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Negative Interest Rates Have Arrived

We are often warned that negative interest rates are an approaching menace — not an immediate menace.

Yet are negative rates already reality in the United States? Has the unholy day already arrived?

Today we don the sleuth’s cap, step into our gumshoes… and unearth evidence that negative interest rates are not the future menace… but the present menace.

What is the evidence? Answer anon.

Under negative interest rates…

Your bank does not compensate you for stabling your money with it. You instead compensate the bank for stabling your money.

A man sinks a dollar into his bank. Under standard rules he hauls out a dollar and change on some distant date — perhaps $1.05.

These days he is of course fortunate to bring out $1.01.

Yet under negative interest rates he endures a rooking of sorts. He pulls out not a dollar and change — but change alone. The bill itself has vanished.

His dollar may be worth 97 cents for example. Thus his dollar — rotting down in his bank — is a sawdust asset, a wasting asset, a minus asset.

Would you willingly hand a bank a dollar today to take back 97 cents next year? You are a strange specimen if you would.

Yet that is precisely as the Federal Reserve would have it…

The Federal Reserve wants your money eternally up and doing, searching, hunting, grasping… adventuring…

It must be forever acquiring, forever chasing rainbows, forever upon the jump.

That is, the Federal Reserve would not allow your money one contemplative moment to sit idle upon its hands… and doze.

For a dollar in motion is a dollar in service — in service to the economy.

The dollar in motion runs down goods and services. It invests in worthwhile and productive enterprises.

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

Why Martians Are Wrong About Gold

A martian — Warren Buffett once razzed — would marvel that earthlings dig gold from the ground… only to rebury it in vaults.

That is, the business is idiotic… pointless… and wasteful.

At first blush, our space man is justly puzzled. Why would humans shovel up hunks of metal — only to lock them away, idle?

Yet the martian — and the Nebraskan — jump past a fundamental truth of human nature.

As one insightful fellow (whose identity we cannot recall) has noted…

Men act with purpose. They do not squander their time or resources on pointless, juiceless pursuits.

Why would they expend vast resources to haul up gold… and risk their lives deep in dangerous mines to grab it… if they lacked compelling reasons?

We note that Mr. Buffett has recently purchased 21 million shares of Barrick Gold. Has this man forgotten his martian?

And so we arrive at this question: Why do men still toil extravagantly to wrest gold metal from stingy earth?

The Gold Standard of Money

Perhaps men continue digging up gold because thousands of years of history demonstrate that gold is worth digging up.

Gold is perhaps the ideal money, money par excellence — if you will forgive the expression, the gold standard of money.

Money must be rare. Rocks cannot be money — for example. Nor can dirt.

Yet there must be enough money to “go around.”

Gold is rare. But there is enough to go around. Hence it meets money’s strict conditions.

Gold is also durable. Gold mined thousands of years ago lives yet, fresh as a sprig, no wrinkles, no sags.

And unlike gems or diamonds, gold is divisible. It can be fashioned into bars or coins as needed.

Meantime, money must be a store of value. And gold maintains its value across centuries, across millenia.

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

They’ve Done It Again

They’ve Done It Again

The stars are back in their courses. The angels are back in the heavens. And the Perfections are back within sight…

For merely 148 trading days after bottoming… the S&P returned to record heights today.

The index closed the day at 3,389 — eclipsing its February 19 height of 3,386.

Thus Jerome Powell’s maniacal persistence has yielded a reward truly fantastic. He has successfully reflated the bubble.

The Federal Reserve has itself become the market.

Shannon Saccocia, Boston Private’s chief investment officer:

Equity markets are reflecting the massive monetary and fiscal stimulus that has been injected over the past four months… the rationale to diversify away from risk assets is hard to pinpoint.

For many the rationale to diversify away from risk assets is indeed hard to pinpoint…

No Longer Considered a Bear Market Rally

Bank of America has concluded its August Global Fund Manager survey. This survey revealed that:

The majority of professional investors no longer believe this market spree represents a bear market rally.

It is as genuine as gold itself, they believe.

What is more, 31% of those surveyed believe it is “early cycle” — the highest percentage since the financial crisis.

Meantime, Deutsche Bank reports, “companies have already restarted buybacks or are considering doing so.”

Buybacks were of course a primary source of helium for the bubble presently reflating.

And the Federal Reserve’s artificially depressed rates opened the taps…

Corporations Take on More Debt Than Ever

These exorbitantly low rates enabled corporations to pile on cheap debt.

With this debt they often purchased their own stock… which reduced shares outstanding… and raised the price per share.

That is, corporations often took on debt to conduct financial sorcery.

And now — as Deutsche Bank reports — the sorcerers are at their tricks again.

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

REVEALED: The Fed’s Next Trick

REVEALED: The Fed’s Next Trick

REVEALED: The Fed’s Next Trick

Today we lower our ear to the rail… and report the approach of a rumbling locomotive.

Free and honest markets are roped to the tracks, squirming, writhing, sobbing.

This iron horse is barreling toward them. Mr. Jerome Powell is at the controls…

And murder is on his mind.

What is the Federal Reserve’s latest plot against the remains of free and honest markets?

And will it pull off the caper?

Answers anon.

We first look in on the seemingly condemned — squirming, writhing, sobbing on the tracks…

A Quiet Day on Wall Street

The day counted plus and minus.

The Dow Jones lost 39 points. The S&P scratched out a 1.85-point gain today. The Nasdaq, meantime, took the ribbon with a 32-point advance.

A dull affair altogether. Yet tomorrow may bring high adventure of course.

And so we now return to today’s central question:

What is the Federal Reserve’s latest plot against the remains of free and honest markets?

Let us first flip back the calendar to the war year of 1942… where our tale begins.

How the Fed Fought WWII

Wars are costly enterprises. And taxes alone would not purchase the arsenals of democracy.

Uncle Samuel therefore held his cap before the bond market… and went upon the borrow.

But the authorities were hot to keep borrowing costs within reasonable limits.

The Federal Reserve and the Treasury Department therefore signed onto an agreement:

The Federal Reserve would place a cap on the government’s borrowing costs.

This it accomplished by purchasing any government bond with yields above a predetermined level.

These purchases shrunk the yield (purchasing Treasuries hammers down the yield; selling Treasuries ratchets yields higher).

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

Goodbye, Free Market

Goodbye, Free Market

Fremdschämen.

Fremdschämen is a noun of the German language. It translates this way:

Embarrassment for those incapable of feeling embarrassment.

Today we suffer embarrassment for Mr. Jerome Powell and his fellows of the Federal Reserve…

For no action they take lowers their heads in shame… or blushes their cheeks with embarrassment.

Mr. Powell is simply in the hands of Wall Street… and on his knees to Wall Street.

Well does he know the taste of shoeblack.

Yesterday Mr. Powell got a fresh coat on his tongue. Details to follow.

But first, let us look in on his masters…

A Banner Day on Wall Street

Wall Street was in full roar today.

The Dow Jones jumped an additional 582 points. The S&P gained 58 points; the Nasdaq, 169 points of its own.

CNBC, by way of explanation:

Stocks rose on Tuesday as a record jump in retail sales — coupled with positive trial results from a potential coronavirus treatment and hopes of more stimulus — sent market sentiment soaring.

Government number-torturers reported this morning that May retail sales jumped a record 17.7%.

The chronically erring Dow Jones survey of economists had projected a 7.7% increase.

Yet we are not surprised by the surge. April’s numbers were true abominations. But certain economic restrictions were waived in May.

A trampolining back was therefore expected.

Meantime, a medicine named dexamethasone — a widely available medicine — is evidently effective in the treatment of deathly ill coronavirus patients.

It reportedly axed hospital deaths by perhaps one-third.

Thus the market had its spree today. But it merely added to yesterday afternoon’s joys…

Powell Licks Wall Street’s Shoes

The Dow Jones had been off 762 points in early trading yesterday, quaking with coronavirus-related fear.

But then Mr. Powell sank to his knees… and tongued Wall Street’s wingtips…

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

The Fed’s Forever War Against Savers

The Fed’s Forever War Against Savers

The Fed’s Forever War Against Savers

The war on savers rages into its second decade.

And yesterday Field Marshal Powell vowed indefinite bombing, shelling, machine-gunning and bayoneting… until the white flag rises over enemy lines.

It is war to the knife… and from the knife to the hilt.

The only peace terms he will accept are these:

Complete, undiluted and unconditional surrender.

These hoarding hellcats must be vanquished. And their cities must be sowed with salt… as triumphant Rome vanquished Carthage… and sowed it with salt.

Here is yesterday’s dispatch from headquarters:

We are going to be deploying our tools — all of our tools — to the fullest extent for as long as it takes… We are not thinking about raising rates; we are not even thinking about thinking of raising rates.

Zero Rates Through at Least 2022

Powell and staff indicated they will clamp rates to zero, or near zero… through 2022.

We wager rates will remain clamped to zero longer yet.

Deflation hangs over the battlefield like a thick cloud of chlorine gas. And the Federal Reserve’s 2% inflation target appears more wishful than ever.

We do not expect any rate hikes until it lifts. And we hazard little will lift until 2022 has passed.

Meantime, Marshal Powell reminded us yesterday that the pre-pandemic 3.5% unemployment rate yielded little inflation.

He suggested, that is, that unemployment could sink below 3.5% before inflation menaced.

But it could be a long, long while before unemployment drops to pre-pandemic levels.

As we recently noted:

After the last financial crisis, over six years lapsed before employment fully recovered — 76 months.

If we assume a parallel recovery… pre-pandemic unemployment would return in 2026.

Of course comes our disclaimer: Pre-pandemic unemployment would return before 2026.

We simply do not know. Nor does anyone.

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

Popular Delusions and the Madness of Crowds

Popular Delusions and the Madness of Crowds

Popular Delusions and the Madness of Crowds

The oppressed rise to their feet. Police sink to their knees. Silence is violence.

And violence is speech.

From sea to glittering sea, from one continent to the next… protests yet rage.

An injustice somewhere on a Minneapolis street evidently threatens justice everywhere.

It certainly threatens the peace everywhere.

Here in Baltimore, storefronts up Charles Street and down Charles Street are barricaded against bricks:

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Is there a greater symbol of hope, of love, than a plywood sheet stretched across a storefront window?

We have yet to encounter one in this world.

“When a Man Enters a Crowd He Exits Civilization”

We have nothing to say against protests, of course. If a man wishes to march against perceived injustice, let him march… lest the heavens fall.

Yet our spacious and tolerant disposition places us in a pickle jar. For a man in a protest is a man in a crowd…

And when a man enters a crowd he exits civilization.

He goes in, his blood goes up… and his reason goes out.

As Herr Nietzsche observed, madness is a rarity in individuals — but the rule in crowds.

Or as argued Mr. Charles Mackay, author of the 1841 classic Extraordinary Popular Delusions and the Madness of Crowds:

Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.

“A Crowd Runs Not on Thought but on Hormones”

A man in a crowd ceases to be a man but a face.

He ceases to be an independent unit but a cog in a lunatic machine.

A man in a crowd does not think for himself. The crowd thinks for him.

That is, the man ceases to think whatsoever.

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

Rise up, America!

Rise up, America!

Rise up, America!

Today we hoist the black flag of anarchy… and plot illicit acts.

For the spirit of sedition steals over us. And passion overmasters our typical Olympian serenity.

We may be declared infamous and set down as an insurrectionist. We may be sent to the gallows.

Yet the time for meek submission is gone. And the time for bald defiance is here.

Do we break heads? Do we holler against the police?

Do we incite our fellow Americans to thieving, to arson, to bedlam?

We do none of it, no.

We are as peaceful as a napping baby, as peaceful as grazing sheep.

Instead we beseech Americans to reclaim their ancient and God-granted liberties.

That is, we beseech Americans to defy the government freezes that imprison them in their homes… and wreck their livelihoods.

All About Saving Lives?

We issue today’s war cry for one central because:

The government authorities that mandated these “lockdowns” clearly do not take them heavily.

Their enforcement has proven selective. Capricious. Nonsensical. Idiotic.

That is to say, predictable.

These gushers of human compassion assured us the public health was their highest thought, that they had no thought beyond the preservation of life.

In consequence… they mandated the self-incarceration of perhaps 300 million Americans.

Yes, it would comatize the economy, they conceded. Yes, stores, restaurants, alehouses, theaters, schools, worship houses, beaches, parks and other places of public resort would be locked.

Yes, millions and millions of Americans would be thrown from their jobs.

Yet these unprecedented, egregious and breath-stealing measures were necessary… else the pandemic would overwhelm us. We were denied all choice.

This is what our jailors told us.

And they sobbed the saltiest tears that ever streamed down cheeks…

“If it saves one life,” sniffled Gov. Cuomo, the incalculable expense was worth the sacrifice.

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

The Biggest Economic Threat Today

The Biggest Economic Threat Today

The Biggest Economic Threat Today

Kind heaven, no! A fresh economic scourge is upon the land. Announces CNN:

“New Threat to the Economy: Americans Are Saving Like It’s the 1980s.”

Is a higher evil possible? Thus we are informed:

Americans are slashing their spending, hoarding cash and shrinking their credit card debt as they fear their jobs could disappear during the coronavirus pandemic…

Although caution is a logical response to that uncertainty, hunkering down also poses a risk to the recovery in an economy dominated by consumer spending. A so-called V-shaped recovery can’t happen if consumers are sitting on the sidelines…

The savings rate in the United States climbed from 8% in February to 13.1% in March. That was the highest savings rate since November 1981.

The article further reminds us that consumer spending constitutes some 70% of the United States economy.

And so the old bugaboo rises from the grave yet again — the “paradox of thrift.”

The Evils of Saving

The individual saver may be the model of prudence, of frugality, of forbearance… of thrift itself.

But if the entire nation tied down its money?

A savage cycle would feed and feed upon itself… until the economy is devoured to the final crumbs.

Consumption would dwindle to near-nonexistence. GDP would collapse in a heap. Waves of bankruptcies would wash through.

All this because the selfishness of savers. They refuse to untie their purse strings… and spend for the greater good.

This paradox of thrift is perhaps the mother myth of economists in the Keynesian line.

Yet no paradox exists whatsoever.

Today we maintain — again — that saving is an unvarnished blessing, at all times, under all circumstances.

Let us first plunge a stake through the squirming heart of another myth:

The myth that consumer consumption constitutes 70% of the United States economy…

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

Prepare for Trench Warfare

Prepare for Trench Warfare

Prepare for Trench Warfare

What if China isn’t half so desperate for a deal as the president believes?

Are we in for an extended siege of economic trench warfare?

Today we explore possibilities… and their implications.

We first direct our gaze to Wall Street.

Investors came crouching from their shelters this morning… as if expecting an aftershock to the quake that drove them underground yesterday.

With Monday’s 617-point battering — piling atop last week’s losses — three months of stock market gains have vanished into the ether.

The S&P 500 endured its 15th-largest decline in history yesterday. It has shed $1.1 trillion since May 5 alone.

Markets Bounce Back

But the Earth held today. And investors cleared away some of yesterday’s wreckage.

The Dow Jones rebounded 207 points.

The S&P reclaimed 23 of the 70 points it lost yesterday. The Nasdaq gained 87.

Markets were encouraged by President Trump’s comments that he will strike a deal with China “when the time is right.”

He will have an opportunity at the G20 summit in late June. There he will meet China’s Xi Jinping, for whom his “respect and friendship is unlimited.”

But is China sweating dreadfully for a trade deal as Trump assumes?

China Braces for Escalation

China does — after all — ship some $500 billion of products to these shores each year.

It cannot afford to sit on them like a broody hen.

But you might have another guess, says the director of monetary policy at the People’s Bank of China:

As for the change in the domestic and external economic environment, China has sufficient leeway and a deep monetary policy toolkit, and so has full ability to deal with [economic] uncertainties.

But here we cite a government mouthpiece, a marionette in human form. You no more trust his word than you would trust a dog with your dinner.

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

Central Banks Don’t Matter

Central Banks Don’t Matter

Central Banks Don’t Matter

“There is no money in monetary policy.”

Could it be true? Is there no money in monetary policy?

Yesterday we argued the Federal Reserve cannot even define money… much less measure it to any reasonable satisfaction.

Today we venture upon a heresy deeper still — that central bank “monetary” policy has no actual existence.

No money stands beneath it, behind it, beside it.

The emperor is well and truly nude.

Who then actually controls monetary policy today?

The answer may very well lie hidden in the “shadows.”

The details — the shocking details — to follow.

Monetary Policy Is Actually About Credit and Debt

First moneyman par excellence Jeff Snider — author of today’s opening quotation — rams a sharp stake through the heart of the monetary myth:

Monetary policy has been quite intentionally stripped of money. Banks evolved and there was really no easy way to define money beyond a certain point (in the ’60s), so economists just gave up trying… 

Money as it relates to “monetary” policy is not really money at all. What monetary policy refers to in contemporary terms is something wholly different… When the Federal Reserve… act[s] on monetary measures, they seek not to increase the supply of money to the economy but rather the supply of credit… Monetary policy in the modern sense of the word actually has little to do with money. Instead, it is always and everywhere about credit and debt…

All money is debt-based money in today’s lunatic and preposterous world.

The dollar in your wallet you consider an asset. But only someone else’s previous debt fanned it into existence.

Technically it is a Federal Reserve note. A note is a debt instrument.

None of the foregoing will stagger or flabbergast Daily Reckoning readers.

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

America’s Weapons: “The Dollar and the Drone”

America’s Weapons: “The Dollar and the Drone”

It was said that “the guinea and the gallows” were the true instruments of British imperial power.

The guinea represented the coined wealth of Great Britain.

The gallows represented its… constabulary zeal in policing restless natives.

This is the 21st century of course… a time of enlightenment.

Today’s instruments of imperial power are no longer the guinea and the gallows.

No. Today’s instruments of imperial power are “the dollar and the drone.”

The dollar and the drone are America’s weapons.

Like the 19th-century pound (which replaced the guinea), today’s dollar is the world’s reserve currency.

Like the 19th-century pound, the dollar finances some two-thirds of global trade.

And the gallows?

Britain hanged its foreign trouble. America explodes its own in drone attacks.

Here is civilization; here is progress.

The sun eventually sank on the British Empire… the gallows came down… and the pound lost its global reserve status.

The U.S. will have its drones. But is its other weapon, the dollar, close to losing global reserve status?

Recent developments may tell…

The global oil trade has centered on the dollar since 1974, when Saudi Arabia agreed to enthrone the dollar as currency of the oil market.

If it was oil you wanted… it was dollars you needed.

But now China — world’s top oil importer — is preparing to create an oil market that bypasses the dollar entirely.

The plan would let China buy oil from Russia and Iran with its own currency, the yuan.

But the yuan is not a major reserve currency like the dollar.

Under this plan, Russia and Iran would be able to swap yuan for an asset far more desirable than Chinese scraps of paper — gold itself.

Perhaps that explains why China’s been hoarding so much gold in recent years?

Jim Rickards says this system marks the beginning of the end for the petrodollar:

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

Debt-Based Money Corrodes Society

Debt-Based Money Corrodes Society

We open today’s reckoning with a hypothesis:

The current monetary system debauches the culture.

Long-suffering readers are familiar with our… diminished regard for paper money.

Paper money — or digital money nowadays — is the great bogeyman of the boom/bust cycle. It inflates bubbles of every model and make.

Meanwhile, paper money fuels big government… as oxygen fuels fire.

But paper money’s effects on the culture?

“It has a very important impact on our culture,” writes economist Jorg Guido Hulsmann.

Under “natural money” like gold Hulsmann explains, prices tend to fall over time.

So natural money encourages the virtues of saving… thrift… deferred gratification. It sets the mind to the future:

In a free economy with a natural monetary system, there is a strong incentive to save money… Investments in savings accounts or other relatively safe investments also play a certain role, but cash hoarding is paramount.

Before the 20th century, explains Hulsmann, debt was a cultural taboo… a big scarlet “D.”

Credit for households was virtually unknown, he says. And only the poorest households resorted to debt-financed consumption.

Ah, but then the 20th century came along with its wars… its social movements… and its cranks…

Gold is a famously uncooperative agent of change.

It resists social uplift, in the same way an old man resists a new pair of shoes.

It turns away from the sound of trumpets.

“You go over there,” gold says. “I’m staying here.”

“The trouble with gold is that it turns its back on world improvers, empire builders and do-gooders,” wrote Bill Bonner and our leader Addison Wiggin in Empire of Debt.

“The nice thing about gold is that it is so unresponsive,” they continued. “It neither laughs nor applauds.”

And that’s why it couldn’t last…

Only a debt-backed system of paper money could finance the great wars, the social improvements and the fevered dreams of the 20th century.

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

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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