Pro Perspectives 8/31/22

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August 31, 2022

Stocks finish down nearly 4% for August, driven by the declines of just the past four days.  
 
Among the many decliners for the month, bonds were down (-4%), gold was down (-4%), copper was down (-1%), most currencies not called the dollar (-2% to -5%)… and crude oil was down (-5%).
 
This is all, of course, attributed to the chorus of tough talk by central bankers on the rate path.
 
What determines the tough talk?  Inflation.
 
With that, the books are now closed on the month of August.  The August inflation report will come on September 13th. And this report comes a week ahead of the Fed's next meeting on rates. 
 
So, let's take a look at what we know is a key input into the inflation calculation:  Gas prices.
 
Remember, we've looked at this chart the past couple of months.  It's a 10-year period that shows how closely gas prices and the consumer price index track …
 
This gas price input has been a huge predictor of the month-over-month CPI number for much of the year.
 
We looked at this in July, ahead of the June inflation data.  Gas prices had exploded 11% higher, and CPI came in scorching hot (+1.3% monthly change).  We saw the opposite in the July data.  Gas prices were down 7%.  Monthly change in CPI was flat – no change.
 
So, what did gas prices do in August? 
 
The Energy Information Administration (EIA) does a weekly survey of gas stations across the country.  Those survey results show a fall in gas prices of 12% in August.
 
You can see in my updated table below how this gas price input has reflected in the inflation report. 
More important than the backward looking annual change in CPI is the monthly change.  Again, last month it was flat.  This August report sets up for another soft number. If it weren't for the clues on rising food prices, I'd say this August number could even be negative.  Nonetheless, a soft number would be good news. 
 
For an additional clue, the Chicago purchasing manager's report, released this morning, showed no monthly change in the prices paid in August.
 

Pro Perspectives 8/30/22

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August 30, 2022

We talked about the subtle announcement yesterday that begins the move toward a U.S. central bank-backed digital currency (CBDC). 
 
And just as the "build back better" and clean energy transformation is an agenda highly coordinated by major global economic powers, so is the concept of CBDCs.  The BIS (Bank for International Settlements) consists of 63 global central banks, and nearly 90% of them are on this CBDC path.
 
What else is highly coordinated?  Monetary policy.  
 
Just as easy money policies were coordinated, so is the new tightening regime (with the exception of Japan).
 
With that, since Friday we've heard the same tough talk from all of the Western central banks that we heard from the Fed over the past few weeks.  And it has come with some very familiar language.
 
It's all a variation of Jay Powell's remarks on Friday:  "we will keep at it (raising rates) until the job is done."
 
This reminds me of the Mario Draghi moment back in 2012.  Draghi, the President of the European Central Bank, was facing a speculative attack on the weak euro zone bond markets (specifically Italian and Spanish bonds).  In a zero interest rate world, mired in the post-financial crisis economic gloom, yields on these government bond markets had soared to 7%+.  These countries were effectively insolvent.  And a blow up/default there would quickly spread and result in the end of the euro (the second most widely held currency in the world).  Apocalypse.
 
What happened?  Draghi vowed to do "whatever it takes" to save the euro, and to maintain stability and solvency in the euro zone.  He vowed to buy unlimited Spanish and Italian debt. 
 
Here's what happened to yields on Spanish bonds …  
Draghi's threat put in the top for yields, without the ECB having to buy a single bond. 
 
Within two years, yields on Spanish debt fell from almost 8% to 1%.  A European collapse was averted.
 
That became a critical part of the playbook of major central banks for getting the desired behavior from markets and consumers:  threats and/or promises. They called it "forward guidance."  
 
With that, now we have this "keep at it" sentiment from Powell, and the promise to "unconditionally" fight the war on prices. 
 
And these promises are being echoed by his global central bank partners.
 
But keep in mind, while the talk doesn't match the actions from the Fed, neither does it from other major central banks. 
 
Here we are, well over a year into an inflation tsunami and the major central banks of the world are (on average) six percentage points UNDER the inflation rate (on average) — and all, still, well under the respective long term averages on interest rates. 
This is all about verbally managing the desired outcome.  And because they are all in it together (all major central banks), it has worked (at least to the extent of keeping the balls in the air). 
 
This brings me to the latest topic of "tough talk":  Energy. 
 
We all know Europe is dealing with the upward spiral in natural gas prices — as much as 35 times the price of two years ago for Dutch Natural Gas (the leading benchmark price).  There is plenty of speculation in this market.  With that, the President of the European Commission appears to going to the Draghi playbook.  She's threatening "emergency intervention," to (somehow) sever the link between gas prices and electricity prices.
 
Already, Dutch gas prices are down 30%. 

Pro Perspectives 8/29/22

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August 29, 2022

The Vice Fed Chair, Lael Brainard, announced today that the Fed will launch a new digital (instant) payment service in the second quarter of next year. 
 
This has been in the works for a few years, but we shouldn't assume coincidence that this announcement comes the Monday after the global central bank meetings at Jackson Hole.
 
Is this a digital dollar?
 
One Fed governor says it weakens the case for a digital dollar (a central bank-backed digital currency, CBDC) because it solves a lot of the problems the CBDC is supposed to solve.
 
While that statement is meant to diminish the need for a CBDC, if it solves the same problems and ultimately moves us to a cashless society where every transaction passes through the Fed, then it is a central bank-backed digital currency.
 
With that, this is how the FedNow concept was described by the WSJ when the Fed announced this goal back in 2019:  "The Federal Reserve plans to develop a faster payments system for banks to exchange money, providing a public option to another real-time network built by big banks. The new system would allow bill payments, paychecks and other common consumer or business transfers to be available instantly and round-the-clock."
 
This has been presented (to this point) as more of a "wholesale" or "institutional" solution. 
 
Conversely, this is how Brainard presented it today:  The FedNow Service will transform the way everyday payments are made throughout the economy."  And it's designed to be scalable "for high-volume retail transactions."  With that, she called on all industry stakeholders to commit to the Fed's new instant payment infrastructure.
 
As you can see, this is intended to be transformational and ubiquitous (and at the consumer/retail level).
 
It doesn't take a lot of imagination to see the end of the road for paper money (both access to, and acceptance of), and the risk to political and economic freedoms that arise.    
 
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Pro Perspectives 8/26/22

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August 26, 2022

We heard from Jerome Powell today at Jackson Hole.
 
He was hawkish.  Stocks went down. 
 
Remember this, when listening to all of the jawboning about the Fed and interest rates, and the markets:  The Fed can raise rates at any time they want, and in any amount.  If they wanted to slay inflation, they could raise rates right now to 6% …7% … 8% — whatever they want. 
 
They haven't.  Instead, they continue to do a lot of talking.     
 
Did we learn anything new today?  
 
First, if we look back at the July Fed meeting, they raised rates to 2.25-2.50% (range), and Powell said they had reached the neutral level.  He went on to say that they need to get to "moderately restrictive."  And then he pointed to the committees published projections of 3.25-3.5% (at year end).  That's another 100 basis points. 
 
Fast forward one month, and today he said they are moving purposefully to a level that will be sufficiently restrictive, and said the current level (of neutral) is "not a place to stop or pause." 
 
Nothing new there.
 
He went on to reference the 70s and 80s inflation period, and cited two former Fed Chairs, specifically their commentary on inflation expectations.   Why?
 
As we've discussed here in my daily notes many times, the Fed is far more concerned about inflation expectations, than they are about inflation.  If they lose control of expectations, people start pulling forward purchases, in anticipation of higher prices, creating a self-fulfilling upward spiral in prices.
 
On that note, the Fed shouldn't be overly concerned. 
 
Here's a look at their favored gauge of inflation expectations …
This is running under 2.5%, and as you can see it's well within the upper part of the range of the past 20 years.
 
This is, in large part, thanks to the tough talk from the Fed this year. 
 
Far more powerful than the 225 basis points of interest rate hikes, has been the Fed's threat to "bring down demand" and push unemployment up.  The former has led to falling stock prices.  The latter has led to less job security, and less leverage in negotiating wages.  And both have led to two consecutive quarters of negative GDP.  
 
The result:  The Fed is doing it's job.  It has crushed the animal spirits in the economy, just through threats.  And with that, the rate-of-change in prices is on the decline.
 
The media would have you believe the Fed is in crisis, in the early stages of fighting inflation from behind (and the Fed benefits from that perception).  The data tells a different story.  They are doing well, especially given their constraints.
 
What are those constraints? 
 
1) Massive domestic debt and debt service.  Every 100 basis points they raise rates, the U.S. government adds $285 billion annually to the deficit.
 
And 2) The higher U.S. interest rates rise, emerging market and fiscally fragile developed market countries become increasingly vulnerable, in this post-global financial crisis environment, to a debt default — which historically we know creates the vulnerability to a global debt-default contagion.
 
So the Fed doesn't appear to have the ability to use the brakes on the economy, but rather to govern the speed as best they can, using the tools they can (which is, manipulating perception).   
 
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Pro Perspectives 8/25/22

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August 25, 2022

We'll hear from the Fed Chair, Jerome Powell, tomorrow morning at 10am. 
 
He's speaking at an economic symposium hosted by the Kansas City Fed in Jackson Hole, Wyoming.  This is annual event attended by the most powerful central bankers and finance officials in the world, and it has a history of producing significant changes, or hints of changes, in policy direction.
 
Stocks had a good day ahead of this big event.  And it's because of a combination of two things:  
 
First, the expectation heading into Powell's speech is for more tough talk on tackling inflation.  Powell's colleagues at the Fed have been working the media, almost daily, for the past three weeks to engrain in the public psyche that the Fed will do more, and will do what it takes to bring inflation down.  With that, there is little risk for a "hawkish" surprise from Powell tomorrow.  Stocks like that.  
 
Second (reason stocks had a good day), stocks like free money.  And the administration delivered the equivalent of another $500+ billion in free money with yesterday's announcement of student debt relief. 
 
Just like the Federal unemployment subsidy, pandemic checks and "child tax credit"/direct payments resulted in a boom in asset prices, this move will likely reignite the asset-price inflation fire.  Even Biden himself said this move should be a catalyst for people to buy a house.
 
So we have the Fed that is pretending to fight inflation. Of course, their words don't match their actions.  And simultaneously, the government is fueling more inflation, with what is now a $1.5 trillion spending binge just in the past month.
 
With that, curiously (maybe most interesting), the financial media and Fed officials constantly posture and debate over trivial (relative to the scale of inflation) next moves in monetary policy, while ignoring the continued inflationary policymaking on the fiscal side.
 
That should tell us all we need to know about the real game plan: currency devaluation. 
 
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Pro Perspectives 8/24/22

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August 24, 2022

Just as the media and global central bankers are trying to keep up the charade that they will execute the unpopular and painful policies necessary to bring inflation down, the White House is yet again pouring more fuel on the inflation fire.
 
Today, Joe Biden announced school loan forgiveness, which would fully cancel school loans for over 20 million people (45% of federal school loan holders).  
 
Even the former top economic advisor in the Obama administration (and spinster of all-policies democrat) can't help himself but to call a spade a spade.  

Remember, it was less than a month ago that the Fed told us they had reached "neutral" on interest rates, at 600 basis point UNDER the rate of inflation. 
 
That was all but an admission that they didn't have the tools to deal with 8.5% inflation.  Still, in total disregard for the Fed's alleged inflation fight, it was later that SAME DAY that the democrat-led Congress kicked off what has become another fresh trillion-dollar spending binge.  
 
And here we are again, with the White House fueling the inflation fire even more, dropping money in the pockets of tens of million Americans, via school debt cancellation.
 
Again, this is blatant inflationary policy.  It's about devaluing the massive government debt load, by devaluing the money in your pocket – by design.   
 
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Pro Perspectives 8/22/22

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August 22, 2022

The market attention has turned to the gathering of global central bankers, at the end of the week, in Jackson Hole. 
 
The headline event will be a prepared speech by Jerome Powell (the Fed Chair) on Friday at 10am EST.
 
If we take the cues from a few well-placed, timely pieces in the Wall Street Journal, a known mouthpiece for the Fed, we should expect Powell's speech to focus on the Fed's "quantitative tightening" program.
 
This is the reversal of "quantitative easing," which is how the Fed injected liquidity into the economy throughout the pandemic.  As we've discussed in my daily notes, this exercise of ending QE, much less reversing it (and extracting liquidity), has a bad track record.  Both globally and domestically, the "quantitative tightening" experiments have resulted with more QE – by necessity (i.e. by emergency).
 
For perspective, let's take a look at what the Fed is trying to reverse here.  Below  is the chart of the assets on the Fed's balance sheet.  As you can see, since the Fed started outright buying assets, in response to the Global Financial Crisis, they've since pumped $8 trillion into the economy.
 
The intent was to promote stability and confidence in the economy — pinning interest rates at low levels, to promote economic activity (spending and risk taking).  It has worked to avert economic disasters.  But it has become a life support for what has been a sluggish economy through most of the past fourteen years. 
 
Again, the record of successful exits of QE isn't a good one.  The best guide to how this proceeds is in Japan.  The Bank of Japan has been engaging in the quantitative easing experiment for the better part of 20 years now.  And they now own half of the Japanese government bond market. 
 
The Fed now owns a quarter of U.S. government debt.
 
What does it all mean?  It means the major economies of the world (this includes Europe) are in a vicious cycle of printing their own money, to finance their own debt.
 
On that note, Jerome Powell and company have talked a big game about aggressively raising interest rates, but they haven't.  And they've talked a big game on shrinking their balance sheet (reversing QE), but they haven't.  Friday will likely just be more talk (on the latter).  
 
But as we discussed in my last note, the real topic of conversation at the meetings in Jackson Hole, with other global central bankers, will likely be about the solution to end this vicious cycle (a cycle that leads to ultimate insolvency).  And the solution seems to be moving toward a coordinated move to central bank-backed digital currencies (and likely some sort of global debt restructuring).  We will see if any disclosures are made, on that front, in this week's meetings. 
 
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Pro Perspectives 8/19/22

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August 18, 2022

On Monday, we looked at this chart of the S&P …
As we discussed, the June low was marked by a central bank moment.  And we headed into this big technical level this week, with a central bank moment on the calendar — the July Fed minutes. 
 
This technical level proved to be a powerful one.  Stocks traded perfectly into the trendline from the all-time highs (the yellow line), and the 200-day moving average (the purple line) — and the positive momentum failed. 
 
But as we also discussed earlier in the week, the big central bank moment is next week. 
 
The Fed Chair, Jerome Powell, will give a prepared speech at Kansas City Fed's economic symposium in Jackson Hole, Wyoming.  This event is well attended by the world's most powerful central bankers and finance officials, and has a history of signaling policy adjustments. 
 
To this point, the biggest central banks in the world have been all bark and little bite.  
 
Inflation hit double digits in the UK this week.  And yet the Bank of England has rates set at just 1.75%.  
 
In Germany, July producer prices jumped 37% from a year ago.  This is the economic engine of the euro zone. 
 
Where are rates?  Remember, they surprised markets with a 50 basis point hike (market was expecting a quarter point).  That took the benchmark short-term lending rate in Europe to a whopping zero percent.  They had negative interest rates before that move, despite record inflation. 
 
Here's a look at the German PPI chart …  
   
Remember, all of this, and the media, corporate America and Wall Street are all constantly parsing the next words uttered from the Fed and other central bankers for clues on what's next in their alleged anti-inflation plans, all while completely ignoring the constant deficit spending binge on Capitol Hill (which is highly inflationary).
 
"Look over here, don't look over there." 
 
This formula is a "debasing" of the currency/devaluing sovereign debt.    
 
With this in mind, its a fair bet that the conversation at Jackson Hole next week, will be about Central Bank Digital Currencies (i.e. a new currency system).  
 
That might be why the cryptocurrency markets were crushed today – losing roughly 10% of value, on average, across the crypto currency universe.  
 
As we've discussed here in my daily notes, the politicians have made clear that they will regulate away private money (i.e. they will maintain their monopoly on money). 
 
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Pro Perspectives 8/18/22

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August 18, 2022

The WSJ wrote a lengthy piece today on the topic we’ve been discussing here in my daily notes. 
 
Here’s the headline of the journal story …  
This is the Fed lamenting the disconnect between the markets, and the narrative the Fed wants the markets to follow (and using the journal as the mouthpiece). 
 
The narrative:  The Fed is working to expeditiously bring inflation down. That implies rapidly rising rates and much tighter financial conditions (more expensive money and tougher to come by). 
 
The markets: The 10-year yield has fallen back from 3.5% down to 2.88%.  Stocks have rallied 17% off of the lows.  All of this in the past two months. 
 
Translation:  The market has stopped believing the Fed's hype.  
 
And for good reason. They have been bluffing!
 
Remember, the former Fed Chair, Ben Bernanke, once said that the Fed can raise rates in 15 minutes to deal with inflation, if needed. 
 
Well, the current Fed has certainly made it clear that the present inflation situation is a significant threat.  So, have they done a one-off, large scale emergency interest rate hike, to recalibrate economic activity and consumer exuberance?  No.
 
First, they watched the clear formula for inflation, as it was launched back in March of 2020 through the Cares Act.  Free money was literally dropped into the hands of consumers and businesses — with expectations of more to come.  
 
Next, they had clear evidence of the resulting inflation more than a year ago, as the core inflation rate sustainably spiked to double the level of their target rate of 2%. 
 
Did they act? 
 
No. They watched and even denied the durability of inflation (despite the clear formula of cash handouts, otherwise known in the central bank biz as "helicopter money"). 
 
And then, after they verbally pivoted and promised an outright attack on the inflation problem, they continued to execute their QE program for another five months (i.e. they continued to juice the economy and fuel the very inflation they were promising to attack). 
 
Fast forward to today, and here we are with inflation at 8.5%, and the Fed Funds rate at just 2.5%.
 
Remember, historically, to beat inflation, short-term rates need to rise above the rate of inflation.  The Fed is not close. 
 
Add to that, after telling us they would aggressively drain the liquidity they have added to the financial system over the past two years, they have done just a tiny fraction of their scheduled plan, thus far.
 
Bluffing. 
 
Why?  Unsustainable sovereign debt (not just in the U.S., but globally).
 
As you can see below, U.S. debt as a percent of GDP has doubled since the Great Financial Crisis.  If the Fed were to raise rates by the 600 basis points, to the level of current inflation, the annual interest we pay on our debt would balloon to over $1.5 trillion (from the current $400 billion).
 
And as we've discussed, even if the U.S. could handle it, the rest of the world couldn't.  It would set off a cascade of sovereign debt defaults.    
The strategy at work:  Inflate the denominator (growth), and inflate away debt relative to the size of the economy.
 
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Pro Perspectives 8/17/22

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August 17, 2022

The minutes from the July Fed meeting were released this afternoon. 
 
Stocks started the day lower, on speculation that some new (hawkish) information might be gleaned from the minutes.  But as we discussed on Monday, the meaningful takeaway from the July Fed meeting came from Jay Powell in the press conference (AFTER the meeting), where he said the newly set Fed Funds rate of 2.25%-2.5% was neutral (no longer accommodative)! 
 
And then he said they would no longer "guide" on policy, but rather take things meeting by meeting, depending on the data. 
 
To that point, dating back to March, their "guidance" had consisted of the threat to "expeditiously" bring inflation down. 
 
Where was inflation in July?  Exactly at the same level it was in March, when they claimed they would be "expeditious" in bringing it down. 
 
Still, in July, they proclaimed they had reached the neutral level for interest rates.  That tells us all we need to know about the appetite the Fed has for meaningfully higher interest rates (i.e. none). 
 
What's most interesting in witnessing the Wall Street and financial media's parsing of the Fed minutes today, is that there was little-to-no-mention of the massive fiscal spend that was greenlighted in the hours following that July 27th Fed meeting. 
 
Do they not think that a trillion dollars of fresh, mostly unexpected, fiscal spending will effect inflation, and the Fed's gameplan?  
 
More likely, they know the Fed couldn't fight the inflation battle that was in front of them already, much less one with even more deficit spending poured on top. 
 
How does it all play out, with a Fed that lets inflation run hot, and a government that rolls out bazooka funding for an economic transformation plan? 
 
You can get high inflation (still), but you also get hyper-growth.
 
Remember, earlier this year we looked at the early 1940s period as a potential analogue to the current period. 
 
Coming out of Depression, we had the New Deal (a huge government spending program), and war spending (World War 2). 
 
Growth boomed! 
 
Real economic growth (growth after inflation) averaged 14% per year from 1939 to 1943.