Tag Archives: central bank policies

Journey To The End Of San Pedro Bay, by MN Gordon

Posted on April 11, 2021 | 1 comment

If you want to see what a monetary-fueled trade imbalance looks like, check out the ports in the Los Angeles area. From MN Gordon at economicprism.com:

Have you recently bought furniture, auto parts, clothes, electronics, plastic wares, doofers, doodads, or other doohickeys?  Chances are, they were made overseas.

The U.S. monthly trade deficit in February scored a new record.  According to the Commerce Department, the U.S. imported $71.1 billion more goods and services than it exported.  Of this, $30.3 billion was from China alone.

What’s more, the month of February only had 28 days.  At a daily gap of $2.54 billion, had it been a full 31-day month, the monthly trade deficit would have been over $78 billion.  What to make of it…

A trade deficit is not inherently bad.  Remember, countries as a whole do not trade with each other.  Individuals and businesses trade with other individuals and businesses between countries.  Presumably they do so because it’s advantageous for both sides.

Sound money, of limited supply and market determined interest rates, would provide natural limits to how wide a trade deficit could expand.  But we don’t live in a world of sound money and market determined interest rates.  We live in a world of fake money where interest rates are set by central planners.

The gargantuan trade deficit is a byproduct of the insanity of central economic planning.  Let’s follow the fake money and see where it leads…

The Federal Reserve creates credit from thin air and loans it to the U.S. Treasury in the form of Treasury bond purchases.  At the same time, commercial banks extend credit via fractional reserve banking.  The Federal Reserve encourages the over issuance of credit by artificially suppressing interest rates for extended time periods – often a decade or more.

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Into the Swarm #1: Archegos in the Coal Mine, by Romain Bocher

Posted on April 10, 2021 | 1 comment

Investors herd, driving prices up and then scattering, taking their liquidity with them, when the market heads the other way. From Romain Bocher at theswarmblog.com:

Down the Market Hole

 

While the S&P 500 keeps rallying and hitting new records, the spectacular collapse of Archegos family office brought a sharp reminder of the consequences of excessive leverage in the financial system.

As always, Warren Buffet had already warned us: “Having a large amount of leverage is like driving a car with a dagger on the steering wheel pointed at your heart. If you do that, you will be a better driver. There will be fewer accidents but when they happen, they will be fatal.”

I do not know what the worst part of that story is. Whether it is the fact that Bill Hwang had criminal record. Or that Archegos used the same collateral to enter contracts with up to seven banks boosting leverage as high as 500%. Or if it is Nomura’s reaction, saying basically that whatever happens central banks will rescue banks if needed. Nothing seems to matter anymore for a system accustomed to perpetual bailouts since the LTCM failure.

But beyond those ethical considerations, the Archegos collapse has taught a few interesting things about US capital markets.

The first lesson for investors is the fact that years of lose monetary policy have laid the ground for moral hazard and very risky bets, as evidenced by the  record of margin debt. And the higher the leverage ratio, the bigger the vulnerability to unexpected moves.

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Yield Curve Control: Bubbles And Stagnation, by Daniel Lacalle

Posted on March 23, 2021 | Leave a comment

Efforts by central banks to control the overall yield curve are doomed to failure. From Daniel Lacalle at dlacalle.com:

Central banks do not manage risk, they disguise it. You know you live in a bubble when a small bounce in sovereign bond yields generates an immediate panic reaction from central banks trying to prevent those yields from rising further. It is particularly more evident when the alleged soar in yields comes after years of artificially depressing them with negative rates and asset purchases.

It is scary to read that the European Central Bank will implement more asset purchases to control a small love in yields that still left sovereign issuers bonds with negative nominal and real interest rates. It is even scarier to see that market participants hail the decision of disguising risk with even more liquidity. No one seemed to complain about the fact that sovereign issuers with alarming solvency problems were issuing bonds with negative yields. No one seemed to be concerned about the fact that the European Central Bank bought more than 100% of net issuances from Eurozone states. What shows what a bubble we live in is that market participants find logical to see a central bank taking aggressive action to prevent bond yields from rising… to 0.3% in Spain or 0.6% in Italy.

This is the evidence of a massive bubble.

If the European Central Bank was not there to repurchase all Eurozone sovereign issuances, what yield would investors demand for Spain, Italy or Portugal? Three, four, five times the current level on the 10-year? Probably. That is why developed central banks are trapped in their own policy. They cannot hint at normalizing even when the economy is recovering strongly, and inflation is rising.

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How A Small Rise In Bond Yields May Create A Financial Crisis, by Daniel Lacalle

Posted on March 16, 2021 | Leave a comment

With the world up to its eyeballs in debt, any rise in interest rates is both painful and capable of causing a chain reaction of financial failure. From Daniel Lacalle at dlacalle.com:

How can a a small rise in bond yields scare policymakers so much?

Ned Davis Research estimates that a 2% yield in the US 10-year bond could lead the Nasdaq to fall 20%, and with it the entire stock market globally. A 2% yield can cause such disruption? How did we get to such a situation?

Central banks have artificially depressed sovereign bond yields for years. Now, a small rise in yields can cause a massive market slump that evolves into a financial crisis.

Quantitative easing was designed as a tool to provide liquidity to a scared market and benefit from exceptionally attractive valuations of the lowest-risk assets, sovereign bonds. Central banks would cut rates and purchase these high-quality, low-risk assets from banks, thus allowing financial entities to lend more to the businesses and families and strengthen confidence in the economy. Once financial conditions improved, central banks would reduce their balance sheet and normalize policy. This never happened.

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Too Busy Frontrunning Inflation, Nobody Sees the Deflationary Tsunami, by Charles Hugh Smith

Posted on March 8, 2021 | Leave a comment

Debt deflation is inherently deflationary, and we’re heading into the mother of all debt deflations. From Charles Hugh Smith at oftwominds.com:

Those looking up from their “free fish!” frolicking will see the tsunami too late to save themselves.

It’s an amazing sight to see the water recede from the bay, and watch the crowd frolic in the shallows, scooping up the flopping fish. In this case, the crowd doing the “so easy to catch, why not grab as much as we can?” scooping is frontrunning inflation, the universally expected result of the Great Reflation Trade.

You know the Great Reflation Trade: the world has saved up trillions, governments are spending trillions, it’s going to be the greatest boom since the stone masons partied at the Great Pyramid in Giza. It’s so obvious that everyone has jumped in the water to scoop up all the free fish (i.e. stock market gains). Only an idiot would hesitate to frontrun the Great Reflation’s guaranteed inflation.

Unless, of course, what we really have is a tale of reflation, told by an idiot, full of sound and fury, signifying nothing. Everyone frolicking in the shallows scooping up the obvious, easy, guaranteed gains is so busy frontrunning inflation that nobody sees the tsunami rushing in to extinguish the short-sighted frolickers. ( When Does This Travesty of a Mockery of a Sham Finally Implode? 3/3/21)

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Robinhood Thursday and the Washington Idiots at Work, by David Stockman

Posted on February 21, 2021 | 2 comments

Central banks’ profligate production of fiat debt liquidity is behind the Gamestop fiasco and stock market valuations completely untethered from underlying economic value. From David Stockman at David Stockman’s Contra Corner via lewrockwell.com:

Today, especially, the “idiots at work” sign should be flying high over Capitol Hill.

We are referring to the boisterous congressional hearings about who is to blame for the crash of GameStop, the alleged nefarious machinations of the hedge funds and Robinhood and the purportedly innocent victims in mom’s basement who thought call options were the greatest new video game since Grand Theft Auto IV.

But among today’s silly foibles, the incessantly repeated idea that the Reddit Mob was a victim of a “pump and dump” scheme surely takes the cake. If these people were stupid enough to think that the value of a company dying in plain sight (i.e. GME) could go from $400 million to $23 billion in less than six months while its reported finances continued to deteriorate, they deserve to loose every dime of the stimmy money they threw into the Robinhood pot.

Still, the fact that the greedy, dimwitted Reddit Mob got its just desserts isn’t the half of it.

What was really on display Thursday in the recently christened (since January 6th) Holy of Holies of American Democracy is the utter cluelessness on both sides of the political aisle with respect to the financial elephant in the room: Namely, that the Fed has transformed Wall Street into a giant, destructive gambling den, which is now sucking a growing share of the populace into the pursuit of instant get-rich speculations that have no chance of panning out.

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“Controlled Yields” Are Curving Towards Gold, by Matthew Piepenburg

Posted on February 16, 2021 | Leave a comment

“Yield curve control” is just another way of shoving more fiat debt into a global financial system that’s already awash in it. From Matthew Piepenburg at goldswitzerland.com:

Looking Behind the Labels

Regardless of one’s politics, most would agree that extremely complex issues are typically given extremely misleading titles.

Not all those of the extreme left, for example, are all that “woke” and not everyone on the far right, to be fair, is a “domestic terrorist.”

Nevertheless, words are often misused and abused to place, as well as burry, otherwise nuanced realities behind simple phrases, as we’ve seen in everything from the “Patriot Act” to “Monetary Stimulus.”

Financial Fiction Writers

So many of the fancy words and phrases tossed about by our financial elites come in such deliberate yet pear-shaped tones of calm, authority and wisdom.

Even the title, “Federal Reserve,” is one loaded with irony for what is otherwise a private bank…

Many of the economic labels and euphemisms disguised as sound policy are now part of a global vernacular, from “quantitative easing” and “Fed accommodation” to “Modern Monetary Theory.”

These are carefully chosen labels. So confident, so academically comforting…

But for those familiar with basic math, economic history or the modern wave of policy hypocrisy masquerading as “forward guidance,” such terms, as well as the deeper truths behind them, have all the tragic irony of an Orwellian dystopia.

In short, they can be used to simplify, and thereby control, an inaccurate public perception.

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Technocrats Everywhere: Central Bankers as Political Saviors, by Robert Aro

Posted on February 7, 2021 | Leave a comment

Central bank band-aids are often mistaken for economic and financial cure-alls. From Robert Aro at mises.org:

The word “technocrat” is seldom used by the liberty crowd. It invokes the idea of a bureaucracy using technical experts to somehow make the right decisions on behalf of the entire nation and stands as the antithesis of a free society. Sadly, it captures the essence of central banking as well. This week, news came out of both Italy and Australia showcasing how this works. Starting with Italy, on Tuesday, the New York Times praised the technocrat when announcing that former head of the European Central Bank Mario Draghi was summoned to Italy in hopes of becoming the next prime minister. Described in the paper as the “pie-in-the-sky wish of many of Italy’s European Union-friendly politicians,” Draghi appears to be the man destined to guide the nation out of the current pandemic. As explained:

By officially bringing in Mr. Draghi as a potential leader in a critical moment, Italy seemed poised to return to the model of the technocratic government that has the reputation of bailing out the country when its political forces fail.

The press tells us politics has failed the country, but salvation can be found through electing a better, more skilled and experienced leader. In this case, it becomes the job of one of “Italy’s highest profile international officials,” who it said to have once steered Europe out of crisis almost a decade ago:

He is credited with easing interest rates and proclaiming in 2012 that he would do “whatever it takes” to save the euro as the Central Bank’s president during the eurozone debt crisis.

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Economic and monetary outlook for 2021, by Alasdair Macleod

Posted on January 3, 2021 | Leave a comment

SLL doesn’t do end-of-the-year review and preview articles, or compile a list of predictions. My prediction for 2021 is that it’s going be a whole lot worse than 2020. Alasdair Macleod agrees. From Macleod at goldmoney.com:

The most important event in the new year is likely to be the Fed losing control of its iron grip on markets. The dollar’s declining trend is already well established against other currencies and commodities, leading to this outcome.

Events in 2021 will be the consequence of a developing hyperinflation of the dollar. Foreign holders of dollars and dollar assets — currently totalling $27.7 trillion — are sure to increase the pace of reducing their exposure. This is a primal threat to the Fed’s policy of using QE to continually inflate assets in the name of promoting a wealth effect and continuing to finance a rapidly increasing federal government deficit by supressing interest rates.

Bubbles will then pop, leaving establishment investors exposed to a combined collapse of fiat currencies, bonds and equity markets, which could turn out to be very rapid. The question remaining is what will replace collapsing fiat currencies: limited issue distributed ledger cryptos, such as bitcoin, or precious metals, such as gold?

Clearly, when the dust settles, it will be gold for no other reason that central banks already own it in their reserves, and it has a long track record of success as money in the past.

This article examines the 2020 economic and financial background to likely developments in 2021 before arriving at its conclusions.

Introduction

It is that time again when we reflect on recent events and what might be ahead of us in the new year. 2020 was dominated by a pre-March descent into a financial slump, when the S&P500 index lost a third of its value between January and March, until the Fed cut its funds rate to zero on 16 March and followed up with a statement of intent to expand QE without limit on the following Monday.

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Unhinged….. And Then Some! by David Stockman

Posted on December 19, 2020 | Leave a comment

Buy stocks because bonds are so central-bank suppressed that they’re the guaranteed investment from hell. That’s what passes for wisdom on Wall Street these days. From David Stockman at davidstockmanscontracorner.com via lewrockwell.com:

Jerome Powell puts you in mind of the boy who killed both of his parents and then threw himself on the mercy of the court on the grounds that he was an orphan!

That’s what JayPo essentially did in his presser yesterday while trying to explain that the most hideous equity market bubble in history is actually not that at all:

“If you look at P/Es they’re historically high, but in a world where the risk-free rate is going to be low for a sustained period, the equity premium, which is really the reward you get for taking equity risk, would be what you’d look at,” Powell said.

“Admittedly P/Es are high but that’s maybe not as relevant in a world where we think the 10-year Treasury is going to be lower than it’s been historically from a return perspective,” Powell said.

Right. The Fed has essentially murdered the bond yield. So relatively speaking, grossly inflated stocks are a bargain compared to dead-in-the-water bonds.

Bloomberg even has a chart to prove all this based on the so-called “Fed model”:

The S&P 500’s earnings yield – profit relative to share price – is 2.5 percentage points higher than the yield on 10-year Treasury notes. The comparison, loosely labeled the Fed model, sits well above what the spread was before the burst of the internet bubble, when bonds yielded more than equities by that measure.

Then again, the “earnings yield” is not exactly cash you can take to the bank, unlike a bond coupon as meager as it might be at present. The former is just a computational hope that today’s vastly inflated stock prices relative to earnings stay inflated indefinitely, world without end.

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