Will Trump Win Reelection?

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For another month, America has proceeded almost as if there is no presidential election this year. Of course, there is a presidential election on Nov. 3, just four months away.

Normally a coming election would dominate the headlines and conversation. We’d be discussing the coming conventions, the choice for vice president on the Democratic side, the platforms, the polls and other minutiae of the political process.

Those conversations are taking place among some and the polls are being reported on cable news on a consistent basis, but almost no one cares.

People may care by October, but not now. Instead the public is focused on three other issues of more pressing concern: the pandemic, the New Depression and social unrest. That’s as it should be.

Joe Biden has been confined to his basement recreation room. Donald Trump has been mostly confined to the White House, although he has begun to venture out and even attended a campaign rally in Tulsa, Oklahoma.

Now, it’s too soon to make definitive forecasts at this stage.

But if the presidential election were held today, Trump would almost certainly lose to Biden.

This reality is reflected not only in the national polls (which don’t mean much because the U.S. does not have national elections; we have state-by-state elections implemented through the Electoral College).

It is also reflected in polls from key battleground states such as Michigan, Pennsylvania and Wisconsin.

Even allowing for the fact that some of the polls are poorly constructed and oversample Democrats relative to Republicans, Biden’s leads are substantial.

I was one of the very few analysts who predicted a Trump victory in 2016. I did this in national TV interviews in Australia, London and New York in addition to writing about it in my newsletters.

I made this forecast at a time when polls and pundits were giving Hillary Clinton a 92% chance of victory. So I know something about how to interpret polls, search for anecdotal evidence and not get caught up in the mainstream media narrative.

Yet those same skills that caused me to predict a Trump victory in 2016 now point to a Trump defeat.

I’ve often defended Trump’s policies, especially regarding trade with China, so I certainly can’t be accused of being anti-Trump.

That’s just an objective analysis based upon the latest data.

Of course, the election is still 125 days away and there’s time to turn things around. A lot can happen in politics in a week let alone four months. But that’s not as much time as it sounds.


Jim Rickards
for The Daily Reckoning

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The Return of Stagflation

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The U.S. Treasury Department has been issuing record amounts of new debt since the coronavirus lockdowns began.

This debt issuance is an important factor driving markets for stocks, bonds, currencies and precious metals.

Today I’ll explain how a large supply of new U.S. Treasury securities has temporarily tightened liquidity in Wall Street’s money markets. Then I’ll discuss the long-run consequences of the soaring national debt.

Looking beyond the short term, in the months and years ahead, the ever-growing supply of U.S. Treasuries will be extremely bullish for precious metals prices and certain other assets that thrive in inflationary environments.

First, let’s consider the short-term environment, which is still characterized by powerful deflationary forces.

Deflation Dominates

Even though measures of bank loan growth and money supply are surging, this is not yet inflationary because money velocity has plummeted.

Bank loan growth has risen because we’ve seen company after company draw down their revolving lines of credit. They sought to boost liquid reserves on their balance sheets. This is a precautionary move, characteristic of behavior in a recession.

These companies are not going to invest in plant expansions or hiring with all this new debt. Rather, they’re hoarding liquidity to try to ride out what could be an extended recession.

Countering the deflationary force of companies hoarding liquidity is the fire hose of liquidity coming from the Treasury and the Fed…

Wall Street’s primary dealers can only absorb so much Treasury debt in a short time frame before finding a permanent home for these securities among their client base of hedge funds, insurers and pension funds.

The Fed’s balance sheet will be the permanent home for many of these Treasuries. So the Fed will likely stand by to absorb any excess supply of Treasuries in the event that yields rise at a pace that they dislike.

Tighter Liquidity Is Bearish for Risk Assets Like Stocks

Some media outlets have mentioned the epic surge in Treasury debt auctions, but it hasn’t gotten broad attention in the financial media.

Several outlets reported on Treasury’s May announcement that it planned to auction $2.999 trillion in securities during the April–June 2020 quarter. It targeted an end-of-June cash balance of $800 billion at the Fed.

That’s a mind-boggling number. And keep in mind that most of this cash hoard was raised from selling new bonds — not from taxing cash out of the existing economy.

Here’s my key point: There has been an ongoing boom in U.S. Treasury security auctions to fund the commitments that the Treasury Department made to dole out stimulus money.

The Federal Reserve has absorbed much of this Treasury security issuance by buying them from primary dealers on Wall Street. However, unless the Fed expands its balance sheet by at least another trillion dollars in the months ahead, liquidity on Wall Street will tighten.

And tighter liquidity is bearish for risk assets like stocks.

The last few times there was a surge in sales of U.S. Treasuries to refill a depleted Treasury account at the Fed (in late 2015–early 2016, and late 2017–early 2018), the Fed wasn’t in balance sheet expansion mode.

So liquidity on Wall Street tightened and those assets at the margins of the global dollar funding system, including emerging markets, corrected sharply.

The takeaway is that if the Fed wants to avoid a repeat of those risk-off episodes and keep liquidity loose on Wall Street, it must reaccelerate its pace of Treasury purchases.

But lately, it has been slowing its purchases from the torrid pace of late March.

I wouldn’t be surprised to see a reacceleration of Fed purchases of Treasuries. The longer this goes on (the Fed financing the Treasury’s deficit), the more the U.S. risks the reputation of the dollar as a store of value.

Now I’ll pivot to the longer-run consequences of the Treasury’s epic binge of bond issuance…

Epic Binge of Debt

The blue line in this chart shows the U.S. national debt by fiscal year (which ends in September) since 1970. Fiscal 2019 ended with $22.7 trillion in debt. The annual growth rate of the debt in the post-recession years since fiscal 2010 has been 3–9%.


In the dotted lines, I added a hypothetical increase of $5 trillion in new debt in fiscal 2020 and $2 trillion in fiscal 2021. We’re already at $25.7 trillion in debt as of June 1, and we still have three months of debt-issuing left in fiscal 2020.

If fiscal 2020 debt jumps $5 trillion from the prior year, the growth rate in the orange line will accelerate to 22%. We haven’t seen these growth rates in the national debt since the late 1970s and early 1980s.

Note that the highest growth rates in the national debt have coincided with strong conditions for gold prices.

A steady acceleration in the national debt throughout the 1970s fueled gold’s first big bull market in U.S. dollar terms. And the exploding deficits of the 2000s drove gold from $300 to $1,900 in 10 years.


Let’s add this bit of context to today’s investing environment: This will be the first time the U.S. will experience accelerating growth in the national debt while the Fed has rates pinned at zero and is buying many of the newly issued Treasury bonds.

All of this activity — which was taken in response to an abrupt March 2020 move into recession and a bear market in stocks — is rapidly boosting the money supply.

We’re seeing an unprecedented injection of newly printed cash into the U.S. economy in a brief time.

New cash enters the U.S. economy through two primary channels: through new bank loans and through rising federal budget deficits.

The bank loan channel will likely be dormant for a few years, because much of the corporate borrowing on revolving credit lines will be repaid once the worst of the crisis passes. Plus, the default of corporate loans will be a deflationary offset to the recent uptick in corporate borrowing.

The latter channel of cash injection into the U.S. economy (high federal budget deficits) will be the one to watch. As deficits expand, the banking system will be flooded with new deposits, including those from the stimulus checks going out in the mail.

Much of the money that has been sent out to households is being saved. That’s why the latest official savings rate number skyrocketed. As the months pass, more and more of this money will start to circulate through the economy.

But will this newly created money be spent on the same basket of goods and services that was consumed by the typical household in 2019? I doubt it.

As consumer confidence remains low, this new money supply will tend to boost the prices of necessities (or “nondiscretionary” items). Higher prices for necessities will leave less room in household budgets for discretionary items.

Discretionary items include things like restaurants, travel and leisure — all the sectors that employed many people, have been hit the hardest by the coronavirus shutdowns and thus will likely request even more federal relief in the near future.


The capacity (or supply) within these sectors will thus remain limited. Income support from the federal government will cushion the demand hit that would have resulted from the depressed consumption of people who’ve lost jobs within these downsized sectors.

The end result will be persistently high federal deficits, steady supplies of new cash entering the economy and a U.S. economy that more closely resembles the 1970s than the economy that most Americans have become accustomed to.

In summary, the cost of the national debt won’t be borne by higher tax rates “on our children and grandchildren,” as politicians and talking heads like to say.

Instead, the cost of the national debt will be borne by holders of Federal Reserve notes, which will buy less than expected in the long run.

Said another way, the cost of endless national deficits is manifested in future inflation.

Once today’s precautionary savings-driven deflation episode ends, we’ll be facing a “stagflation” economy with high unemployment and chronically high inflation in the most commonly consumed items within a typical consumption basket.

And you can expect gold to soar, just like it did in the 1970s when we last confronted stagflation.


Dan Amoss
for The Daily Reckoning

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Central Banks Driving Gold

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Gold as an asset class is confusing to most investors. Even sophisticated investors are accustomed to hearing gold ridiculed as a “shiny rock” and hearing serious gold analysts mocked as “gold bugs,” “gold nuts” or worse.

As a gold analyst, I grew used to this a long time ago. But, it’s still disconcerting when one realizes the extent to which gold is simply not taken seriously or is treated as a mere commodity no different than soy beans or wheat.

The reasons for this disparaging approach to gold are not difficult to discern. Economic elites and academic economists control the central banks. The central banks control what we now consider “money” (dollars, euros, yen and other major currencies).

Those who control the money supply can indirectly control economies and the destiny of nations simply by deciding when and how much to ease or tighten credit conditions, and when to favor (or disfavor) certain types of lending.

When you ease credit conditions in a difficult environment, you help favored institutions (mainly banks) to survive. If you tighten credit conditions in a difficult environment, you can more or less guarantee that certain companies, banks or even nations will fail.

This power is based on money and the money is controlled by central banks, primarily the Federal Reserve System. However, the money-based power depends on a monopoly on money creation.

As long as investors and institutions are forced into a dollar-based system, then control of the dollar equates to control of those institutions. The minute another form of money competes with the dollar (or euro, etc.) as a store of value and medium of exchange, then the control of the power elites is broken.

This is why the elites disparage and marginalize gold. It’s easy to show why gold is a better form of money, why it’s more reliable than central bank money for preserving wealth, and why it’s a threat to the money-monopoly that the elites depend upon to maintain power.

Not only is gold a superior form of money, it’s also not under the control of any central bank or group of individuals. Yes, miners control new output, but annual output is only about 1.8% of all the above-ground gold in the world.

The value of gold is determined not by new output, but by the above-ground supply, which is 190,000 metric tonnes. Most of that above-ground supply is either owned by central banks and finance ministries (about 34,000 metric tonnes) or is held privately either as jewelry (“wearable wealth”) or bullion (coins and bars).

The floating supply available for day-to-day trading and investment is only a small fraction of the total supply. Gold is valuable and is a powerful form of money, but it’s not under the control of any single institution or group of institutions.

Clearly gold is a threat to the central bank money monopoly. Gold cannot be made to disappear (it’s too valuable), and it would be almost impossible to confiscate (despite persistent rumors to that effect).

If gold is a threat to central bank money and cannot be made to disappear, then it must be discredited. It becomes important for central bankers and academic economists to construct a narrative that’s easily absorbed by everyday investors that says gold is not money.

The narrative goes like this:

There’s not enough gold in the world to support trade and commerce. (That’s false: there’s always enough gold, it’s just a question of price. The same amount of gold supports a larger amount of transactions when the price is raised).

Gold supply cannot expand fast enough to keep up with economic growth. (That’s false: It confuses the official supply with the total supply. Central banks can always expand the official supply by printing money and buying gold from private hands. That expands the money supply and supports economic expansion).

Gold causes financial panics and crashes. (That’s false: There were panics and crashes during the gold standard and panics and crashes since the gold standard ended. Panics and crashes are not caused or cured by gold. They are caused by a loss of confidence in banks, paper money or the economy. There is no correlation between gold and financial panic).

Gold caused and prolonged the Great Depression. (That’s false: Even Milton Friedman and Ben Bernanke have written that the Great Depression was caused by the Fed. During the Great Depression, base money supply could be 250% of the market value of official gold. Actual money supply never exceeded 100% of the gold value. In other words, the Fed could have more than doubled the money supply even with a gold standard. It failed to do so. That’s a Fed failure not a gold failure).

You get the point. There’s a clever narrative about why gold is not money. But, the narrative is false. It’s simply the case that everyday citizens believe what the economists say (usually a bad idea) or don’t know enough economic history to refute the economists (and how could you know the history if they stopped teaching it fifty years ago).

The bottom line is that economists know that gold could be a perfectly usable form of money. The reason they don’t want it is because it dilutes their monopoly power over printed money and therefore reduces their political power over people and nations.

To marginalize gold, they created a phony narrative about why gold doesn’t work as money. Most people were too easily impressed by the narrative or simply didn’t know enough to challenge it. Therefore the narrative wins even if it is false.

If gold is viable as a form of money, what does gold’s recent price trading range combined with fundamental factors tell us about its investment prospects?

Right now, my models are telling me that gold is poised to breakout of its recent narrow trading range.

As always in technical analysis, the term “breakout” can mean sharply higher or sharply lower prices. Using fundamental analysis, a breakout to sharply higher prices is the expected outcome. This may be the last opportunity to buy gold below $2,000 per ounce.

For the past three months, gold has been trading in a range between $1,685 per ounce and $1,790 per ounce (it’s trading at about $1,782 today). For most of those three months gold was trading in a fairly narrow band.

When trading a volatile asset narrows to that extent, it’s a sign that the asset is ready for a material technical breakout. The question is will gold breakout to the upside or downside?

To answer that question, we can turn to fundamental analysis. (Technical analysis is data rich and is useful for spotting patterns, but it has low predictive analytic power).

One of the most important fundamental factors forcing gold higher is shown in Chart 1 below. This shows central bank purchases of gold bullion from 2017 to 2020 (each year is shown as a separate line measured in metric tonnes on the left scale).

Chart 1 – Central Bank purchases of gold
(in metric tonnes) 2017 – 2020


Chart 1 shows significant purchases of gold with 2019 running ahead of 2017 and 2018 at about 500 metric tonnes.

The chart also shows over 150 metric tonnes of gold purchases through April 2020, which puts 2020 on track to show 450 metric tonnes purchased for the year if present trends hold.

Of course, the actual result could be higher or lower. Cumulative central bank purchases from January 2017 to April 2020 are approximately 2,050 metric tonnes.

In fact, central banks went from being net sellers to net buyers of gold in 2010, and that net buying position has persisted ever since. The largest buyers are Russia and China, but significant purchases have also been made by Iran, Turkey, Kazakhstan, Mexico and Vietnam.

Here’s the bottom line:

Central banks have a monopoly on central bank money. Gold is the competitor to central bank money and most central banks would prefer to ignore gold. Yet, central banks in the aggregate are net buyers of gold.

In effect, central banks are signaling through their actions that they are losing confidence in their own money and their money monopoly. They’re getting ready for the day when confidence in central bank money will collapse across the board. In that world, gold will be the only form of money anyone wants.

Central banks are voting with their printing presses in favor of gold. What are you waiting for?

Here’s a once in a lifetime opportunity to front run central banks and acquire your own gold at attractive prices before the curtain drops on paper money.


Jim Rickards
for The Daily Reckoning

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Central Banks: Gold’s Greatest Ally

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You’re likely aware of the price action in gold lately. Gold has rallied from $1,591 per ounce on April 1 to $1,782 per ounce as of today. That’s a 12% gain in less than three months.

My earlier forecast was that gold would hit $1,776 by the Fourth of July. I guess I was a bit early!

Today’s price of $1,782 per ounce is the highest since 2012 and a 70% gain from the low of $1,050 per ounce at the end of the last bear market in December 2015.

The history of gold bull markets (1971–80 and 1999–2011) shows that the most powerful gains come toward the end of the bull market, not at the beginning.

That means even if you’ve missed out on the gold rally so far, you could still score huge gains as gold trends toward $10,000 per ounce or higher over the next four years.

As I’ve stated on multiple occasions, I didn’t just come up with that number out of the blue or to be controversial.

It’s simply the implied nondeflationary price of gold based on the M1 money supply and assuming it will have a 40% gold backing.

What’s driving this bull market in gold?

It’s not retail investors (apart from a small number who understand the dynamics) and it’s not institutional investors (institutional portfolio allocations to gold are typically about 1–2%).

Instead, the steady buying is coming from central banks (especially Russia and China) and from the super-rich, who typically store their gold in private nonbank vaults in Switzerland and other good rule-of-law jurisdictions.

The drive toward larger portfolio allocations to gold (in some cases up to 10%) is coming not just from the rich themselves but from their wealth managers and portfolio advisers.

This is a sea change.

For decades, wealth managers have rejected gold and pushed their clients into stocks, corporate credit and alternative investments including private equity. Recently all of those portfolio allocations have backfired. Equity markets crashed in March and are set for another fall soon after recovering over half the losses.

Corporate credit downgrades are at an all-time high and that market is being propped up by the Fed in nonsustainable ways. Private equity looks increasingly illiquid as IPO markets dry up and most hedge fund investors have badly underperformed.

This leaves gold as one of the best performing asset classes around.

But it’s still early. Here’s how I expect the process to play out…

As confidence in the dollar is eroded due to Fed money printing and congressional super-deficits, investors gradually look for alternative stores of wealth including gold.

These trends begin slowly and then gather momentum. As the dollar price of gold begins to soar, investors take notice. Even more people invest in gold, driving the price still higher.

Investors like to say that the price of gold is going up. But what is really happening is that the value of the dollar is going down (it takes more dollars to buy the same amount of gold).

This is the real inflation and the real dollar collapse most investors miss at the early stages.

Eventually, confidence in the dollar is lost completely, central bankers need to restore confidence, and they turn to some type of gold standard to do so.

We’re a long way from that point right now.

But if central banks, the super-rich and their advisers are all jumping on the gold bandwagon, what are you waiting for?

Gold’s worst ever bear market (2011–15) is behind us and gold is positioned for new highs of over $2,000 per ounce in the short run and much higher over the next several years.

The time to go for the gold is now.


Jim Rickards
for The Daily Reckoning

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Storm Warning

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The USA has gone so crazy in these months of the coronavirus freak-out that an orgy of looting, arson, and murder, on top of epic job loss and business failure, propelled the stock markets up-up-and-away back to near-record highs.

Makes sense, right?

The market came down a bit towards the end of the week, but don’t worry. The Fed will make another announcement that it’s going to do something or other and presto, the market will be off to the races again.

In the background of these weeks of protests, riots, looting, and arson is the disintegrating economy, which signifies that pretty much everybody in this land will not be able to keep on keeping on in the ways we’re used to.

Reduced Living Standards

Everybody will have a harder time making a living. Everybody will endure shocking losses in wealth, status, and comfort. And, sadly, everybody will be too perplexed and bamboozled by the rush of events to understand why.

The short version of that story is we’ve overshot our resources, especially the basic energy resources that all other activities require.

This mystifies the public, too, but you can boil it down to the cost of getting oil out of the ground being too high for customers and not high enough for the oil producers to cover their costs — a quandary.

One result has been the rapid bankruptcy of the shale oil industry. Another is the incremental impoverishment of what used to be America’s broad middle-class — a malady that has, just for now, fenced off the denizens of Wall Street, the notorious One Percent (of the population), who still luxuriate in zooming share prices and dividends while everybody else sucks wind in a ditch with-or-without the added affliction of Covid-19.

The perplexed and bamboozled include the entire leadership nucleus of the land, who seem starkly unable to act coherently in the tightening vortex of crisis.

Piling on More Debt

While Mr. Trump seems to dimly apprehend the urgent need for economic restructuring, he’s able to express it only in messages that sound like a 1961 Frigidaire commercial, with overtones of Marvel Comics superhero grandiosity.

The president may understand that a country can’t consume stuff without producing stuff, but he doesn’t get that it’s too late to bring back all that activity at the scale we used to run it when he was a young man in the 1960s.

His answer to the call of restructuring — what the Soviets called perestroika before they fell apart — is to pile on more debt, that is, borrow more from the future to pay for hamburgers today.

That dovetails neatly with the needs of the financial community, led by the hapless “Jay” Powell at the Federal Reserve, who is on a mission to destroy the U.S. dollar in order to save the banking system and its auxiliaries in the stock markets.

He literally doesn’t know what to do — except “print” more dollars to support share prices, a symbolic talisman of theoretical economics that has less and less to do with what people actually do on-the-ground in the hours when they’re not sleeping.

It looks unlikely that the Fed will rescue either Wall Street or Main Street. The longer he props up the former at the expense of the latter, the more certain it is that it will provoke insurrection that goes well beyond the current hostilities.

Vanishing Commerce From Cities

The looting and arson of recent days hugely aggravated a central feature of it: the destruction of small business.

In Minneapolis alone, the damage stands at $100-million. Things were difficult enough under the strictures of Covid-19, but this guarantees that many cities will not see the return of commerce — and there are only a few other reasons for cities to even exist.

Not only did the Democratic Party fail to object to the mayhem, but the city governments they controlled abetted, incited, and applauded the anarchy.

Meanwhile, last Saturday in Tulsa, Mr. Trump made the signal error of bragging on the latest highs in the stock markets. Hasn’t he learned by now what a flimsy representation of reality that is?

Evidently not. The air may be coming out of that lifebuoy in the next couple of weeks, and his election prospects will sink with it.

This will happen as the nation approaches the dark moment when the postponement of debt repayments ends. Imagine how many mortgage, car payments, and small business loan defaults will crackle across the land, and how that will thunder through the banking system.

Civil and Social Collapse Before November 3?

Anyone with half a brain knows that only the strenuous manipulations of the Federal Reserve have kept stocks levitating, doing the only trick they know how to do: printing money by digital keystrokes.

There are so many dimensions to that blunder, it could hasten a more complete economic, civil and social collapse before November 3.

If markets somehow magically stayed elevated, would all those Americans dispossessed of houses, cars, and businesses not feel more resentful than ever about the skullduggery of the elites?

And might they form a third faction in a burgeoning civil war against both the Woke Left and the Trump-led government? And what if the Federal Reserve’s stupid trick of money-printing destroys the value of the dollar per se?

That’s hardly a far-out scenario.

Beware the 4th of July

Events are rushing ahead at a pace you can barely follow. Summer is underway and why, now, would you expect any lessening in civil disorders?

The summer heat is always an invitation to raucous behavior on the steamy streets. Have Chuck Schumer and Nancy Pelosi appealed to their followers to end their violence?

Maybe I missed that. They are hinting at a return to Covid-19 lockdown conditions — but you can forget about anyone following that when the temperature tops ninety degrees (and certainly the Dem leadership knows that).

Meanwhile, the devastation of small business, careers, livelihoods, households, and futures continues.

Then, there’s the sinister joker-in-the-deck next week. It’s called the Fourth of July. It’s hard to imagine a fatter target for those who are truly intent on making things as bad as possible than that particular holiday. Hey, they’ve already torn down statues of George Washington.

What else is left to trash?

Take measures to protect your own future, as far as possible. Put your energy into imagining how you can be helpful to other people, and perhaps incidentally earn their trust and their assistance in mutually beneficial ways.

Think about finding a plausible place to live where the rule of law perseveres. Think about how you might fit into an economy run at a smaller scale. Start taking action on that thinking.

There’s potential for a lot of people to get hurt in the disorders-to-come.

There’s plenty you can do to not be one of them.


James Howard Kunstler
for The Daily Reckoning

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The Fed Isn’t a Magic Money Tree

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There seems to be no end to the Federal Reserve’s arrogance. Fed officials believe that through their wise actions, they can eliminate the business cycle, lower unemployment and make society prosperous.

But it’s actually much more limited in what it can do.

All the Fed can reliably do is stop bank runs and limit liquidity panics. It can also fund (or “monetize”) the U.S. federal deficit, as it has done in recent months.

By buying essentially the same amount of U.S. Treasury securities the government has issued, the Fed has taken pressure to fund mammoth federal deficits off of the private sector.

But such actions are not cost-free.

They store up trouble for the future. These actions swell the Fed’s balance sheet, which will limit the Fed’s flexibility and its willingness to tighten policy during the next inflation spike.

The more the Fed intervenes, the harder it is for it to reverse course without causing damage.

By promising the public that it can do anything more than offer dollar liquidity, the Fed is setting up both investors and workers for disappointment.

Yet it’s going to try anyway. And it’ll only undermine its limited reputational capital in the process.

“Yield Curve Control”

The Wall Street Journal recently reported that the Fed is considering implementing “yield curve control” in the Treasury market. This policy hasn’t been used since WWII and the early postwar period.

It essentially funded the war effort. If unleashed today, it wouldn’t be done to support a civilization-saving war effort but to maintain the debt-saturated economy to which we’ve become accustomed.

Here’s how it would work in practice:

The Fed would set a target range, or cap, on yields for Treasury bonds of a specific maturity — say, 3-, 5- or 7-year Treasuries.

It would defend this target by buying unlimited amounts of Treasuries at that yield — however many it took to bring the yield down to its target rate (remember, bond prices and yields move in opposite directions. Buying bonds lowers their yield).

If adopted, the Fed would switch its QE policy from a fixed dollar amount (currently $120 billion per month) to an unknown amount that will depend on supply and demand in the Treasury market.

Yield curve control has been underway in Japan for the past few years. It has proven to not be effective at stimulating the economy, so there’s little reason to expect it would work here.

Here Comes Helicopter Money

We’ve had our fill of quantitative easing over the years, but it’s mostly inflated assets while doing little for overall economic growth.

The quantitative tightening, or QT, process that occurred from early 2018–mid-2019 slowly reversed that process until the Fed ran into a wall of resistance from the markets. Since then, we’ve obviously had another epic wave of QE.

But here’s what’s different about the current round of QE from the QE programs of the past decade:

A much greater proportion of the money the Fed has created to buy bonds will be injected into the real economy through the federal budget. It won’t just be sequestered on Wall Street, where it pumps up asset prices.

As the brand-new U.S. money supply that is currently sitting in the U.S. Treasury’s General Account at the Fed is injected into citizens’ checking accounts through stimulus checks, unemployment insurance, tax refunds, Social Security checks and more, consumers will have plenty of purchasing power.

The Treasury General Account balance is currently $1.5 trillion, which is easily 10 times higher than the historical average. This will be sent out to recipients of federal dollars in the months ahead.

Will the recipients spend it all at once?

No, they won’t. They’ll likely hold precautionary savings in a weak economy. But make no mistake: The cash is there, it will get into consumers’ hands and it will eventually be spent — even if the economy remains sluggish.

It’s like water that’s built up in front of a dam. All it takes is to open the sluices (in this case have the Treasury spend down its cash balance) to inject an unprecedented amount of cash into the economy.

The U.S. job market (and wages) won’t necessarily have to fully recover for a chronic inflation problem to set in, because the tool for the Fed to inject newly printed cash into the economy (through the federal budget) is well established.

That’s a recipe for stagflation.

Turning Money Into a Hot Potato

It involves a chronically high federal deficit, a Fed balance sheet that is expanding with the deficit and private-sector productivity growth that lags the growth in newly printed money.

Historical evidence shows that when government debt and deficits are high, central bank balance sheets are growing rapidly and private-sector productivity growth lags the growth in newly printed money, inflation will be the result.

When the public starts to recognize that supply of a fiat currency is too plentiful today and expects money supply to grow much faster than production of goods and services, then the public will start treating that currency as a hot potato.

This is the psychological part of inflation that’s so difficult for mainstream economists to grasp. It’s nonlinear and unpredictable. This is why Jim Rickards calls inflation a “psychological phenomenon.”

And that brings me to Modern Monetary Theory, or MMT.

MMT Doesn’t Understand Money

Consider this question: Do you hold cash as a store of value solely for the purpose of paying taxes?

Of course not. Thus, legal tender laws do not give fiat money intrinsic value. Fiat money only has value to the extent that its holders believe it can be exchanged for goods and services both now and in the future.

But Modern Monetary Theory (MMT) is ultimately based on the notion that fiat money derives its value from the fact that citizens need it to pay their taxes.

But MMT advocates might be surprised if they survey the public and discover that the public does not, in fact, save money for the sole purpose of paying federal taxes.

The exchange of fiat money for goods in the future is critical. In Chapter 5 of his book Aftermath, titled “Free Money,” Jim identifies the essential problem with MMT:

“The problem with… MMT is not that the theory is wrong as far as it goes; the problem is that it does not go far enough. MMT fails not because of what it says but because of what it ignores. The issue is not whether there is a legal limit on money creation but whether there is a psychological limit.”

Promoters of MMT consider taxation the solution to inflation. If inflation becomes a problem, their solution is to raise taxes, which would drain money out of the economy. But they don’t understand the psychology of inflation.

They focus on the accounting mechanics of dollar creation and downplay how their policy proposals might affect the use of dollars in the real world. I’ve seen no successful real-world case study showing that MMT works.

It’s an abstract theory that is not supported by historical evidence. That’s why detractors often make fun of MMT by calling it “Magic Money Tree.”

The Fed is not a Magic Money Tree today… and it wouldn’t become one even if MMT were officially adopted in the future.

Owning gold and gold-related assets is the best protection against the damage that the Fed and the federal government are doing today and what they’ll do in the future.

The damage isn’t yet obvious, but it will be more noticeable in time.


Dan Amoss
for The Daily Reckoning

The post The Fed Isn’t a Magic Money Tree appeared first on Daily Reckoning.

Are We in for a 20-Year Winter?

This post Are We in for a 20-Year Winter? appeared first on Daily Reckoning.

The shifting passions of the stock market entertain us, as the shifting passions of a soap opera entertain us.

They entertain us, that is. But they do not fascinate us.

It is the longer view, the overall view that commands our attention… the eagle’s view.

Today the horizon drifts into focus. Yes, we have the future in sight.

How will the stock market fare these next 20 years?

Today we undertake a tour of the horizon.

We first take a canvass of the passing scenery…

One Day, Two Markets

The stock market shook off early staggers to close strong. Yahoo! Finance:

Earlier, stocks traded choppily after Texas said it was pausing its reopening process due to a renewed surge in COVID-19 infections in the state. Investors also monitored incoming economic data, with a new report showing stubbornly high levels of new unemployment claims.

New unemployment claims came in at 1.48 million for the week ending June 20, marking the 14th-straight week that claims held above 1 million. Consensus economists had expected new claims to total 1.32 million.

But late today the Federal Deposit Insurance Commission offered stocks a hand up. It announced it is easing its grip on the banks.

CNBC explains the lighter restrictions would:

Allow banks to more easily make large investments into funds such as venture capital funds. Also, banks will not have to set aside cash for derivatives traders between different affiliates of the same firm, potentially freeing up more capital.

We hazard our Nomi Prins has a thing or three to say about this.

And so the Dow Jones surged late to a final 298-point gain. The S&P leapt 33 points and the Nasdaq vaulted to a 107-point advance.

But now we avert our gaze from the hurly-burly of the present… and face the distant horizon…

The Seasons of the Stock Market

The weather has its seasons. And so the stock market has its seasons…

Summer, winter, bull market, bear market.

As we have argued before, climate is what you can expect. But weather is what you actually get.

Sometimes summer extends far into Indian summer before letting go… before nature slips off her green dress… and into her autumn pastels.

And sometimes winter holds its iron grip deep into calendar spring.

The winter of 1929 — for example — was so fierce the ice held 25 years.

Only in 1954 did stocks thaw to their pre-freeze levels.

The investor who lost all in 1929 waited 25 ice age years to make his losses good.

The years 1982–2000 — conversely — were extended summer for the stock market.

Between August 1982–December 1999, compounded real returns on the Dow Jones ran to 15% per annum.

A chill northern gust occasionally blew on in… as in 1987… and 1990. But they quickly blew on out.

Investors believed they had discovered endless summer.

The Return of the Seasons

Investors had another guess when an arctic gale came barreling in, 2001–02.

But summer’s warmth soon returned investors to the beaches… until the harsh winter of 2008–09.

Then 11 balmy years of summer, under the warming influence of the Federal Reserve.

But the weather turned in 2020 as never before…

Summer yielded to winter in record time… and the deep freeze of 2020 held the world in siege.

The unprepared, tee-shirted stock market lost over 30% within weeks.

But record heat from the Federal Reserve soon broke the ice. The stock market has thawed some 30% since March.

And its February heights are in sight.

Summer or Winter Thaw?

Is it summer once again for the stock market?

Or is it heading into a 20-year year winter… similar to the 25-year winter of 1929–54?

We remind you:

By spring 1930, the stock market had made good many of its October ’29 losses.

And fevers raged through 1931. As Jim Rickards notes:

Stocks rose 28.6% from Nov. 17, 1929–April 20, 1930. They rose 13.2% from June 22–Sept. 7, 1930. Stocks rallied again by 17.5% from Jan. 18–Feb. 22, 1931. Finally, stocks rallied 22.2% between May 31–June 28, 1931.

Yet these sweatings proved fleeting, mere winter thaws.

Despite these fiery stretches… the Dow Jones plunged a frigid 89.2% from 1929–32.

And the ice age did not pass until 1954.

And so again we ask: Is it summer once again — or the initial thaw of long, harsh winter?

“Stock Market Valuations Are a Sort of Farmers’ Almanac, a Generally Accurate Farmers’ Almanac”

For clues, we look to stock market valuations. For stock market valuations are a sort of Farmers’ Almanac, a generally accurate Farmers’ Almanac.

These valuations are indicated by price-earnings ratios — P/E ratios.

A low P/E ratio indicates stocks are cheap. A high P/E ratio indicates stocks are dear.

The lower the valuation… the higher returns investors can expect over the next several years.

The opposite likewise holds true.

A P/E ratio of 17 is about par… historically.

That is, P/E ratios below 17 indicate stocks are cheap. Above 17, stocks are expensive.

What is today’s P/E ratio for the S&P as a whole?

Twenty-two — high by history’s standards.

It indicates investors are willing to ladle out $22 for each $1 of earnings.

It also means they will likely meet disappointment…

If there is anything in the term “mean reversion”… investors may soon be in for winter…

“Starting From This Level, Stocks Are Likely to Disappoint Over the Next 20 Years”

Times of expensive stocks are followed by times of cheap stocks.

That is, winter follows summer. Indian summer may delay winter’s onset. But eventually Jack Frost pays his visit.

And he may presently be preparing an extended stay.

Given present P/E ratios… how long might the coming winter last?

Mr. Michael Carr instructs technical analysis at New York Institute of Finance. Says he:

“Starting from this level, stocks are likely to disappoint over the next 20 years.”

Twenty years?

When the P/E ratio is near all-time highs, as it is now, the S&P 500 delivers annual returns averaging about 5% over the next 20 years. When the P/E ratio is near all-time lows, returns are about three times higher, averaging 15.4% a year over the next 20 years.

$163,665.37 vs. $26,532.98

Assume you have $10,000 to adventure in the stock market.

If you invest it at a time of low P/E ratios, Mr. Carr’s calculations reveal $10,000 would ultimately become a handsome $163,665.37.

A $10,000 investment at a time of average P/E would come out at $67,275.00.

But a $10,000 at a time of high P/E ratios… as today?

You would have a mere $26,532.98 on your hands — a minus 61% deviation from average.

“Imagine finding yourself 61% below target at retirement,” warns Mr. Carr.

Imagine it — if you can take the jolt.

The line at the bottom is this: Your long-term prospects are poor when you invest at a time of elevated P/E ratios.

Lance Roberts of Real Investment Advice draws this identical conclusion…

Better off Stuffing Your Cash in Your Mattress for 22 Years

At today’s valuation extremes, Roberts asks…

Would you be better off placing $10,000 into the stock market each year — or wedging it into your mattress?

Roberts has given the numbers a good, hard soaking. At 20x valuations, he finds…

Your stock market money would finally outperform your bed-bound cash… in 22 years.

Twenty-two years!

“Historically, it has taken roughly 22 years to resolve a period of overvaluation,” adds Mr Roberts.

We remind you that today’s S&P trades at 22x valuations — higher than 20.

Are you prepared for a 22-year winter?

Hedging Our Bets

Summer, winter… we do not know which will prevail ultimately.

We are presently outfitted for summer.

And perhaps the Federal Reserve can extend the season, hold the sun up in the sky a bit longer.

It has extended summer before.

But the Horae — the Greek goddesses of the seasons — are fickle and capricious beings.

They resent man’s encroachments upon their natural prerogatives.

And so we have our winter apparel ready…


Brian Maher
Managing editor, The Daily Reckoning

The post Are We in for a 20-Year Winter? appeared first on Daily Reckoning.

These Statues Must Come Down

This post These Statues Must Come Down appeared first on Daily Reckoning.

Today we enter into the revolutionary spirit of the times… topple idols… and haul down statues.

We will be declared subversive. We will be denounced as vandalous. The establishment will yell blue murder and demand our immediate arrest.

Yet justice is with us.

For we bring low the authors of destruction, of human inequality, of wickedness itself.

Which icons, which statues come crashing down today?

You will have your answer shortly. First to the site of a famously iconic statue — the statue of a fearsome bull…

Pandemic Fears Grip Wall Street

Faces were taut on Wall Street today… and nerves in tatters.

An uprising of the coronavirus is the evident cause. It presently lays siege to the Sunshine State. Explains CNBC:

The major averages hit their lows of the day after Florida said its confirmed cases jumped by 5,508 on Tuesday, a record, and now total 109,014. The state also said its positivity rate rose to 15.91% from 10.82%.

To Florida we must add fresh insurrections in California, Arizona, Texas and others.

“We’re going to eclipse the totals in April, so we’ll eclipse 37,000 diagnosed infections a day.”

That is the warning of former Food and Drug Administration Commissioner Dr. Scott Gottlieb.

And so the stock market took a severe fright today…

The Dow Jones plunged 710 points by closing whistle.

The S&P shed 81 points today; the Nasdaq 222.

And so the V-shaped recovery goes on ice.

But the stock market is not our central concern today. For a mad passion seizes us… and we are hot for mischief.

Central Bank Theory

Before we shatter icons, before we pull down statues… let us identify the source of our heat…

Central banks run on this primary theory:

Higher interest rates encourage saving and discourage consumer spending.

Low rates, meantime, coax bashful dollars out of wallets… and into consumer goods.

Why save money — after all — if it merely rots down in your wallet?

And consumer spending is the engine of inflation. There must be inflation, we are told.

Without inflation we risk deflation. And deflation is the great bugaboo of economics.

Under deflation, consumers cling to their cash in anticipation of lower prices tomorrow.

Before long the entire economy is trapped in the vortex of deflation… and the wolf of depression soon snarls at the door.

Central banks therefore pursue low interest rates — and a moderate dose of inflation — with a zeal verging upon mania.

But do their theories hold together?

The Magic 4%

Bank of America recently hauled central bank policy in for interrogation…

It released a report bearing this title: “Stagnation, Stagflation or Elevation.” Here is the question it pursued:

Do low interest rates truly spark consumption — and inflation?

The answer is yes, concedes the report — but only to a point. Below that point rates do not encourage spending. They encourage hoarding instead.

Low interest rates, meantime, do not yield inflation. They rather yield deflation.

What is that point of separation between spending and hoarding, between inflation and deflation?

Four percent.

Interest rates beneath 4% do not bring out more consumption. They store in more savings.

And rates beneath 4% do not yield inflation — but deflation.

The Vicious Cycle

Reports Bank of America:

As low growth and inflation make low-risk-asset income scarce (e.g., from government bonds), households are forced to reduce consumption and increase savings in order to meet retirement goals.

Forced saving further depresses demand in a vicious cycle.

And the lower rates slip beneath 4%, the more people save — and the less they spend.

We might remind you that rates presently stand scarcely above zero.

The iconoclasts of Zero Hedge in summary:

[Bank of America] shows that while lower rates indeed stimulate spending and lead to lower savings, this effect peaks at around 4% and then goes negative. In fact, the lower yields — and rates — drop below 4% — not to mention to 0% or below — the lower the propensity to spend and the higher the savings rate!…

And so the Federal Reserve is the snake devouring its tail, the man who shoots a hole in his foot, the goalkeep who rifles the ball into his own net.

That is, the Federal Reserve is its own saboteur.

It digs and digs in the belief it is digging its way up. Yet in reality it is digging its way down:

It demonstrates without a shadow of doubt that hyper-easy monetary policy is not inflationary but is deflationary. Which is catastrophic for central banks, who publicly state that the only reason they are pursuing ultra easy monetary policy, which includes QE and negative rates, is not to goose the market higher (even though by now we all know that’s the real reason) but to stimulate inflation.

And the cycle it has begun is truly vicious:

This means that the lower (and more negative) central banks push rates, the lower (not higher) the spending, the higher (not lower) the savings rate, the lower the inflation, the higher the disinflation (or outright deflation), which in turn forces central banks to cut rates even more, to add QE, yield curve control, buy junk bonds, buy ETFs or pursue any of a host of other monetary policies that are even more devastating to consumer psychology, forcing even more savings, resulting in even more disinflation, causing even more intervention by central banks in what is without doubt the most diabolical feedback loop of modern monetary policy and economics.

Said otherwise, monetary easing is deflationary. Let that sink in.

We have let it sink in. And it penetrated clear through to the marrows.

Scarlet Sins

And so today we are out to yank down the statues of those who have perpetuated “the most diabolical feedback loop of modern monetary policy and economics.”

Wall Street erected the statues.

The artificially low interest rates the Federal Reserve has chased — after all — inflated the stock market to dimensions grotesque and obscene.

But their economic sins are scarlet… and of the mortal category.

And so we come now to the bronze statue of Alan Greenspan, stately, regal, august…

Down Comes “The Maestro”

“The Maestro” is chiseled into its pedestal.

At once we seize our canister of spray paint… and graffiti “Traitor” over the inscription.

That is because Mr. Greenspan once exalted the gold standard and the golden handcuffs it placed upon central bankers.

Yet when he directed the central bank of the United States, he slipped the cuffs…

He tinkered interest rates downward against his own earlier advice.

He engineered two manias — the technology mania and the housing mania — earning him the applause of Wall Street and title of Maestro.

Both of his creations came tearfully to grief.

And so we string a chain around Mr. Greenspan’s cold metal wrist, hitch the other end to our bumper… and flatten the accelerator.

Down he comes with a mighty and rapturous thud.

Thus Mr. Alan Greenspan’s is the first statue to topple. Central bankers everywhere moan in sorrow, decrying our wanton vandalism.

“Helicopter Ben” Is Next

Next we come to “Helicopter” Ben Bernanke. This fellow’s pedestal bears the dedication: “The Courage to Act.”

We reach once again for our spray can. We improve the inscription with “Coward.”

Come the crash…

Mr. Bernanke could have allowed the profound imbalances within the financial system to correct — as they would have under honest capitalism.

The pain would have proved acute. But the pain would most likely have proven brief.

A newer, healthier economy… erected on surer footings… would have risen upon the wreckage of the old.

Yet Mr. Bernanke lacked the courage to let the free market take its natural course.

He instead pummeled rates to zero, devised quantitative easing… and inflated the greatest stock bubble market in history.

For his crimes against economics, his statue too comes crashing down today.

Even Janet Yellen?

Now, what is this? A rare statue of a female — Ms. Janet Yellen, next in line after Bernanke.

She is honored for being “The First Female Chairperson in the History of the Federal Reserve.”

This we cannot dispute. Yet she perpetuated Mr. Bernanke’s economic vandalism.

She did not believe another financial crisis would befall us “in our lifetimes,” she declared in retirement.

And so today we razz her prophecy, in red spray-paint upon her pedestal:

“We Must All Be Dead.”

Yet we are highly gallant. We are therefore loath to rip down the statue of a woman. Yet we yield to an egalitarian impulse…

We cannot discriminate on the basis of gender. Down Janet Yellen comes in the customary manner. And with the customary clank.

Powell’s Day Will Come

Mr. Jerome Powell is still on duty. His statue has therefore yet to be dedicated. That day will come of course.

He will be depicted upon a galloping horse, in the manner of Napoleon.

He will be credited with saving the United States economy at its darkest moment since the Great Depression.

And so we will be there with our spray paint, our chain… and our pickup truck…


Brian Maher
Managing editor, The Daily Reckoning

The post These Statues Must Come Down appeared first on Daily Reckoning.

The Fed’s “Big Shift”

This post The Fed’s “Big Shift” appeared first on Daily Reckoning.

There have been endless announcements by the Fed that they will add this and that to their asset-purchase programs. The media jumped all over these announcements, how the Fed is going to get into the junk bond market and ETFs with hundreds of billions of dollars.

Each time, all kinds of hoopla broke out in the markets with stocks soaring and junk-bond ETFs soaring, and everything soaring — despite the worst economy in memory, despite 30 million people on unemployment insurance, and despite shocking earnings reports heading our way.

The Fed has set up an alphabet soup of programs so far — and it has been buying some of the assets it said it would buy.

In all, the Fed has indirectly monetized about 65% of the government debt it’s taken on since March. But here’s what you might not realize:

The Fed’s monetization of the U.S. debt has slowed to a trickle in recent weeks after the original shock-and-awe spree in March and April, whittling down its purchase programs of Treasuries.

It also has been shedding alphabet-soup assets it had bought in March and April, and cutting back its purchases of mortgage-backed securities (MBS) for the past two months.

And believe it or not, total assets on the Fed’s balance sheet actually shrank by $74 billion last week:


This $74 billion decline in total assets last week was powered by a few factors. First, there was a plunge in “repo” balances. If you weren’t already familiar with the term, you might remember “repo” from late last year when the Fed pumped in trillions in liquidity to liquify the overnight lending markets that were seizing up.

Anyway, a dramatic drop in repo balances partly account for the drop in the Fed’s balance sheet.

Also contributing to the balance sheet decline were foreign central bank liquidity swaps, while some alphabet-soup programs also unwound. And the junk-bond and ETF buying program stalled.

I don’t want to get deep in the weeds on any of these things (it’s all rather technical), but they explain the $74 billion decrease in the Fed’s balance sheet. Now, in basic terms the decrease is little more than a rounding error. It only brought the Fed’s total assets down to a still breath-taking $7.095 trillion.

But there is a big shift happening right now that Wall Street doesn’t seem to understand:

The Fed has started lending to entities, including states and banks, under programs that channel funds into spending by states, municipalities, and businesses, rather than into the financial markets.

These programs include the Paycheck Protection Program Liquidity Facility ($57 billion), the Main Street Lending Program ($32 billion), and the Municipal Liquidity Facility ($16 billion).

This is not QE but more like paying businesses and municipalities, and ultimately workers/consumers, to consume. This money is circulating in the economy rather than inflating asset prices.

These types of programs are propping up consumption — not asset prices. That’s a new thing. I don’t think the hyper-inflated markets, which have soared only because the Fed poured $3 trillion into them, are ready for this shift. Again, that’s an important change and a big shift. But it’s not getting any attention.

You can see from the curve that last week’s decline in the balance sheet isn’t an accident, but part of a plan to front-load QE and then back off, rather than let it drag on for years:


Now, the Fed is still offering theoretically huge amounts of repos every day. But it has tweaked the offering terms, so that there is now almost no appetite for them, and what’s left on the balance sheet are older term repos that unwind and are gone.

The repo balances dropped by $88 billion from the prior week to $79 billion, the lowest since September 18:


Meanwhile, the Fed’s “dollar liquidity swap lines” with other central banks had been roughly flat for seven weeks, after the $400 billion surge in early April. But last week some swaps matured and were unwound, and the balance dropped by $92 billion to $352 billion.

Of that drop, $75 billion came from the swap line with the European Central Bank, $9 billion from the Bank of Japan, and $7 billion from the Bank of England (country data via the New York Fed).

With these swaps, the Fed lends newly created dollars to other central banks and takes their domestic currency as collateral. When the swap matures, the Fed gets its dollars back, and the foreign central bank gets its currency back.

This is where much of the media hype has focused on, following the endless announcements by the Fed. The Fed says that these bailout schemes are authorized under Section 13 paragraph 3 of the Federal Reserve Act, as amended by the Dodd-Frank Act. And Powell calls these creatures “thirteen-three facilities.”

Under the program, the Fed creates a Special Purpose Vehicle (SPV) as a limited liability corporation (LLC). The Treasury pads it with taxpayer equity capital. The Fed lends to the SPV with a leverage ratio of 10 to 1. Then it’s off to the races, with the SPV buying up the entire world, or so it would seem, according to the media.

The number of SPVs keeps growing. There are 10 active ones on today’s balance sheet. But in dollar terms, by the Fed standards, they’re small. After an initial burst in early April of $130 billion spread among the first three SPVs, there came a lull, and the overall balance declined. New SPVs were added, but as the balance of the first three SPVs declined, the overall balance also declined until mid-May.

Starting in late May, the new SPVs added enough so that overall balances began rising, and reached $196 billion by June 10. But last week, the overall balance ticked down by $1.6 billion:

There are now three SPVs that route funds into consumption rather than asset purchases: Again, these include the Paycheck Protection Program Liquidity Facility ($57 billion), the Main Street Lending Program ($32 billion), and the Municipal Liquidity Facility ($16 billion).

The Fed added $26 billion of Treasury securities during the week, bringing the total to $4.17 trillion. Over the past four weeks, the balance increased in a range between $9 billion in $26 billion, about the same range before the outbreak of bailout mania:


This progression of the Treasury purchases, from front-loading to tapering, is visible in the flattening curve of total Treasuries on the Fed’s balance sheet:


The Fed has cut its purchases of government-backed mortgage-backed securities (“Agency MBS”) after the initial burst. But its MBS trades take one to three months to settle, and the Fed books them after they settle, which creates an erratic pattern. So what we’re seeing today are settled trades from some time ago.

The balance of MBS rose by $83 billion to $1.92 trillion. This includes Agency Commercial Mortgage Backed Securities that the Fed started buying as part of its bailout program. But the balance of these CMBS has remained flat over the past three weeks at $9.1 billion.

For the stock market, a new phase has started. It now has to figure out how to stand on its own swollen and inflated legs in the worst economy in a lifetime, with the worst corporate earnings reports coming its way, while stock prices are ludicrously inflated.

So good luck to Wall Street.


Wolf Richter
for The Daily Reckoning

The post The Fed’s “Big Shift” appeared first on Daily Reckoning.

“There Is a Big Shift Happening”

This post “There Is a Big Shift Happening” appeared first on Daily Reckoning.

“There is a big shift happening.”

Here you have the judgment of old Daily Reckoning hand Wolf Richter.

The “big shift” to which Mr. Richter refers is this:

A big shift in Federal Reserve policy.

But a big shift away from what policy… and toward which policy?

To which we must add our own question:

Is the “big shift” a genuine wheeling around — or merely a brief detour, a fleeting and transient veering?

These are the questions we peer into today.

We first peer in on the central beneficiary of existing Federal Reserve policy — Wall Street.

The Dow Jones gained another 150 points today. The S&P gained another 20 of its own; the Nasdaq, 110.

As is often the case, technology stocks such as Apple, Microsoft, Netflix and Amazon hauled much of the market’s cargo.

But to revisit our central question:

Is the Federal Reserve silently plotting a “big shift” in course?

The Hon. Jerome Hayden Powell appeared before Congress last week…

This he told Congress:

“We” — the Federal Reserve — must “keep our foot on the gas.”

Their foot has been on the gas since March…and heavily on the gas since March.

They collapsed rates clear to zero. They nearly doubled the balance sheet within three months.

Their violent and spasmed pummeling of the gas pedal — in fact — knows no precedent.

The delirious octane flood set Wall Street’s engine racing… and the tachometer to astonishing indications.

In no time whatsoever the stock market was chasing down its February highs. It chases yet.

But the gas pedal came off the floor last week…

The Federal Reserve’s gargantuan balance sheet actually contracted $74 billion on the week.

It was the first weekly winnowing since the crisis commenced — the coronavirus crisis, that is (a fellow must be specific nowadays).

It was also the largest weekly balance sheet shrinkage in 11 years… since May 2009.

In fairness, a deliberate easing off the gas pedal did not cause it. The peculiarities and practicalities of balance book operations did cause it…

$88 billion of “repos” went rolling off the books last week. As $92 billion in foreign central bank “liquidity swaps” likewise went rolling off the books (details below).

Their combined rolling off overmatched — by $74 billion — the Treasuries and mortgage-backed securities that came rolling on.

Hence… the largest weekly balance sheet off-rolling in 11 years.

The stock market has lost some zoom of late. Is it because the hi-test was running low?

Here is a second question, chained to the leg of the first:

Is the Federal Reserve abandoning Wall Street… for Main Street?

Wolf Richter — the aforesaid Wolf Richter — believes:

“There is a big shift happening right now that Wall Street doesn’t seem to understand.”

What precisely constitutes this shift?

The Fed has started lending to entities, including states and banks, under programs that channel funds into spending by states, municipalities and businesses, rather than into the financial markets.

These programs include the Paycheck Protection Program Liquidity Facility ($57 billion), the Main Street Lending Program ($32 billion) and the Municipal Liquidity Facility ($16 billion).

How do these programs differ from quantitative easing?

This is not QE but more like paying businesses and municipalities, and ultimately workers/consumers, to consume. This money is circulating in the economy rather than inflating asset prices… These types of programs are propping up consumption — not asset prices. That’s a new thing.

Is Wall Street prepared for this “big shift” of which you write, Mr. Richter?

I don’t think the hyperinflated markets, which have soared only because the Fed poured $3 trillion into them, are ready for this shift. Again, that’s an important change and a big shift. But it’s not getting any attention.

We do not believe the Federal Reserve will walk away from Wall Street.

Yet we have long maintained that authorities would reroute “stimulus” from Wall Street… toward Main Street.

It would go under the banner of “QE for the People” or some such.

The pandemic has merely deepened our conviction.

Millions and millions are idle, unemployed. Many will likely remain idle and unemployed, their jobs permanently erased.

Heaps of businesses nationwide, meantime, may never swing open their doors… or register another sale.

Each extinct business represents one dream permanently dashed.

Are the frustrated and dream-dashed prepared to watch Wall Street prosper beyond avarice — while they wallow?

Legions of unemployed seethed for much of the past decade watching Wall Street prosper in this fashion.

We do not believe they are prepared to seethe another 10 years.

Eventually the pitchforks come out, the barricades are manned, the citadels are stormed.

And elected officials do not wish to be aerated, hanged or guillotined.

They will therefore have a go at QE for the People.

Of course, it too will end in folly. Yet that is a tale for a different day…


Brian Maher
Managing editor, The Daily Reckoning

The post “There Is a Big Shift Happening” appeared first on Daily Reckoning.