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Lacy Hunt On Debt and Friedman’s Famous Quote Regarding Inflation and Money

Lacy Hunt On Debt and Friedman’s Famous Quote Regarding Inflation and Money

Lacy Hunt takes on the widespread belief that sustained inflation is on the way in his latest quarterly review.
Money Velocity and the Commercial Bank LD Ratio

Hoisington Quarterly Review and Outlook 2nd Quarter 2021

Here are some snips to the latest at Hoisington Management Quarterly Review (Emphasis Mine).

Too Much Debt

In highly indebted economies, additional debt triggers the law of diminishing returns. This fact is confirmed when the marginal revenue product of debt (MRP) falls, where MRP is the amount of GDP created by an additional dollar of debt. In microeconomics, when debt is already at extreme levels, a further increase in debt leads to an increase in the risk premium on which a borrower will default suggesting that the bank or other lender will not be repaid.

Combining both the falling MRP with a declining loan to deposit (LD) ratio, results in a reduction in the velocity of money. In terms of the impact on monetary activities, a drop in the LD ratio means that more of bank deposits are being directed to the purchase of Federal, Agency and state and local securities in lieu of private sector loans. The macroeconomic result is that funds are shifted to sectors that are the least productive engines of economic growth and away from the high multiplier ones.

More than thirty years ago, Stanford Ph.D. Rod McKnew demonstrated that the money multiplier, referred to as “m”, is higher for bank loans than bank investments in securities. The money multiplier, which is money stock (M2) divided by the monetary base should not be confused with the velocity of money. The latest trends strongly support McKnew’s analysis.

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

Still More Green Hypocrisy In the EU, This Time Hydrogen

Still More Green Hypocrisy In the EU, This Time Hydrogen

Let’s discuss the meaning of “Green” EU style.
What We Mean By 'Green'

Hooray More Green Energy!

The EU is cheering a new hydrogen project at a refinery in Germany.

The plant will be built by Shell and ITM power and will be able to produce about 1,300 tonnes of hydrogen per year, which can be fully integrated into the refinery processes, such as for the desulphurisation of conventional fuels. It will be the world’s largest hydrogen electrolyser.

Tudor Constantinescu, Principal Advisor, DG ENER at the European Commission stressed the the contribution of green hydrogen to the Energy Union objectives, saying: “Renewable electricity can support decarbonisation not only of the power sector, but, through sectoral integration also of other carbon intensive industries, such as refining. Green Hydrogen is a key enabler in this process, contributing to the Energy Union objectives both in terms of emissions reductions and increased renewables share.

Ten Times the Hydrogen, Ten Times the Cost?

Euractive has some interesting details of the undertaking, allegedly Set to Multiply Capacity tenfold by 2024.

The 10 MW electrolyser, while already Europe’s largest of its kind, is a pilot project for grander ambitions.

If the pilot works out well, the partnership around Shell wants to add another 100 MW of electrolysis capacity which would complete construction in 2024. That would then be the largest electrolyser in the world.

Yet the pilot project depended on financing by the FCH JU at a 50% rate, meaning that the business case for a project ten times larger without public funding would be questionable at best.

Whether those ambitions come to fruition will therefore depend on the carbon price and the amount of additional funding available, which could come from either the EU or Germany.

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

 

 

 

Swiss Reject Climate Change With Zoomers and Millennials Leading the Way

Swiss Reject Climate Change With Zoomers and Millennials Leading the Way

A climate change referendum in Switzerland just went down in flames led by 18-34 year old voters.
Switzerland Climate Change Referendum

Swiss Reject Climate Change

Eurointelligence reports Swiss Reject Climate Change

After Switzerland dropped its negotiations with the EU, the country has now rejected a climate-protection law in a referendum. Concretely, they rejected all three parts of the law in separate votes: on CO2, on pesticides, and on drinking water.

We agree with the Swiss journalist Mathieu von Rohr that this failure is not merely important in its own right, but symptomatic for the difficulties facing Green politics in general. It is one thing for people to pretend they support the Green party, especially when it is cool to do so. It is quite another to make actual sacrifices as the Swiss were asked to do.

But what is particularly interesting about this referendum is that the strongest opposition came from young people. 60-70% of the 18-34 year old voted No in the three categories.

Each country is different, but the big yet unanswered question is whether people elsewhere would agree to make personal sacrifices for the greater good. The Swiss referendum tells us we should not take this for granted. The German elections will be the next big test.

Huge Shock

The referendum Failed 51-49. And it took a crushing rejection by Zoomers and millennials to do it.

The BBC comments on the Huge Shock.

A referendum saw voters narrowly reject the government’s plans for a car fuel levy and a tax on air tickets.

The measures were designed to help Switzerland meet targets under the Paris Agreement on climate change.

Opponents also pointed out that Switzerland is responsible for only 0.1% of global emissions, and expressed doubts that such policies would help the environment.

The vote, under Switzerland’s system of direct democracy, went 51% against, 49% in favour.

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

A World that Operates by Financial Cheating and Unsound Money Is Doomed

It’s all phony money but there’s no revolt yet.
Value for ValueMy friend Hugo Salinas Price wrote a short post that I agree with.

Please consider A World that Operates by Cheating Is Doomed

In ages past, gold and silver provided humanity with a system of economic co-operation among productive humans, which was fair to all participants.

With gold and silver, humans were trading value-for-value: what changed hands were amounts of physical gold or silver, or at least, Bills which were unquestioned claims upon gold or silver.

When the exchange had taken place, everyone was happy! The seller because he had gold or silver, in exchange for the goods or services he offered; and the buyer was pleased because he had the goods or services he wanted, and he got them by tendering gold or silver in exchange.

So, everyone was pleased: the buyer because he got the goods or services he wanted, in exchange for his gold or silver; and the seller was pleased because he traded the goods or services he had to offer, tor gold or silver.

Under the present monetary system, there can be no justice or “fair trading”, because all the World’s MONEY IS FAKE MONEY. No money in today’s world is gold or silver, nor does it represent an unquestioned claim upon a stated amount of gold or silver.

And a gigantic shooting war will mark the end of our times, as a result of the cheating involved – all because fake money was forced upon humanity.

No Consequences, Yet

Except in isolated hyperinflation cases, governments have learned there are no consequences to the ruling class (at least yet) for unsound money.

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

Fed’s New Paradigm Adds Helium to the Stock Bubble

Valuation are not only high, they are among the highest on record.
The Laws of InvestingThe Wall Street Journal asks Has the Fed Rewritten the Laws of Investing?

It has been an odd year with the Covid-19 crisis hammering the economy, but stocks recovering from sharp losses and then powering to new highs. As a result, standard measures show valuations are at rarely-seen levels that have typically ended in tears.

The S&P 500 trades at 22 times analysts’ expected earnings—its most expensive level since the dot-com bubble. It also trades at its richest multiple to its inflation-adjusted earnings over the past decade—the valuation method popularized by economist Robert Shiller —in nearly 20 years. The total value of U.S. stocks as a percentage of the U.S. economy, which Warren Buffett once called “the best single measure of where valuations stand at any given moment,” is now higher than at any point during the dot-com years.

Stocks vs Interest Rates

Some suggest stocks may not be as expensive as they seem because that interest rates are extremely low.

John Hussman has pointed out the fallacy of that theory many times. The Journal explains the fallacy this way.

The 10-year Treasury largely reflects investor expectations of what the overnight rates set by the Fed will average over the next decade. The Fed responds to what is going on with the economy, setting rates higher when it is trying to cool things down, lower when it is trying to heat things up. So low yields are tantamount to a low-growth, low-inflation economy—one in which profit growth would be low, too. Why pay up for stocks under that scenario?

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

New Covid Mutation Is ‘Out of Control’ in the UK

Belgium and the Netherlands suspend travel from the UK as authorities assess impact of fast-spreading new virus variant.
Out of Control 

U.K. Health Secretary Matt Hancock  warns a new strain of the coronavirus is “Out of Control”.

More than 16 million Britons are now required to stay at home after a lockdown came into force Sunday in London and southeast England and the government scrapped plans to relax rules on socializing at Christmas.

The measures to control the fast-spreading new variant of the virus forbid household mixing in those areas and restrict socializing to just Christmas Day across the rest of England. Residents across the country were told to keep to their local areas, and extra police were being deployed at rail stations to stop people traveling out of London.

“Cases have absolutely rocketed, so we’ve got a long way to go,” Hancock told Sky News. “I think it will be very difficult to keep it under control until the vaccine has rolled out.” People in the new Tier 4 areas “should behave as though they have it,” he said.

Race to Block the New Strain

In a race to block the new Covid-19 strain, Countries Ban Travel From U.K.

Countries across Europe and beyond raced Sunday to stem a more-infectious strain of Covid-19 by banning travel from the U.K., following a British announcement Saturday that it is imposing fresh lockdowns.

Germany, France, Spain, Italy and Israel on Sunday were preparing to join the Netherlands and Belgium, which hours earlier had banned passenger air travel from the U.K., while other countries considered similar moves in an effort to prevent a worsening of the pandemic before Christmas.

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

Fed’s GDP and Unemployment Projections: Who Believes Them?

In addition to its blather about interest rates, the Fed also made numerous economic projections.
Economic Projections

Please consider the Economic Projections of FOMC Participants under their individual assumptions of appropriate monetary policy, September 2020.

Fed’s GDP, Unemployment, PCE Inflation Projections

Fed's GDP, Unemployment, PCE Inflation Projections 2020-09

GDP Projection

The Fed believes GDP will only contract 3.7% in 2020 then rebound 4% in 2021, and 3% in 2022.

Do you believe this?

Unemployment Projection

The Fed believes the Unemployment Rate will be 7.6% in 2020, 5.5% in 2021, and 4.6% in 2022.

Do you believe this?

PCE Inflation Projection

The Fed believes Core Personal Consumption Expenditure inflation (excluding food and energy) will be 1.5% in 2020, 1.7% in 2021, and 1.8% in 2022.

Do you believe this?

GDP Poll

Unemployment Poll

PCE Poll

My Take

  • GDP: I will take the under. Way under. Much of the rebound was due to $600 pandemic stimulus checks that expired on July 25. This will be a huge headwind going forward.
  • Unemployment: I am leery of games with the participation rate and labor force but I will go with higher.
  • PCE : This one is humorous. For months, the Fed has committed not only to 2% but letting inflation run hotter than expected for some time to make up for needed lost inflation. Yet the Fed admits it will not hit its targets until 2023. PCE inflation, as measured, is a joke. So perhaps the Fed is on target.

The Wonders of Free Money in Two Pictures

Lesson of the Day

If you give away enough free money, spending recovers.

Census Report on Advance Retail Sales 

The Census report on Advance Retail Sales provides half of our “Lesson of the Day“.

Adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, July sales were $536.0 billion, an increase of 1.2 percent from the previous month, and 2.7 percent above July 2019.Total sales for the May 2020 through July 2020 period were down 0.2 percent  from the same period a year ago.

The May 2020 to June 2020 percent change was revised from up 7.5 percent to up 8.4 percent. Retail trade sales were up 0.8 percent from June 2020, and 5.8 percent above last year.

Nonstore retailers were up 24.7 percent from July 2019, while food and beverage stores were up 11.1 percent  from last year.

Retail spending rose for the third straight month despite a rise in coronavirus infections with reopenings stalled.

Spike in Government Spending

Government Spendiing Spiked

The chart from Pew shows stimulus and deficits exceed that in the Great Recession.

Since March, government stimulus authorizations (not all spent yet) total at least $3 trillion. Another $2 trillion is on the deck when Democrats and Republicans agree to another package.

That is the second half of the Free Money Wonder.

The federal government has run deficits nearly every year since the Great Depression and consistently since fiscal 2002. Through the first 10 months of fiscal 2020, the government took in $2.82 trillion in revenue and spent $5.63 trillion, for a year-to-date deficit of just over $2.8 trillion, according to the Treasury Department’s Bureau of the Fiscal Service. Through the first 10 months of fiscal 2019, by comparison, the deficit stood at $866.8 billion.

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

A Surge in Small Business Bankruptcies is Underway

A Surge in Small Business Bankruptcies is Underway

The new rules make it easier for small businesses to file for chapter 11. And they are.

Small Businesses Walking Away

In 2008, homeowners walked away from mortgages. 

Thanks to the Small Business Reorganization Act of 2019 (SBRA), in effect as of February 19, 2020, small businesses have an easier shot at doing the same.

For example, the Twisted Root Burger grew quickly, but co-founder now says ‘I’m gonna walk away’ from some locations.

Twisted Root Burger was a Texas success story, expanding from one casual restaurant in 2006 to 24 sites including restaurants, bars, a brewery and a theater. Now, the company is moving fast in another direction—into bankruptcy.

“I’m not gonna open that restaurant at half the revenue,” said co-founder Jason Boso. “I’m gonna walk away from those restaurants. I’m not gonna set myself up for failure.”

More than 500 companies filed for bankruptcy under the small-business bankruptcy rules since February, according to the American Bankruptcy Institute. June was the top month for filings with 131 cases; many were filed in states hit hard by the pandemic like Florida, Texas, California, New York and Illinois.

“It was somewhat prescient,” said Ryan Wagner, a restructuring and bankruptcy attorney with international law firm Greenberg Traurig LLP. “It was passed without the foresight of the pandemic.” The law is the most significant change to the bankruptcy code since 2005.

SBRA Highlights

  • Applies to businesses with $2.7 million in liabilities, raised to $7.5 million under coronavirus stimulus
  • Owners continue operating their business while in court
  • Owners can retain equity after exiting bankruptcy
  • Owners can modify residential mortgages if home was collateral for a business loan
  • Faster turnaround to save time and minimize legal fees
  • Owners generally have three to five years to repay creditors
  • Creditors can be paid based on a business’s projected income

Walking away gets a new lease on life, this time for small businesses.

Industrial Production Declines Most in 101 Years

Industrial Production Declines Most in 101 Years

On the heels of miserable retail sales numbers comes the worst ever industrial production numbers.

The Fed’s Industrial Production report provides another grim look at the Covid-19 wrecked economy.

Total industrial production fell 11.2 percent in April for its largest monthly drop in the 101-year history of the index, as the COVID-19 (coronavirus disease 2019) pandemic led many factories to slow or suspend operations throughout the month.

Manufacturing output dropped 13.7 percent, its largest decline on record, as all major industries posted decreases. The output of motor vehicles and parts fell more than 70 percent; production elsewhere in manufacturing dropped 10.3 percent.

The indexes for utilities and mining decreased 0.9 percent and 6.1 percent, respectively. At 92.6 percent of its 2012 average, the level of total industrial production was 15.0 percent lower in April than it was a year earlier.

Capacity utilization for the industrial sector decreased 8.3 percentage points to 64.9 percent in April, a rate that is 14.9 percentage points below its long-run (1972–2019) average and 1.8 percentage points below its all-time (since 1967) low set in 2009.

No V-Shaped Recovery

As noted earlier today Retail Sales Plunge Way More Than Expected

Despite talk from hopers, even the fed understands there will not be a V-Shaped recovery.

Instead they are promoting a helicopter drop of money. For details, please see Panic Sets In: Fed Promotes More Free Money

The Problem is Not Deflation, It’s Attempts to Prevent It

The Problem is Not Deflation, It’s Attempts to Prevent It

Let’s investigate the Fed’s effort to prevent price deflation.

Here’s a Tweet that caught my eye. 


Real Vision✔@RealVision · 

“We’re about to have deflation and the market hasn’t figure it out yet… when it does, the Fed is going to shit itself.” @hendry_hugh @raoulGMI
https://rvtv.io/3aWzxf4 

Embedded video

david moravec@davidmooravec

Problem with deflation is- Why buy anything if you know it will be cheaper in the future.


Problem with deflation is- Why buy anything if you know it will be cheaper in the future.,” responded one person. 

Let’s investigate that question starting with a look at the CPI basket.

CPI Percentage Weights

CPI percentage weights

Why Buy Anything Questionnaire

Q: If consumers think the price of food will drop, will they stop eating?
Q: If consumers think the price of natural gas will drop, will they stop heating their homes? 
Q: If consumers think the price of gasoline will drop, will they stop driving?
Q: If consumers think the price of rent will drop, will they hold off renting until that happens?
Q: If consumers think the price of rent will rise, will they rent two apartments to take advantage?
Q: If consumers think the price of taxis will rise, will they take multiple taxi rides on advance?
Q: If people need an operation, will they hold off if they think prices might drop next month?
Q: If people need an operation, will they have two operations if they expect the price will go up?

All of the above questions represent inelastic items. Those constitute over 80% of the CPI.  Let’s hone in on the elastic portion with additional Q&A.

Questions for the Fed – Elastic Items

Q: If people think the price of coats will rise will they buy a second coat they do not need?

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

Eurozone Collapse: V-Shaped Recovery Mirage Is Gone

Eurozone Collapse: V-Shaped Recovery Mirage Is Gone

Eurozone Economy Collapses 3.8% in the first quarter, the worst on record.  Spain (-5.2%) and France (-5.6%) GDP were much worse than Italy (-4.7%).

Economist Daniel Lacalle offers his thoughts on the European economy in a YouTube video. 


Daniel Lacalle✔@dlacalle_IA

EUROZONE COLLAPSE

The V-Shaped Recovery Mirage Is Gone.

https://www.youtube.com/watch?v=kO_RxjESCk4 … YouTube at 🏠 ‎@YouTube


What LaCalle says about the Eurozone also applies to the US. 

What’s Next for America?

For a 20-point discussion of what to expect, please see Nothing is Working Now: What’s Next for America?

No V-Shaped Recovery

Here’s the correct viewpoint: The Covid-19 Recession Will Be Deeper Than the Great Financial Crisis.

Simply put, a quick return to business as usual is not in the cards.

Inflation or Deflation?

Meanwhile, the debate over inflation or deflation continues.

Will it be Inflation or Deflation?

If you believe the answer is inflation, then you do not understand the importance of credit and demand shocks. Click on the link for discussion.

Rate of Contraction Exceeds the Global Financial Crisis

Rate of Contraction Exceeds the Global Financial Crisis

The US is suffering  the fastest deterioration in operating conditions for over 11 years.

Markit reports Output Contracts at Fastest Pace in Survey History amid COVID19 pandemic .

Key Findings

  • Flash U.S. Composite Output Index at 27.4 (40.9 in March). New series low.
  • Flash U.S. Services Business Activity Index at 27.0 (39.8 in March). New series low.
  • Flash U.S. Manufacturing PMI at 36.9 (48.5 in March). 133-month low
  • Flash U.S. Manufacturing Output Index at 29.4 (46.5 in March). New series low

Adjusted for seasonal factors, the IHS Markit Flash U.S. Composite PMI Output Index posted 27.4 in April, down from 40.9 in March, to signal the fastest reduction in private sector output since the series began in late-2009.

Services companies registered the steepest rate of decline in the survey’s history, while manufacturers recorded the sharpest fall in sales since the depths of the financial crisis in early-2009. 

The cancellation and postponement of orders led firms to reduce their workforce numbers at a rate far exceeding anything seen previously over the survey history at the start of the second quarter. 

Chris Williamson, Chief Business Economist Comments

  1.  “The COVID-19 outbreak dealt a blow to the US economy of a ferocity not previously seen in recent history during April. The deterioration in the flash PMI numbers indicates a rate of contraction exceeding that seen even at the height of the global financial crisis, with jobs also being slashed at a rate far exceeding anything previously recorded by the survey.” 
  2. “The large swathe of non-essential business that has been shut down temporarily amid efforts to contain the virus means the blow has been most heavily felt in the service sector, and especially for consumer facing companies in the recreation and travel industries. Those companies still actively trading meanwhile reported the steepest drop in demand seen since data were first available, and are also struggling against twin headwinds of staff shortages and supply chain delays.”

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

As Unemployment Claims Rise, So Do Missed Mortgage Payments

As Unemployment Claims Rise, So Do Missed Mortgage Payments

Over 22 million people have filed for unemployment benefits in the past 4 weeks. Many struggle with payments.

Black Knight reports More than 2.9 Million in Forbearance, 5.5% of All Mortgages

Key Details 

  • As of April 16, more than 2.9 million homeowners – or 5.5% of all mortgages – have entered into COVID-19 mortgage forbearance plans
  • This population represents $651 billion in unpaid principal and includes 4.9% of all GSE-backed loans and 7.6% of FHA/VA loans
  • At today’s level, mortgage servicers would be bound to advance $2.3 billion of principal and interest payments per month to holders of government-backed mortgage securities on COVID-19-related forbearances
  • Another $1.1 billion per month in lost funds will be faced by those with portfolio-held or privately securitized mortgages

Forbearance Totals

Black Knight Forbearance Totals 2020-04-16

Payment Forbearance Under Cares Act

On March 27, 2020, President Donald Trump signed the Coronavirus Aid, Relief, and Economic Security Act (also known as the CARES Act) into law. A provision of the CARES Act allows borrowers with federally backed mortgages to request temporary loan forbearance for up to 180 days. Borrowers also have the right to apply for an extension of another 180 days of forbearance

Once a borrower requests hardship forbearance due to the COVID-19 pandemic, the act requires the servicer to offer a CARES Act forbearance. 

Pitfalls 

Forbes warns of Mortgage Forbearance Pitfalls

John Ulzheimer, an Atlanta-based credit expert formerly of FICO and Equifax, warns of a potential balloon payment.

“If the lender or servicer demands that you pay back the deferred amount all at once or in an otherwise expedited manner, that could be impossible for the borrower.” 

Unfortunately, having a mortgage servicer ask for a “balloon” payment once your forbearance period ends is a very real possibility. Borrowers from multiple national banks have reportedly been informed of the need to repay any delayed payments in a lump sum at a future date.

Three Things Not to Do

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

Hyperinflationists Come Out of the Woodwork Again

Hyperinflationists Come Out of the Woodwork Again

CoinDesk asked me to share my opinions on the chance of hyperinflation. My thoughts are below.

From CoinDesk

Hi Mish,

I am working on an article for CoinDesk about recent fiscal and monetary splurge by governments and central banks across the globe and the impact on gold and bitcoin. As I see, a majority of analysts and economists are calling for hyperinflation and rally in gold.

Could you please share your take?

Thanks

CoinDesk

Matter of Definitions

Before there can be a rational debate on anything, people must agree on definitions.

I believe most people would accept this definition: Hyperinflation is the complete collapse in currency against every other asset.

Pick a currency, say the US dollar. To bet on hyperinflation and be correct, the dollar would have to go nearly worthless vs the Euro, the Pound, the Yen.

Alternatively, 50% in a single month would quality. Professor Hanke defines Hyperinflation as a 50% Currency Collapser in a Month.

Q: How likely is that?

A: Close to zero.

Replay Discussion

Curiously, this is a replay of my 2010 article Williams Calls for “Great Hyperinflationary Great Depression”.

Williams is John Williams of Shadowstats. He was not alone. Here is a snip changing the name Williams to “Hyperinflationsists” in the first word of these four points.

  1. Hyperinflationists focus on money supply, ignoring credit although credit is far more important.
  2. Hyperinflationists ignore numerous global interconnections. Calling for hyperinflation in the US alone ignores happenings in Europe, Japan, and China. I remain amazed at how US-centric hyperinflationists in general are.
  3. Hyperinflationists ignore US gold holdings, the largest in the world.
  4. Hyperinflationists ignore the massive influence of consumer attitudes and bank attitudes towards lending.

To expect the US dollar to go to zero vs the Euro, Yen, Food, gold, Yuan, etc., was then and is now pure silliness.

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

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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