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Olduvai III: Catacylsm
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Fed’s Asset Purchases Result in Increased Market Volatility

Fed’s Asset Purchases Result in Increased Market Volatility

“Once again, the empirical evidence supports reigning in the Fed; the economy works better when the Fed does less, not more.”

The Federal Reserve underwent a massive regime shift following the 2008 financial crisis. It incorporated several new tools into its monetary policy arsenal, ranging from interest on excess reserves to large‐​scale asset purchases (“quantitative easing”) to deal with the crisis. Unfortunately, as with most public institutions, power given is seldom relinquished.

As a recent Cato CMFA article noted, if the Fed is expected to massively increase its balance sheet in response to every major crisis, it will never return to a pre‐​2008 operating system. Furthermore, the COVID-19 pandemic spurred a further round of massive quantitative easing, so much so that instead of shrinking back down, the Fed’s asset holdings are now over one‐​third the size of the entire US commercial banking sector.

It stands to reason that such a massive shift in central banking should have effects on the financial system. A recent Wall Street Journal opinion piece makes this argument and uses options market data to suggest that the Fed’s involvement in financial markets has increased stock market volatility.

To be fair, the article points out a singular observation, one which may not reflect any underlying trend.

But there are ways to check for any underlying trend, such as vector autoregressions (VARs). In this post, I use a VAR method and demonstrate that the Fed’s 2008 regime shift has indeed had serious repercussions for market volatility as measured with the CBOE Volatility Index (“VIX”). (For those interested, I provide more details on the methodology after discussing the results.)

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This “Unprecedented” Fiscal Doom Loop Is Getting Worse

This “Unprecedented” Fiscal Doom Loop Is Getting Worse

Friend of Fringe Finance Lawrence Lepard released his most recent investor letter this week.

I believe Larry to truly be one of the muted voices that the investing community would be better off considering. He gets little coverage in the mainstream media, which, in my opinion, makes him someone worth listening to twice as closely.

Larry was kind enough to allow me to share his thoughts heading into Q4 2023. The letter has been edited ever-so-slightly for formatting, grammar and visuals.


It was an interesting quarter. There was a whiff of deflation as the Dow Jones, S&P 500 and NASDAQ all declined in value. But this was not matched by the prices of crude oil and commodities, both of which were strong, and the bond market had a bad quarter as rates continued to rise across the curve. A slowing economy, falling stocks and bonds, and rising commodity inflation spell one thing very clearly to us: STAGFLATION.

In the third quarter of 2023, the Fund increased in value slightly by 0.5% and picked up considerable ground (over 10% outperformance) on our benchmark index the Gold Stock Juniors ETF (GDXJ). A big piece of this outperformance occurred due to our large position in Lavras Gold which we profile on page 21. As we have said before, we manage the Fund aggressively, and in bear markets for gold stocks, we expect that we will do worse than GDXJ. However, we also want to point out that the converse is true in bull markets; in 2019 EMA was up 98% vs. the GDXJ which was up 40%, and in 2020 EMA was up 122% vs. the GDXJ which was up 33%. We believe that when this market turns, the results will be similar.

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Olduvai IV: Courage
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Olduvai II: Exodus
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