Category Archives: Investing

Money supply and rising interest rates, by Alasdair Macleod

Posted on January 7, 2022 | Leave a comment

Inflate the money supply enough and sooner or later you’ll have rising interest rates keeping up with rising prices. From Alasdair Macleod at goldmoney.com:

The establishment, including the state, central banks and most investors are thoroughly Keynesian, the latter category having profited greatly in recent decades from their slavish following of the common meme.

That is about to change. The world of continual Keynesian stimulus is coming to its inevitable end with prices rising beyond the authorities’ control. Being blinded by neo-Keynesian beliefs, no one is prepared for it.

This article explains why interest rates are set to rise substantially in this new year. It draws on evidence from the inflation crisis of the 1970s, points out the similarities and the fact that currency debasement today is far greater and more global than fifty years ago. In the UK, half the current rate of monetary inflation for half the time — just for one year — led to gilt coupons of over 15%. And today we have Fed watchers who can only envisage a Fed funds rate climbing to 2% at most…

A key factor will be the discrediting of this Keynesian hopium, likely to be replaced by a belated conversion to the monetarism that propelled Milton Friedman into the public eye when the same thing happened in the mid-seventies. The realisation that inflation is always and everywhere a monetary phenomenon will come too late for policy makers to stop it.

The situation is closely examined for America, its debt, and its dollar. But the problems do not stop there: the risks to the global system of fiat currencies and credit from rising interest rates and the debt traps that will be sprung are acute everywhere.

Introduction

Clearly, the outlook is for higher dollar interest rates. The Fed is trying to persuade markets that it is a temporary phenomenon requiring only modest action and that while inflation, by which the authorities mean rising prices, is unexpectedly high, when things return to normal it will be back down to a little over two per cent. There’s no need to panic, and this view is widely supported by the entire investment industry.

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The Economy / Market Look “Healthy” Until They Have a Seizure and Collapse, by Charles Hugh Smith

Posted on January 6, 2022 | Leave a comment

There’s not a cloud in sight at the top of markets, everything is just peachy. From Charles Hugh Smith at oftwominds.com:

So one index or asset or another hits a new high, wow, more proof everything is so robust and healthy, we never had it so good–right up to the seizure and collapse.

Some readers occasionally make the point that I’ve been predicting a market crash for ten years and been dead-wrong for ten years. I’m all for mocking presumptuous pundits of either the tin-foil hat or mainstream variety, but that’s not quite what I’ve been saying for 13 long, tedious years.

What I’ve been saying is that living on junk food and sugar-cocaine speedballs isn’t “health” just because a handful of pills has dropped cholesterol readings to “healthy” levels. If we define “health” by a metric that is easily manipulated, then the illusion of “health” can be maintained right up until the supposedly “healthy” individual has a seizure and drops dead.

Since the 2008-2009 financial-coronary and emergency-intervention that revealed the abjectly poor health of the global financial system, central banks and states have jacked up stocks and other assets as the metric of a “healthy” economy. Just as banging down cholesterol doesn’t actually make a chronically ill person subsisting on junk food, sugar and cocaine healthy, jacking stocks to new highs doesn’t make the economy or financial system healthy. All it does is mask the decay of real health and amplify the eventual reckoning.

There are three dynamics at work in the artifice that ever-greater monetary and fiscal stimulus and jacked-up stock markets will restore the health of a decaying, sickly economy. One is that sugar-cocaine speedballs generate miraculous results at first: the manic rush of energy and the delusional confidence in god-like powers looks like robust health if viewed through a distorted lens that filters out all the hidden trade-offs and costs to depending on speedballs to function.

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Nancy Pelosi Buys Millions In Call Options In Google, Micron, Roblox, Salesforce And Disney, by Tyler Durden

Posted on December 31, 2021 | Leave a comment

Throw out all those hoary old maxims about avoiding even the appearance of impropriety. From Tyler Durden at zerohedge.com:

Despite a populist grassroots movement seeking to ban Congress members from trading stocks, one which has attracted bipartisan political support, Democratic House Speaker Nancy Pelosi – arguably one of the most prolific Congressional traders – said two weeks ago that lawmakers should be allowed to make trades while serving.

“We’re a free market economy,” Pelosi told reporters during a news conference. “They should be able to participate in that.”

Pelosi’s statement came days after progressive New Yorker, Alexandria Ocasio-Cortez, reiterated her support for banning lawmakers from the practice. Ocasio-Cortez and other members of Congress argue that lawmakers have access to information the public is not privy to and the ability to write and pass policy, they should abstain from buying and selling individual stock and other assets. She and other lawmakers support members of Congress investing in index funds.

“I choose not to hold any so I can remain impartial about policy making,” Ocasio-Cortez wrote on Instagram.

Pelosi’s statement also came in the wake of a series of scandals involving federal lawmakers, Fed and government officials making suspect trades throughout the coronavirus pandemic.

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Watch the Top 5%–They’re the Key to the Whole Economy, by Charles Hugh Smith

Posted on December 23, 2021 | Leave a comment

When the top 5% hold most of the assets, they have an outsize effect on the economy. From Charles Hugh Smith at oftwominds.com:

Go ahead and become dependent on asset bubbles and the free spending of the top 5%, and optimize your economy to serve this “growth,” but be prepared for the consequences when the costs of this optimization and dependency come due.

Here’s the problem with concentrating most of the income and wealth in the top 5%: the whole economy now depends on their spending and “the wealth effect” of bubbles driving that spending. As the charts below show, the top tier of households own the vast majority of the wealth and take home roughly half of all income, including virtually all (97%) the income derived from capital.

By inflating an enormous everything bubble, the Federal Reserve and other central banks have inflated the “wealth” of this top tier. This was of course the plan: by artificially inflating asset bubbles, the central bankers believed that those seeing their net worth expand would loosen their purse strings and borrow and spend freely: the wealth effect.

The problem with relying on the the wealth effect is that if wealth has concentrated in the top, then only the top will benefit. The bottom 50% own virtually no capital (see chart below) and the modest wealth owned by the bottom 90% generates a mere 3% of all income derived from assets (stocks, bonds, real estate, etc.).

Monopoly Versus Democracy: How to End a Gilded Age (foreignaffairs.com):
Ten percent of Americans now control 97 percent of all capital income in the country. Nearly half of the new income generated since the global financial crisis of 2008 has gone to the wealthiest one percent of U.S. citizens. The richest three Americans collectively have more wealth than the poorest 160 million Americans.

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Stocks Don’t Need More Alarm Bells, They’re Already Clanging and Jangling All Over the Place. But Here we Are: Leverage, by Wolf Richter

Posted on December 18, 2021 | Leave a comment

Leverage—borrowed money—amplifies both gains and losses. From Wolf Richter at wolfstreet.com:

Stock market leverage, the big accelerator on the way up, and on the way down.

Increasing leverage – borrowing money to buy stocks – puts buying pressure on the stock market up. Declining leverage – selling stocks to reduce leverage – puts selling pressure on the market. Stock market leverage has ballooned over the past 20 months by historic proportions, which has contributed to the historic surge in stock prices. So we’ll keep an eye on leverage.

The tip of the iceberg of stock-market leverage that we can actually see is margin debt, which is reported on a monthly basis by FINRA, based on data reported by its member brokers.

Other forms of stock-market leverage occur in the shadows, such as Securities Based Lending (SBA) that isn’t tracked and reported in a centralized manner, though some banks choose to disclose it quarterly or annually.

There is leverage associated with options and other equities-based derivatives. Then there is leverage at the institutional level such as with hedge funds, which doesn’t show up until a fund implodes, such as Archegos, and everyone gets to pick through the debris.

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The credit cycle and zombies’ downfall, by Alasdair Macleod

Posted on December 17, 2021 | Leave a comment

Once interest rates start moving up in earnest and credit begins to contract rather than expand, financial asset prices will fall and economies will contract. From Alasdair Macleod at goldmoney.com:

Leading central banks like to think that through careful interest rate management, they have tamed the economic cycles which lead to regular economic downturns. Instead, they have only managed to bury the evidence.

To appreciate the extent of their delusion one must understand the source of economic instability. In modern times it has always been driven by a cycle of bank credit. In this article the role of commercial banking in this regard is explained. The effect on non-financial economic sectors in the context of Hayek’s triangle under today’s currency regime is re-examined.

With cyclical variations in the economy buried under a tsunami of currency, market participants are oblivious to the dangers of a cyclical downturn in bank lending and the consequences that flow therefrom.

This article gives the problem its economic and monetary context. It concludes that the global banking system is horribly over-leveraged and, with empirical evidence as our guide, on the edge of a bank credit contraction of historic proportions, likely to undermine the entire fiat currency system.

Introduction

Readers of articles that dissent from the mainstream media’s complacency might be aware that there are many zombie corporations which only exist courtesy of low interest rates or government support. The story often goes further. These are businesses loaded to the gunwales with unproductive debt, vulnerable to being swamped and sunk by higher interest rates. The extent of the problem is undoubtedly greater than most people think.

We have arrived at this point with economies around the globe cluttered with unproductive businesses which would otherwise have been cleared out in an unsuppressed interest rate environment. Schumpeter’s process of creative destruction would have done its work. Without it, the current situation presents enormous dangers now that with price inflation rising, interest rates will almost certainly increase in the coming months. Central banks appear to be conscious of this danger, given their evident reluctance to permit rates to rise, even fractionally. Rising interest rates also blow holes in their narrative, that they have succeeded in managing economic cycles out of existence.

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Get in Crash Positions, by Charles Hugh Smith

Posted on December 13, 2021 | Leave a comment

The classic signs of a market top are currently all there. From Charles Hugh Smith at oftwominds.com:

When the market goes bidless, it’s too late to preserve capital, never mind all those life-changing gains.

Everyone with some gray in their ponytails knows the stock market has ticked every box for a bubble top, so everybody get in crash positions:

Let’s run through the requirements for a bubble top:

1. Retail investors (i.e. dumb money) are all in and buying the dip with absolute confidence. As the gray-ponytail traders know, there are many moving parts to the retail dumb money going all in:

— The pain of the last bubble bursting has finally faded and been replaced by greed as retail punters watch everyone else mint fortunes by buying the dip and gambling with abandon at the casino’s trendy tables: crypto, NFTs, Mega-Tech, EVs, uranium, etc.

— Prudence and caution (i.e. holding cash in low-risk accounts) are thrown to the wind as the more money you put into the bet, the bigger the rewards.

— Punters realize the key to the really big gains is maxing out margin and leverage, preferably by foregoing owning the underlying equity in favor of options and futures contracts.

— Confidence in the Federal Reserve’s god-like powers and determination to never let stocks decline more than a few percentage points over a few hours or days is off the charts.

— Confidence that this is a new era and so old rules no longer apply is in the stratosphere. Retail punters believe that cryptos, NFTs and blockchain are can’t-lose bets as these are A) unstoppable and B) revolutionizing finance and the economy. As for stocks, retail traders have discovered the power of the herd: if the herd all buys call options by the thousands, this forces market makers to buy the underlying stocks, pushing the price higher in a self-reinforcing feedback loop that is guaranteed to succeed.

— Retail investors view all these bets as extremely low risk and so there’s no financial sense in hedging bets or limiting margin debt, leverage or risk, because risk has been abolished by the Fed Put.

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Investors Struggle to Make a Profit in an Economy With High Liquidity, by Bill Bonner

Posted on December 10, 2021 | Leave a comment

Buying financial assets at this point means buying assets whose values have been artificially inflated by an ocean of fiat debt issuance. That means the investor will probably not make money. From Bill Bonner at rogueeconomics.com:

Tell me, friend, when did Saruman The Wise abandon reason for madness?

– Gandalf, Lord of the Rings

YOUGHAL, IRELAND – The Federal Reserve keeps “printing” money – at the rate of about $3 billion per day – and lending it to member banks at a real (inflation-adjusted) rate of MINUS 6%.

Not surprisingly, the hustlers are out in force, figuring out new ways to get their hands on it. Bloomberg reported in November:

[Solar-powered vehicle maker] Sono has racked up about 108.8 million euros ($123 million) in losses since its inception in 2016. When key investors balked at putting in more money roughly two years ago, co-CEOs and co-founders Laurin Hahn and Jona Christians turned to crowdfunding. There was a hitch in that strategy: since March of last year, Sono has been unable to access about 5 million euros from PayPal. The online payment company froze its account, citing risks related to unexpectedly high transaction volume. Sono says it started the process of fighting this as of mid-August.

Without any proceeds from this week’s IPO, Sono estimates it would have been insolvent by next month or shortly thereafter. It expects to lose money for the foreseeable future and continue relying on external financing to stay in business.

But the IPO went forward on November 17 at $15 per share and Sono (SEV) briefly got a market value of $1.8 billion…

And it’s not the only company in FantasyLand drawing in big bucks.

Last month, Bloomberg reported that companies have taken in a record $600 billion in IPOs so far this year. That’s up from $235 billion in 2019 and $370 billion in 2020.

Prior to this, the record stood at about $420 billion… in 2007.

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Doug Casey on How Economic Witch Doctors Convince Everyone They’re Neurosurgeons

Posted on December 10, 2021 | Leave a comment

Most so-called economists are really just special pleaders for government intervention. From Doug Casey at internationalman.com:

Economic Witch Doctors

International Man: The average person doesn’t care about economics. But to the extent that he does, he only reads mainstream publications like The Economist and editorials in The New York Times.

In these publications, the average person will find so-called economists advocating upside-down and destructive concepts like negative interest rates, banning cash, debt-fueled consumption, government spending, and rampant money printing as the cures to economic ailments.

And if those methods don’t work—or inflict damage—the establishment economists’ response is to simply call for more money printing, more debt, and even lower interest rates.

What’s your take on conventional economic thinking and methods?

Doug Casey: Frankly, most “economists” today are only political apologists masquerading as economists.

An economist is somebody that describes the way the world works—how people go about producing, consuming, buying, selling, and living their lives. That’s not, however, what most of today’s PhD economists do. Instead, they prescribe the way they would like the world to work and tailor theories to help politicians demonstrate the virtue and necessity of their quest for more power.

As a result, legitimate economics barely exists today. What passes for economics has a very bad reputation, and it’s well deserved. Economics has become degraded. It’s not quite a laughingstock like gender studies, but it’s on a level with political science—which isn’t a science at all.

Every individual has vastly differing likes and dislikes and wants and needs. But these so-called economists like to treat people as if they were standardized atoms. They think they can manipulate people as if they were chemicals and treat the economy as something they can heat up or cool down. And they’re the ones who decide what the masses need.

Economics has become an excuse for central planning, and economists have become social engineers.

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Doug Casey on Why Uranium has Enormous Upside Potential

Posted on November 17, 2021 | Leave a comment

One of these days, and it may not be too far in the future, most people will recognize that nuclear power’s advantages far outweigh its disadvantages and new nuclear power plants will be constructed in the U.S. That’s bullish for uranium. From Doug Casey at internationalman.com:

Upside Potential

International Man: What makes uranium attractive as a speculation?

Doug Casey: First of all, consider simple physical reality. Uranium is the cleanest, cheapest, and safest form of mass power generation. I understand that most people will be shocked to hear that, so let me explain.

It’s the cleanest. Unlike coal—which generates millions of tons of pollutants that need to be buried or are dumped into the air—a large nuclear power plant only turns out waste that can be measured in cubic yards.

It’s the cheapest. Of course, this is something that’s very hard to determine since the nuclear industry is burdened with so many counterproductive regulations, controls, and requirements. But uranium itself amounts to less than 5% of the overall cost of running a nuclear plant. In a free market—which we don’t have—nuclear would be, by far, the cheapest type of mass power generation.

And it’s the safest. Notwithstanding what happened at Chernobyl—which failed because of backward and shoddy Soviet technology, or Fukushima, which had literally a one in a million chance of occurring—nobody has ever died of because of nuclear power. But many thousands of people die every year from the pollution caused by burning coal. And when a dam producing hydropower collapses, typically thousands of people die. There are risks and costs to absolutely everything.

I’m not mentioning wind and solar because, contrary to the huge volumes of propaganda touting them and the hundreds of billions malinvested in them, they’re only viable for select and isolated applications. They only produce a couple of percent of the world’s power and do so at great cost. They’re not viable alternatives for an industrial civilization.

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