn’t have fed so deeply at the trough.

…click on the above link to read the rest of the article…

US Money Supply – The Pandemic Moonshot

June 15, 2020

US Money Supply – The Pandemic Moonshot

Printing Until the Cows Come Home…

It started out with Jay Powell planting a happy little money tree in 2019 to keep the repo market from suffering a terminal seizure. This essentially led to a restoration of the status quo ante “QT” (the mythical beast known as “quantitative tightening” that was briefly glimpsed in 2018/19). Thus the roach motel theory of QE was confirmed: once a central bank resorts to QE, a return to “standard monetary policy” becomes impossible. You can check in, but you can never leave.

Phase 1: Jay Powell plants a happy little money tree to rescue the repo market from itself (from: “The Joy of Printing”).

It is easy to see why. Any attempt to seriously reduce outstanding central bank credit will bring about the very situation QE was intended to prevent, i.e., falling asset prices and an economic bust. Seemingly no-one in officialdom ever stops to ask why that should be so. What happened to “self-sustaining recoveries” and “achieving escape velocity”? Could it be the economy is neither a perpetuum mobile nor a space ship?

Before we consider this question, here is what has happened since then: shortly after the double-plus-uncool novel SARS-2 corona-virus traversed several ponds and made landfall in the US, Mr. Powell and his fellow merry pranksters decided to water the money tree with super-gro. Or maybe it was hyper-gro:

The “QE” roach motel, illustrated by the history of the Fed’s balance sheet.

That is a rather noteworthy bout of inflation. Readers may have noticed that in the realms of finance and economics there has also been an inflation of verbiage describing never before seen extremes. By its very nature, one would normally not expect to hear the term “unprecedented” very often, but it has become disconcertingly commonplace in connection with monetary pumping, deficit spending and debt growth.

…click on the above link to read the rest of the article…

This Time, the Fed Can’t Avoid Inflation, Says Expert

June 2, 2020

This Time, the Fed Can’t Avoid Inflation, Says Expert

This week, Your News to Know rounds up the latest top stories involving gold and the overall economy. Stories include: Is the latest QE program finally going to spike prices, gold cannot be printed by central banks, and virus intensifies the flow of gold to U.S. vaults.

Can the Federal Reserve avoid inflation once again?

As the dust around the 2008 financial crisis settled, some may have been surprised that the eagerness of the Federal Reserve to print money did not cause inflation, or even hyperinflation. Yet those who are expecting the same turnout this time around should look at the underlying nature of both crises.

FXEmpire’s Arkadiusz Sieron points out that 2008 was, in essence, a banking crisis, and banks were the ones receiving aid in the form of bank reserves. While they function in a similar capacity, these notes differ from actual money as they do not enter the economy but are rather used as a medium of exchange between banks. Adding to that was a lack of appetite among individual creditors to take on debt combined with a lack of willingness to issue loans on the banks’ part, as shown by the growth rate of credit supply reaching negative territory.

Now, the scenario appears to be the exact opposite, as consumers and business owners are the ones primarily affected by the crisis. Sieron argues that there is no question as to whether the stimulus will enter the money supply, as programs like the Term Asset-Backed Securities Loan Facility and Main Street Lending Program will ensure funding for eager debtors.

…click on the above link to read the rest of the article…

Someday They Are Going To Write Books About This!

May 9, 2020

Someday They Are Going To Write Books About This!

What is occurring today is absolutely mind-boggling. Someday they are going to write books about this! While there have been some messed up financial conundrums over the years none rival the current situation now before us. The dilemma before us is a fast-moving enigma wrapped in a gossamer cloak. Not only are the players that make up the global political-financial complex busy buying up bad debt, stocks, and bailing out those they deem too big to fail, they have destroyed the concept of real interest on loans. They have trampled all over true price discovery the basis of a free market.

The budget forecast be damned, its full speed ahead. The only justification we need is saying it will be far worse if we do nothing.The bungled response of a delusional government so obsessed with the idea that by simply passing legislation they can make things happen should not be overlooked. The Paycheck Protection Program or PPP was originally funded with $350 billion but the money was soon gone. Of the thirty million small businesses in America, only 1.7 million received money from the 2.3 trillion dollar aid package passed to help sustain America during this difficult time.

This resulted in more funding but still, the last report I saw indicated only around 13% of the, less than half the businesses that were eligible, were approved before the fund was again depleted and 60% of these had yet to receive any money. Just as poorly handled was rapidly getting out money promised to individuals and creating a system where many people could receive more money by collecting unemployment than returning to work. The problem is that when all is said and done, large businesses with access to cheap capital will again be the winners and the big losers are the middle-class, small businesses, and social mobility.

…click on the above link to read the rest of the article…

Fed Cut Back on Helicopter Money for Wall Street & the Wealthy

April 25, 2020

Fed Cut Back on Helicopter Money for Wall Street & the Wealthy

Tapered QE-4 Further, Still Hasn’t Bought Junk Bonds or ETFs, Was Just Jawboning.

Total assets on the Fed’s balance sheet rose by $205 billion during the week ending April 22, to $6.57 trillion. Since the week ending March 11, when the bailout of the Everything Bubble and its holders began, the Fed has printed $2.26 trillion.

But the $205 billion increase was the smallest increase since the mega-bailout began with its Sunday March 15 announcement. The Fed is tapering its purchases of Treasury securities and mortgage-backed securities (MBS). Repurchase agreements (repos) are falling into disuse. Lending to Special Purposes Vehicles (SPVs) has leveled off. And foreign central bank liquidity swaps, after having spiked initially, only ticked up by a small-ish amount.

The sharply reduced increases confirm that the Fed is following its various announcements over the past two years that during the next crisis – namely now – it would front-load the bailout QE and after the initial blast would then taper it out of existence, rather than let it drag out for years.

This concept was further confirmed by Fed Chair Jerome Powell on April 10 when he said that the Fed would pack away its emergency tools when “private markets and institutions are once again able to perform their vital functions of channeling credit and supporting economic growth.”

Overall, the Fed has cut the big QE purchases by 65% since the peak week (week ending April 1, $586 billion), to $205 billion:

Purchases of Treasury securities get slashed.

The Fed added $120 billion of Treasury securities to its balance sheet, the smallest amount since this began, down 67% from the $362 billion it had added during the peak week:

…click on the above link to read the rest of the article…

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