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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…

In Gold We Trust, 2020 – The Dawning of a Golden Decade

June 4, 2020

In Gold We Trust, 2020 – The Dawning of a Golden Decade

The New In Gold We Trust Report is Here!

The In Gold We Trust 2020 report by our good friends Ronald Stoeferle and Mark Valek was released last week. It is the biggest and most comprehensive gold research report in the world. As always it contains a wealth of new material, as well as the traditional wide-ranging collection of charts and data that makes it such a valuable reference work for everything of interest to gold investors or indeed for anyone interested in precious metals (a download link to the report is provided below).

Left: casting gold bars. Right: using gold as a shield against assorted slings and arrows.

Here is a brief overview of the main subjects discussed in the report:

– A review of the most important events in the gold market in recent months
– An analysis of the impact of the Covid-19 crisis on the price of gold
– The increasing importance of gold in times of de-dollarization
– Silver – ready to fly high?
– Gold and cryptocurrencies
– Gold mining stocks: The bull market has started
– Outlook for the gold price development in this decade: A gold price of around USD 4,800 suggested by our quantitative model, even with a conservative calibration of the parameters.

As an aside, yours truly has also contributed a brief chapter to this year’s report, namely the chapter on capital consumption starting on page 192.

As this year’s IGWT report is published, gold has finally clearly reentered a bull market. Of course, with hindsight it is obvious that a bull market was underway ever since the mid-cycle correction ended in late 2015, but it was initially a very labored, halting affair, a “stealth” bull market if you will. And while gold may not yet be at a new all time high in US dollar terms, it has reached new highs in numerous other major currencies:

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

In Gold We Trust, 2020 – The Dawning of a Golden Decade

June 2, 2020

In Gold We Trust, 2020 – The Dawning of a Golden Decade

The New In Gold We Trust Report is Here!

Left: casting gold bars. Right: using gold as a shield against assorted slings and arrows.

Here is a brief overview of the main subjects discussed in the report:

– A review of the most important events in the gold market in recent months
– An analysis of the impact of the Covid-19 crisis on the price of gold
– The increasing importance of gold in times of de-dollarization
– Silver – ready to fly high?
– Gold and cryptocurrencies
– Gold mining stocks: The bull market has started
– Outlook for the gold price development in this decade: A gold price of around USD 4,800 suggested by our quantitative model, even with a conservative calibration of the parameters.

As an aside, yours truly has also contributed a brief chapter to this year’s report, namely the chapter on capital consumption starting on page 192.

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

Credit Markets – The Waiting Game

April 15, 2020

Credit Markets – The Waiting Game

Everything and the Kitchen Sink

After the first inter-meeting rate cut in early March, we opined that further rate cuts were a near certainty and that “not-QE” would swiftly morph into “QE, next iteration” (see Rate Cutters Unanimous for the details). As it turned out, the monetary mandarins did not even wait for the official FOMC meeting before deciding to throw everything and the kitchen sink at the markets. Not only were rates insta-ZIRPed, but “not-QE” became “QE on steroids, plus”.

The federal debt monetization machinery goes into orbit. Moon landing next?

The “plus” stands for the alphabet soup of additional support programs for various slices of the credit markets, ranging from money markets to commercial paper to corporate bonds (investment grade only – for now). Alan Greenspan once said in Congressional testimony that if need be, the Fed would one day even “monetize oxen” – he may well live to see it.

What spooked the central bank was clearly the fact that corporate credit markets froze in response to the stock market crash and the lockdown measures. The latter have left a great many companies bereft of cash flows, not an ideal situation considering that trillions in corporate debt have to be refinanced in coming months and years. We have long argued that burgeoning corporate debt was the Achilles heel of the bubble, and this remains the case.

When the stock market crash started, money initially continued to flow into investment grade corporate bonds. LQD (investment grade corporate bond ETF) still made new highs in early March, while stocks were already in free-fall. But that didn’t last, and in less than two weeks LQD not only joined the crash, but began to trade at unprecedentedly large discounts to its NAV.

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

The Weird Obsessions of Central Bankers, Part 1

September 21, 2019

The Weird Obsessions of Central Bankers, Part 1

How to Hang on to Greenland

Jim Bianco, head of the eponymous research firm, handily won the internet last Thursday with the following tweet:

Jim Bianco has an excellent idea as to how Denmark might after all be able to hang on to Greenland, a territory coveted by His Eminence, POTUS GEESG Donald Trump (GEESG= God Emperor & Exceedingly Stable Genius).

Evidently the mad Danes running the central bank of this Northern European socialist paradise were reacting to the ECB Council’s decision earlier that day to carpet-bomb the euro zone economy with another dose of monetary napalm.

The sad spectacle was the outcome of the penultimate ECB meeting chaired by Mario Draghi, who will undoubtedly enter the history books in the “what not to do” section, inter alia as the only central bank chieftain who didn’t raise interest rates even once during his entire term.

Mario Draghi, the scourge of Old World savers

The Beatings Will Continue Until Morale Improves… or Something

The following tablet engraved with decisions was handed down from the Europe’s Central Planning Olympus:

(1) The interest rate on the deposit facility will be decreased by 10 basis points to -0.50%. The interest rate on the main refinancing operations and the rate on the marginal lending facility will remain unchanged at their current levels of 0.00% and 0.25% respectively. The Governing Council now expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.

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

Writing on the Wall

August 18, 2019

Writing on the Wall

Not Adding Up

One of the more disagreeable discrepancies of American life in the 21^st 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…

Feeling the Heat of a Civilization on the Downside

June 23, 2019

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…

Drain, drain, drain…

January 5, 2019

Drain, drain, drain…

Money from thin air going back whence it came from – circling the drain of a ‘no reinvestment’ black hole strategically placed in its way by the dollar-sucking vampire bat Ptenochirus Iagori Powelli.

Our friend Michael Pollaro recently provided us with an update of outstanding Fed credit as of 26 December 2018. Overall, the numbers appear not yet all that dramatic, but the devil is in the details, or rather in the time frames one considers.

The pace of the year-on-year decrease in net Fed credit has eased a bit from the previous month, as the December 2017 figures made for an easier comparison – but that is bound to change again with the January data. If one looks at the q/q rate of change, it has accelerated rather significantly since turning negative for good in April of last year.

Below are the most recent money supply and bank lending data as a reminder that “QT” indeed weighs on money supply growth rates. It was unavoidable that the slowdown in money supply growth would have an impact on asset prices and eventually on economic activity.

Note that in the short to medium term, the effects exerted by money supply growth rates are far more important than any of the president’s policy initiatives, whether they are positive (lower taxes, fewer regulations) or negative (erection of protectionist trade barriers). The effects of changes in money supply growth are also subject to a lag, but in this case the lag appears to be over.

Any effects seemingly triggered by “news flow” are usually only of the very short term knee-jerk variety, and they are often anyway the opposite of what one would normally expect – particularly in phases when news flow actually lags market action (see the recent case of disappointingly weak PMI and ISM data). The primary trend cannot be altered by these short term gyrations.

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

A Global Dearth of Liquidity

December 7, 2018

A Global Dearth of Liquidity

Worldwide Liquidity Drought – Money Supply Growth Slows Everywhere

This is a brief update on money supply growth trends in the most important currency areas outside the US (namely the euro area, Japan and China) as announced in in our recent update on US money supply growth (see “Federal Punch Bowl Removal Agency” for the details).

Nobody likes a drought. This collage illustrates why.

The liquidity drought is not confined to the US – it is fair to say that it is a global phenomenon, even though money supply growth rates in the euro area and Japan superficially still look fairly brisk. However, they are in the process of slowing down quite rapidly from much higher levels – and this trend seems set to continue.

Euro Area – Money Supply Growth Still High, But Slowing Fast

The chart below shows the euro area’s narrow money supply aggregate M1 (stock) and its year-on-year growth rate. M1 in the euro area is almost equivalent to US TMS-2, which makes it a good enough stand-in (it includes savings deposits that are in practice payable on demand; however, it lacks euro deposits belonging to foreign residents and central government deposits).

It is worth noting that a slowdown to a 0% growth rate triggered crisis conditions in 2008. After a sharp, but short term spike in money supply growth after the ECB made emergency liquidity facilities available to European banks to mitigate the fallout from the US housing bubble implosion, crisis conditions promptly returned when these facilities expired and money supply growth fell to around 1% in 2011.

Euro area, M1 (~TMS-2): Total in millions of EUR (blue line) and y/y rate of change (orange line). We have highlighted the three most recent slowdowns in money supply growth associated with economic crises and declining asset prices.

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

The Federal Punch Bowl Removal Agency

November 30, 2018

The Federal Punch Bowl Removal Agency

US Money Supply and Credit Growth Continue to Slow Down

Not to belabor the obvious too much, but in light of the recent sharp rebound, the stock market “panic window” is almost certainly closed for this year.* It was interesting that an admission by Mr. Powell that the central planners have not the foggiest idea about the future which their policy is aiming to influence was taken as an “excuse” to drive up stock prices. Powell’s speech was regarded as dovish. If it actually was, then it was a really bad idea to buy stocks because of it.

Jerome Powell: a new species of US central banker – a seemingly normal human being in public that transforms into the dollar-dissolving vampire bat Ptenochirus Iagori Powelli when it believes it is unobserved.

We say this for two reasons: for one thing, the Fed is reactive and when it moves from a tightening to a neutral or an easing bias, it usually indicates that the economy has deteriorated to the point where it can be expected to fall off a cliff shortly.

In this case it seems more likely that Mr. Powell has tempered his views on tightening after contemplating the complaints piling up in his inbox and looking at a recent chart of 5-year inflation breakevens. After all, there is no evidence of an imminent recession yet, even though a few noteworthy pockets of economic weakness have recently emerged (weakness in the housing sector is particularly glaring).

Recall that the last easing cycle began with a rate cut in August 2007. This first rate cut was book-ended by a double top in the SPX in July and October. Thereafter the stock market collapsed in the second-worst bear market of the past century – while the Fed concurrently cut rates all the way to zero (and eventually beyond, in the form of QE).

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

The Myth of Capitalism – A Book by Jonathan Tepper

November 7, 2018

The Myth of Capitalism – A Book by Jonathan Tepper

Crony Capitalism vs. Free Markets

Many of our readers are probably aware of the excellent work our friend Jonathan Tepper does for Variant Perception (VP)*****, a financial research boutique that really does bring a unique perspective to the table*. Jonathan (with co-author Denise Hearn) has just added a new book to his résumé, which is going to be released on 12 November: The Myth of Capitalism (MoC) – Monopolies and the Death of Competition** (a link to the official site is at the end of this post).

Jonathan Tepper and Denise Hearn: The Myth of Capitalism, an excellent plea for more competition and free markets.

MoC deals with a subject that has increasingly captured the attention of political and economic observers in recent years: the growing quasi-monopolistic powers of a small (and shrinking) number of large corporations that have seemingly succeeded in exempting themselves from competition.

They are often aided and abetted by government imposing regulations certain to suppress competition from less well-funded upstarts and smaller firms. At the same time governments are creating loopholes which only the biggest established firms with international operations are able to take advantage of.

Don’t get us wrong – we have no problem with loopholes as such: to paraphrase Mises, they allow capitalism to breathe. Problematic is only that the benefits granted to the most powerful players are denied to their potential competitors; we wouldn’t want to see these loopholes closed, we would like to see them extended far and wide.

Restoring Consumer Sovereignty

MoC is not focused on questions of monopoly theory***. The book is actually quite a page turner, at the same time informative, entertaining and infuriating. It is primarily concerned with practical problems and discusses what might be done to overcome them.

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

Fed Credit and the US Money Supply – The Liquidity Drain Accelerates

October 10, 2018

Fed Credit and the US Money Supply – The Liquidity Drain Accelerates

Federal Reserve Credit Contracts Further

We last wrote in July about the beginning contraction in outstanding Fed credit, repatriation inflows, reverse repos, and commercial and industrial lending growth, and how the interplay between these drivers has affected the growth rate of the true broad US money supply TMS-2 (the details can be seen here: “The Liquidity Drain Becomes Serious” and “A Scramble for Capital”).

The Fed has clearly changed course under Jerome Powell – for now, anyway.

Our friend Michael Pollaro* recently provided us with an update on outstanding Fed credit. As there are no longer any outstanding reverse repos with domestic banks, the liquidity drain is accelerating of late, with growth in net Fed credit contracting at fairly rapid rate of 3.4% year-on-year in September, the fourth consecutive month of decline:

The year-on-year contraction in net Fed credit accelerates. Since there are no longer any outstanding reverse repos with domestic financial institutions, the only force counteracting the negative effect on money supply growth is inflationary bank lending.

Michael also sent us a chart comparing the monthly trend in total net Fed credit in the course of 2017 with the trend in 2018 to date. When “QT” started in September of 2017, outstanding Fed credit initially kept growing well into 2018, largely because reverse repos with US banks ran off faster than securities held by the Fed decreased – but that has changed quite noticeably in the meantime:

Fed credit in 2017 (blue bars) vs. 2018 (red bars). The downtrend becomes more pronounced.

Keep in mind that the reverse repos mainly served to alleviate growing delivery fails due to a shortage in certain off-the run treasury securities which banks needed as collateral. As the Fed has stopped reinvesting all proceeds from maturing treasuries and MBS, banks no longer need to borrow securities from its portfolio.

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

Corporate Credit – A Chasm Between Risk Perceptions and Actual Risk

September 14, 2018

Corporate Credit – A Chasm Between Risk Perceptions and Actual Risk

Shifts in Credit-Land: Repatriation Hurts Small Corporate Borrowers

A recent Bloomberg article informs us that US companies with large cash hoards (such as AAPL and ORCL) were sizable players in corporate debt markets, supplying plenty of funds to borrowers in need of US dollars. Ever since US tax cuts have prompted repatriation flows, a “$300 billion-per-year hole” has been left in the market, as Bloomberg puts it. The chart below depicts the situation as of the end of August (not much has changed since then).

Short term (1-3 year) yields have risen strongly as a handful of cash-rich tech companies have begun to repatriate funds to the US.

Now these borrowers find it harder to get hold of funding. This in turn is putting additional pressure on their borrowing costs. At the same time, the cash-rich companies no longer need to fund share buybacks and dividends by issuing bonds themselves.

The upshot is that the financially strongest companies no longer issue new short term debt, while smaller and financially weaker companies are scrambling for funding and are faced with soaring interest rate expenses – which makes them even weaker.

As Bloomberg writes:

What is really noteworthy about this is that as these corporate middlemen are getting out, the quality of fixed-rate securities available to the rest of the investoriat continues to deteriorate in the aggregate.

Risk Perceptions vs. Risk

Meanwhile, despite the fact that euro-denominated corporate debt is reportedly still selling like hot cakes, both spreads and absolute yields have increased markedly in euro as well since late 2017 (as yields on German government debt are used as sovereign benchmarks for the euro area and remain stubbornly low, credit spreads on corporate and financial debt have increased almost in tandem with nominal yields).

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

Not Just Fangs: Manias and Echo Bubbles Abound

August 5, 2018

Not Just Fangs: Manias and Echo Bubbles Abound

It’s not just the FANGs investors should be worried about. A Tweet and an article explain.

✔

“With the FANG stocks faltering lately investors are starting to become concerned about their impact on the broader market. And there is certainly something to this.”https://app.hedgeye.com/insights/69386-it-s-more-than-just-fang-stocks-investors-should-be-worried-about?type=guest-contributors …

6:17 PM – Aug 3, 2018

It’s More Than Just FANG Stocks Investors Should Be Worried About

What investors really should be worried about then is the possibility that the reappraisal of the FANG stocks is representative of a much wider reappraisal that began back in February.

app.hedgeye.com

Echo Bubbles Abound

Pater Tenebrarum at Acting Man discusses Stock Market Manias of the Past vs the Echo Bubble.

The Big Picture

The diverging performance of major US stock market indexes which has been in place since the late January peak in DJIA and SPX has become even more extreme in recent months. In terms of duration and extent, it is one of the most pronounced such divergences in history. It also happens to be accompanied by weakening market internals, some of the most extreme sentiment and positioning readings ever seen and an ever more hostile monetary backdrop.

The above combination is consistent with a market close to a major peak – although one must always keep in mind that divergences can become even more pronounced – as was for instance demonstrated on occasion of the technology sector blow-off in late 1999 – 2000.

Along similar lines, extremes in valuations can persist for a very long time as well and reach previously unimaginable levels. The Nikkei of the late 1980s is a pertinent example for this. Incidentally, the current stock buyback craze is highly reminiscent of the 1980s Japanese financial engineering method known as keiretsu or zaibatsu, as it invites the very same rationalizations.

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

Stock Market Manias of the Past vs the Echo Bubble

August 4, 2018

Stock Market Manias of the Past vs the Echo Bubble

The Big Picture

The diverging performance of major US stock market indexes which has been in place since the late January peak in DJIA and SPX has become even more extreme in recent months. In terms of duration and extent it is one of the most pronounced such divergences in history. It also happens to be accompanied by weakening market internals, some of the most extreme sentiment and positioning readings ever seen and an ever more hostile monetary backdrop.

Who’s who in the zoo in 2018

The above combination is consistent with a market close to a major peak – although one must always keep in mind that divergences can become even more pronounced – as was for instance demonstrated on occasion of the technology sector blow-off in late 1999 – 2000.

Along similar lines, extremes in valuations can persist for a very long time as well and reach previously unimaginable levels. The Nikkei of the late 1980s is a pertinent example for this. Incidentally, the current stock buyback craze is highly reminiscent of the 1980s Japanese financial engineering method known as keiretsu or zaibatsu, as it invites the very same rationalizations.

We recall vividly that it was argued in the 1980s that despite their obscene overvaluation, Japanese stocks could “never decline” because Japanese companies would prop up each other’s stocks. Today we often read or hear that overvalued US stocks cannot possibly decline because companies will keep propping up their own stocks with buybacks.

Of course this propping up of stock prices occurs amid a rather concerning deterioration in median corporate balance sheet strength, as corporate debt has exploded into the blue yonder (just as it did in Japan in the late 1980s).

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

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