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Inflation or Deflation? Collapse in Demand Trumps Supply Shocks

Inflation or Deflation? Collapse in Demand Trumps Supply Shocks

The inflationists are coming out of the woodwork, but they are wrong.

Get Ready for the Return of Inflation, says Tim Congdon, in a Wall Street Journal op-ed.

The economists Milton Friedman and Anna Jacobson Schwartz demonstrated in “A Monetary History of the United States” that a collapse in the quantity of money was the main cause of the Great Depression. Hoping to avoid a repeat, the Federal Reserve in recent weeks has poured money into the economy at the fastest rate in the past 200 years. Unfortunately, this overreaction could turn out just as poorly; history suggests the U.S. will soon see an inflation boom.

Friedman and Schwartz used a broad definition of the quantity of money that included all bank deposits, and found that U.S. money stock shrank by 38% between October 1929 and April 1933. Some prominent economists—including Princeton’s Paul Krugman and Columbia’s Joseph Stiglitz—claim that money growth no longer matters much, but they’re wrong. After all, the 2007-09 recession showed that the ever-changing fortunes of the banking system have a significant effect on demand, output and employment. From 2010-18, growth rates of the quantity of money and nominal gross domestic product were virtually identical at 4% a year.

Policy makers have repeatedly called the battle against the novel coronavirus a war. As in wartime, federal expenditures are rising sharply while tax revenues are being hit by the lockdown. Both World War I and World War II—and, indeed, the Vietnam War—were followed by nasty bouts of inflation. If that happens again, policy makers today being cheered for their swift, decisive action will instead have to answer for their grave lack of foresight.

Inflation View is Wrong

The inflation view espoused above is widely held. Some even call for hyperinflation. 

However, the collapse in demand, dwarfs supply shocks and monetary printing.

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

Finally, It Matters What The Fed Can And Can’t Print

Finally, It Matters What The Fed Can And Can’t Print

Sound money advocates have been proclaiming that “the Fed can’t print gold” pretty much since the end of the last gold standard in 1971. But no one outside our little echo chamber paid attention, fixating instead on what the Fed could print: trillions of dollars that were perfectly fine for buying anything a creditworthy person could want. To paraphrase the old Saturday Night Live skit, “Fiat currency has been berry berry good to me.”

But the reaction of the world’s central banks to this latest crisis – effectively unlimited currency creation to buy up/bail out everything everywhere – seems to have rattled people who in the past have viewed aggressively-easy money as an unequivocally good thing:

‘The Fed can’t print gold’: How the yellow metal could hit $3,000 — 50% above the current record

(Financial Post) – Bank of America Corp. raised its 18-month gold-price target to US$3,000 an ounce — more than 50 per cent above the existing price record — in a report titled “The Fed can’t print gold.”

The bank increased its target from US$2,000 previously, as policy makers across the globe unleash vast amounts of fiscal and monetary stimulus to help shore up economies hurt by the coronavirus.

“As economic output contracts sharply, fiscal outlays surge, and central bank balance sheets double, fiat currencies could come under pressure,” analysts including Michael Widmer and Francisco Blanch said in the report. “Investors will aim for gold.”

BofA expects bullion to average US$1,695 an ounce this year and US$2,063 in 2021. The record of US$1,921.17 was set in September 2011. Spot prices traded around US$1,678 on Tuesday and are up 11 per cent this year.

To be sure, a strong dollar, reduced financial market volatility, and lower jewelry demand in India and China could remain headwinds for gold, BofA said.

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

Eric Peters: ‘Fed Isn’t Just Delaying The Inevitable Reckoning…It’s Making It Worse’

Eric Peters: ‘Fed Isn’t Just Delaying The Inevitable Reckoning…It’s Making It Worse’

As investors in the US and around the world confront the fact that the Federal Reserve is never really out of ammo, One River Asset Management Founder Eric Peters joined Erik Townsend for an interview on Townsend’s weekly MacroVoices podcast, which features in-depth interviews with portfolio managers and prominent figures in the wealth-management industry.

Markets finally rebounded last week after the fastest, most brutal selloff in modern history, a selloff that was inspired by the realization that half the world would need to stop to prevent millions from dying and hospitals from being absolutely overwhelmed like they were in Wuhan.

Fueling the enthusiasm, late last week, just before Peters’ interview, the Fed unleashed its latest program: a $2.3 trillion program that expanded liquidity to small businesses and municipalities alike – or at least that’s how Jay Powell marketed it.

With the Fed’s balance sheet on its way to $6 – and then $8 – trillion, Townsend asked Peters what he suspects will be the ultimate result of Powell & Co’s repeated interventions in credit markets, interventions that the market has come to depend on, especially now.

Whether or not the central bank’s decision is setting us up for an even more dramatic reversal later on no longer seems like a matter of speculation. The rapidity with which the market unraveled in March – erasing three years’ worth of artificially inflated gains in three weeks – is evidence of what happens when artificial supports finally give way, leaving chaos in their wake.

But at this point, actually swallowing the medicine is almost too painful a prospect to contemplate. Peters pointed out that it wasn’t just stocks that crashed. At points, corporate debt and gold have gotten hammered – the selling hasn’t been constrained to stocks.

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

The destructive force of bank credit

The destructive force of bank credit 

Commentators routinely confuse the deflationary effects of a contraction of bank credit with the inflationary effects of central bank policies designed to offset it. Central banks always ensure their stimulus is greater, so inflation, not deflation, is always the outcome.

In order to understand bank credit, we must enter the mind of a banker and understand how it is created, why it is expanded and why expansion is always followed by a sharp contraction. 

But we have now moved on from a simplistic credit cycle model, given the global economy was already facing a tendency for bank credit to contract before the coronavirus drove supply chains into the greatest global payment crisis in history. The problem is now so large that to maintain both economic stability and price levels for financial assets the central banks, led by the Fed, will have to issue so much base currency that fiat currencies will become almost worthless.

In these conditions the banks that survive the next several months will then begin to expand bank credit anew to buy up physical assets instead of their normal financial fare, sealing the fate of fiat currencies with a final expansion of bank credit as the banks themselves dump worthless currencies for real assets.  

Introduction

Never has it been more important to understand the psychology and motivation behind changes in the level of bank credit at a time when governments and central banks are relying on commercial banks to transmit Keynesian stimuli to distressed borrowers. And never has it been more important for analysts to differentiate between deflationary forces that come entirely from the contraction of bank credit and inflationary forces that arise from central banks’ monetary policy.

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

The Trickle-Up Bailout

The Trickle-Up Bailout

It’s early days, but the Federal Reserve “bazooka” has mostly impacted the 1%

Take a look at some contrasting sets of headlines. First, from planet earth:

Weekly Jobless Claims Hit 5.425 Million, Raising Monthly Loss To 22 Million Due To Coronavirus (CNBC)

Worst Case Fears Of 20%-Plus U.S. Jobless Rate Are Now Realistic (Bloomberg)

Then from Wall Street:

Private Equity-Owned Companies Sell New Bonds in Credit Rally (Bloomberg Law)

Fed’s Historic Move Spurs Rally in Junk Bonds: 6 ETF Picks (Nasdaq.com)

As we head into the second month of pandemic lockdown, two parallel narratives are developing about the financial rescue. 

In one, ordinary people receive aid through programs that are piecemeal, complex, and riddled with conditions. 

A law freezing evictions applies to holders of government-backed mortgages only. “Disaster grants” are coming more slowly and in smaller amounts than expected; small businesses were disappointed to learn from the SBA early last week that aid would be limited to $1000 per employee

A one-time “economic impact payment,” reportedly delayed so recipients could experience the thrilling visual of Donald Trump’s name on the check, might help make half a rent payment. Unemployment insurance amounts have been raised, so tip and gig workers can now be ineligible for $600 a week more than before! The cost of a coronavirus test might be free, but you test positive, you could up paying $50,000 or more in hospital costs even with insurance. And so on. 

Meanwhile, “relief” programs aimed at the top income levels were immediate, staggering in size and scope, and often appeared as grants rather than loans. One of the biggest layouts of the Covid-19 rescue was a political carrying charge that members of congress extracted just to get the larger bailout out the door – a pre-bailout bailout, if you will.

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

Credit Markets – The Waiting Game

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…

Weekly Commentary: When Money Died

Weekly Commentary: When Money Died

Sitting at the dinner table, our eleven-year old son inquired: “If a big meteor was about to hit the earth, how much money would the Fed print?” I complimented his sense of humor. Yet it was a sad testament to the historic monetary fiasco that will haunt his generation.

Federal Reserve Assets surpassed $6.0 TN for the first time, having inflated another $272 billion for the week (to $6.083 TN). Fed Assets inflated an astonishing $1.925 TN, or 46%, in only six weeks. Bank of American analysts this week suggested the Fed’s balance sheet could reach $9.0 TN by year-end.

M2 “money supply” surged another $371 billion for the week (ending 3/30) to a record $16.669 TN. M2 expanded an unprecedented $1.136 TN over five weeks (up $2.123 TN, or 14.6%, y-o-y). For some perspective, M2 has expanded more during the past six months than it did the entire nineties (no slouch of a decade in terms of monetary inflation). Not included in M2, Institutional Money Fund Assets expanded an unparalleled $676 billion in five weeks to a record $2.935 TN. Total Money Fund Assets were up $1.375 TN, or 44%, over the past year to a record $4.473 TN.  

There was a sordid process – rather than a specific date – for When Money Died. But it’s dead and buried. There are a few things that should remain sacrosanct. Money is absolutely one of them. Money is special. Sound Money is precious – to be coveted and safeguarded. As a stable and liquid store of value, Money is the bedrock of Capitalism, social cohesion and stable democracy. Society trusts Money – and with that trust comes great responsibility and risk.  

Analysis I read some years back on the Gold Standard resonates even more strongly today: Limiting the capacity for inflating its supply, the structure of backing Money with the precious metal worked to promote monetary and economic stability.

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

What Are You Gonna Do About It?

What Are You Gonna Do About It?

Tucked into the recent recovery bill was a provision granting the Federal Reserve the right to set up a $450 billion bailout plan without following key provisions of the federal open meetings law, including announcing its meetings or keeping most records about them, according to a POLITICO review of the legislation.

The provision further calls into question the transparency and oversight for the biggest bailout law ever passed by Congress. President Donald Trump has indicated he does not plan to comply with another part of the new law intended to boost Congress’ oversight powers of the bailout funds. And earlier this week, Trump dismissed the government official chosen as the chief watchdog for the stimulus package.

The changes at the central bank – which appear to have been inserted into the 880-page bill by sympathetic senators during the scramble to get it approved — would address a complaint that the Fed faced during the 2008 financial crisis, when board members couldn’t easily hold group conversations to address the fast-moving economic turmoil.

The provision dispenses with a longstanding accountability rule that the board has to give at least one day’s notice before holding a meeting. Experts say the change could lead to key information about the $450 billion bailout fund, such as which firms might benefit from the program, remaining inaccessible long after the bailout is over.

The new law would absolve the board of the requirement to keep minutes to closed-door meetings as it deliberates on how to set up the $450 billion loan program. That would severely limit the amount of information potentially available to the public on what influenced the board’s decision-making. The board would only have to keep a record of its votes, though they wouldn’t have to be made public during the coronavirus crisis.

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

Houston: The Banks Have A Huge Problem

Houston: The Banks Have A Huge Problem

For many years after the financial crisis, US commercial banks were mocked when instead of generating earnings the old-fashioned way, by collecting the interest arb on loans they had made, or even by frontrunning the Fed with their prop (and flow) trading desks, they would “earn” their way to just above consensus estimates by releasing some of their accumulated loan loss reserves, which thanks to creative accounting, would end up boosting the bottom line. The thinking here went that having suffered massive losses during the financial crisis “kitchen sink” when all banks suffered crushing losses to they would get bailed out, banks would then “recoup” billions in losses over time that would be run through the income statement as a reversal of accrued loss provisions.

Well, after the longest expansion in history, it’s time for this process to go into reverse, and instead of releasing loan loss reserves the banks are now starting to build them up again in preparation for a wave of consumer defaults due to the US economic shutdown.

As we reported earlier, this big story from earnings season so far – now that all major US money center banks have reported earnings – has been how much in loan loss provisions and reserves have the big US banks taken as precaution for the economic upheaval due to the coronacrisis. As shown below, on average most banks – this time including the hedge fund known as Goldman Sachs which has since pivoted to becoming a subprime lender to the masses with “Marcus” – saw their loan loss provisions surge by roughly 4x from year ago levels, with JPMorgan’s jumping the most, or just over 5x, hinting the other banks are likely undercapitalized for the storm that is coming.

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

What Happens When The Pandemic Ends?

What Happens When The Pandemic Ends?

Let’s assume that by the end of this year a combination of social distancing and some new and effective treatments convert covid-19 from existential threat to chronic nuisance and the economy starts to assume an air of normalcy. Which is to say that people go back to traveling and eating out and buying Chinese-made things they don’t need with money they don’t have.

Are we really home free? Or will some other, even bigger black swan come in for a landing?

To put this question into context, it helps to look at how the world got here. In extremely brief form: We engineered a tech stock bubble in the 1990s that burst in 2000, requiring drastically lower interest rates and truly insane speculation in housing to rescue the big banks. When that bubble burst in 2008, interest rates had to fall even further and even more debt – ranging from government to student to subprime auto (and, yes, mortgage) — had to be taken on to save Wall Street. Hence the term “everything bubble.”

Then came the pandemic, which burst the everything bubble and has convinced the world’s governments that truly astounding amounts of new debt are required to bail out all the parts of the private sector that have more-or-less ceased to exist.

Here, for instance, is the Fed’s balance sheet, which is a proxy for the amount of new currency the central bank has created out of thin air and dumped into the economy. The blue line is GDP growth and the red line is Fed currency creation. Note that more and more currency has to be created to maintain the same anemic growth trend:

Fed balance sheet pandemic

And here’s the federal government’s debt. Note the same situation as with the Fed: ever-greater borrowing is necessary to maintain a diminishing rate of growth.

US government debt pandemic

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

The very complex Jigsaw

The very complex Jigsaw

Blain’s Morning Porridge – 14 April 2020.

“If you try to take a cat apart to see how it works, the first thing you will have is a non-working cat.”

On Thursday I posted a note on the Fed doing exactly what I predicted – a programme to buy high-yield junk. A sniffy Wall Street trader called me an imbecile – which is quite a big word for a Wall St trader. He told me the Fed is not buying junk bonds, just ETFs related to junk and levered finance. He yelled at me to get it right. Really..? Go figure. Same difference. Its detail. I confidently predict the Central Banks will be buying equity ETFs soon enough – which is buying equity. End of. 

*********

After a glorious 4 days Easter staycation over the best April weekend in history, do I feel refreshed enough to face another week in markets? As analysts simultaneously forecast global depression and record stock markets by year end, are we are into the realms of financial insanity? I have some seriously dark dystopian forebodings about where this could go…. 

Get over it… Smile.

But before we talk ourselves into giving up.. REMEMBER – things are never as bad as you fear they might be. (It doesn’t mean they are looking particularly good either.) If you are prepared for the worst, then you are less likely to be disappointed if it happens…  

Work out why the market is fooling itself. Markets are scared of change, with a default position things will revert to “as-they-were.” This time they will not. There are a number of dangerous narratives playing out in markets at present – all of which expect things to revert to “same-as”. 

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

Deep Economic Suffering Has Erupted All Over America, But Guess Who The Federal Reserve Is Helping?

Deep Economic Suffering Has Erupted All Over America, But Guess Who The Federal Reserve Is Helping?

As millions upon millions of Americans lose their jobs in the greatest wave of unemployment in U.S. history, the Federal Reserve has decided that now is the time to spend trillions of newly created dollars in a desperate attempt to protect financial asset values.  In other words, as much of the country suddenly plunges into poverty, the Federal Reserve is working exceedingly hard to protect the wealth of the elite.  Approximately fifty percent of all stock market wealth is owned by the wealthiest one percent of all Americans, and the amount of stock market wealth owned by the poorest 50 percent of all Americans is so small that it really doesn’t matter.  And those running the Fed certainly understand that their reckless policies will create very painful inflation that will hit average American families extremely hard, but they don’t seem to care.  At this point, they figure that asset values must be protected at all costs, and that is going to continue to expand the absolutely massive gap between the rich and the poor in this country.

Over the past 3 weeks, more than 16 million Americans have filed new claims for unemployment benefits.

Prior to this year, the highest number that we had ever seen in any 3 week span in all of American history was about 2 million.

It is a collapse of unprecedented magnitude, and things have already gotten so bad that even “the Happiest Place on Earth” is conducting mass layoffs

Walt Disney World Resort will furlough 43,000 union workers while its theme parks remain closed as authorities restrict large gatherings due to the coronavirus pandemic, according to the Service Trades Council Union.

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

“Down The Rabbit Hole” – The Eurodollar Market Is The Matrix Behind It All

“Down The Rabbit Hole” – The Eurodollar Market Is The Matrix Behind It All

Summary

  • The Eurodollar system is a critical but often misunderstood driver of global financial markets: its importance cannot be understated.
  • Its origins are shrouded in mystery and intrigue; its operations are invisible to most; and yet it controls us in many ways. We will attempt to enlighten readers on what it is and what it means.
  • However, it is also a system under huge structural pressures – and as such we may be about to experience a profound paradigm shift with key implications for markets, economies, and geopolitics.
  • Recent Fed actions on swap lines and repo facilities only underline this fact rather than reducing its likelihood

What is The Matrix? 

A new world-class golf course in an Asian country financed with a USD bank loan. A Mexican property developer buying a hotel in USD. A European pension company wanting to hold USD assets and swapping borrowed EUR to do so. An African retailer importing Chinese-made toys for sale, paying its invoice in USD.

All of these are small examples of the multi-faceted global Eurodollar market. Like The Matrix, it is all around us, and connects us. Also just like The Matrix, most are unaware of its existence even as it defines the parameters we operate within. As we shall explore in this special report, it is additionally a Matrix that encompasses an implicit power struggle that only those who grasp its true nature are cognizant of.

Moreover, at present this Matrix and its Architect face a huge, perhaps existential, challenge.

Yes, it has overcome similar crises before…but it might be that the Novel (or should we say ‘Neo’?) Coronavirus is The One.

So, here is the key question to start with: What is the Eurodollar system? 

For Neo-phytes

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

Takeover

Takeover

We can’t print ourselves out of this crisis again, but that isn’t stopping the Federal Reserve from trying. Thursday’s intervention program, the latest in a string of panic moves to keep the financial system afloat, constitutes a complete takeover attempt of the market ecosphere, only the buying of stocks directly is last missing piece of eventual complete central bank control of equity markets. But seizing control of the bond market is the nearest equivalent step.

Not only that, the Fed is buying junk corporate debt propping up companies that should be let to fail as Chamath Palihapitiya pointed out poignantly this week. But not this Fed, no, with its actions it is again setting up the economy for yet another slower growth recovery, financed by even more debt.

QE doesn’t produce growth, that is the established track record:

Nobody wants to talk about the consequences to come following this crisis, but that doesn’t mean the consequences won’t be a real and present reality.

No, the Fed, while trying to save the world, is once again engaged in vastly distorting asset prices from the fundamental reality of the economy. It is in essence again laying the foundation for the next bubble, while the bursting of this bubble has yet to be fully priced in.

Even the Wall Street Editorial Board has made it perfectly clear what this is all about:


The @WSJ Editorial Board tells you what the new price distortion is all about: Save Wall Street and the top 1% and hope for trickle down economics later:https://www.wsj.com/articles/the-feds-main-street-mistake-11586474912 …

View image on Twitter

Asset price inflation to save markets in the hopes of trickle down growth to come.

Absurd.

The message the Fed is again is sending is to invite reckless behavior on the side of investors, the same reckless, TINA, fueled behavior that got us the bubble blow-off top in February.

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

The Fed’s Balance Sheet: The Other Exponential Curve

The Fed’s Balance Sheet: The Other Exponential Curve

As the threat of COVID-19 keeps millions of Americans locked down at home, businesses and financial markets are suffering.

For example, a survey of small-business owners found that 51% did not believe they could survive the pandemic for longer than three months. At the same time, the S&P 500 posted its worst first-quarter on record.

In response to this havoc, the U.S. Federal Reserve (the Fed) is taking unprecedented steps to try and stabilize the economy. This includes, as Visual Capitalist’s Marcu Lu details below, a return to quantitative easing (QE), a controversial policy which involves adding more money into the banking system. To help us understand the implications of these actions, today’s chart illustrates the swelling balance sheet of the Fed.

How Does Quantitative Easing Work?

Expansionary monetary policies are used by central banks to foster economic growth by increasing the money supply and lowering interest rates. These mechanisms will, in theory, stimulate business investment as well as consumer spending.

However, in the current low interest-rate environment, the effectiveness of such policies is diminished. When short-term rates are already so close to zero, reducing them further will have little impact. To overcome this dilemma in 2008, central banks began experimenting with the unconventional monetary policy of QE to inject new money into the system by purchasing massive quantities of longer-term assets such as Treasury bonds.

These purchases are intended to increase the money supply while decreasing the supply of the longer-term assets. In theory, this should put upward pressure on these assets’ prices (due to less supply) and decrease their yield (interest rates have an inverse relationship with bond prices).

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

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