Recent Monetary Actions – 8/4/2023

Banking, Bond Market, Currencies, Economics, Geoeconomics, Government Statistics, Interest Rates, Monetary Policy, , , ,

The past few months have produced some rather notable monetary activity. For myriad reasons, the money pumping of the not-so-USFed during the period of 2009-2019 produced nominally higher price inflation, but not anywhere near the increases in prices that should have occurred. Our operating theory as the 2008 crisis was ending was that the newly unveiled ‘quantitative easing’ nay relentless money printing, would push up both consumer prices and the nominal prices of various asset classes as well. In essence, the ‘fed’ would replace the burst US residential housing market bubble with yet another bubble.

The central bank of the US, followed by other G7 central banks, embarked not just on money printing, but money channeling as well. The blowout preventers, if you will, for this excess were primarily the US Bond Market and the US stock market as well. Bond yields were artificially low during much of this period, thanks to the fed monetizing USGovt debt. Nominal yields were a joke. Real yields were far into the red. The US consumetariat didn’t notice this because, as always, credit was easily obtained. The consumer just dove deeper and deeper in debt. This was not a US-centric phenomenon. The European Union behaved in much the same manner, but the EU blew up a massive residential housing bubble as well, particularly England. Technically, England is no longer in the EU, but for practical purposes, this distinction is negligible.

What many people (investors in particular) forget is that there are always cycles. These cycles can rather easily be altered by extraneous actions of central banks, governments, and even consumers. However, the more distorted or prolonged the boom is, the bust is all the more pronounced. Think of Newton’s Laws and apply them to monetary policy and economics.

With the proverbial spring fully compressed by the massive deficit spending commencing in 2020, the not-so-USFed poured literally trillions in fresh dollars into the USEconomy, monetizing massive amounts of government debt to finance social spending. Since the US consumer, as a whole, has negligible savings, when economies were shutdown, the government became the primary support structure at levels never before seen. The ‘channeling’ of the 2009-19 period went out the window and the fresh dollars were poured directly into the consumer economy. We all know what happened next. Prices head for the stratosphere.

We noticed something curious start at the end of Q1 2023, however. The US M2 monetary aggregate began to contract – for the first time in.. well, forever basically. Was this a one-off month or the beginning of a new trend. We’ve seen a few months’ worth of data now and it would appear that there is something of a trend brewing. Deflation. Not falling prices, but an actual contraction of the money supply. It is interesting to note that during this stretch, US stock indexes, particularly the DJIA have forged towards all-time highs. What gives? Housing prices have taken a hit, which, in ordinary circumstances, would be a good thing – from an affordability perspective at least, but the reason housing prices are cooling is simply because the cost of mortgages has been pushed out of the reach of many by mortgage rates that are still hovering around 7%.

Our thesis – for now at least – is that the not-so-USFed is once again channeling money, but not in the same way it was during the 2009-19 period. It appears – and we admit it is very early to say for sure – that the consumer economy has, in the aggregate, been cut off from new money. The financial economy has not. However, the net effect is the contraction of the US M2 aggregate.

Interestingly enough, the last data pointed to a reversal, which complicates the situation a bit. The reversal could end up being a one-off event, or it could be a true reversal in the trend. Further study on prior deflationary periods is in order. In any case, the top to bottom action in the aggregate as shown above does explain the slowing of the rate of price inflation. Remember, inflation is a monetary event that manifests itself in prices. While the mainstream financial press claims otherwise in their headlines, the whole of their reporting proves they know the truth and choose to obfuscate, which is typical.

Since monetary data has a significant lag associated with it, we will not be able to ascertain until likely the end of 2023 or Q1 2024 if this is definitely the case or not. There should be anecdotal indications between now and then and we will certainly keep the readers of this blog appropriately informed.

Sutton/Mehl

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Great Depression II – It Can’t Happen to Us, Can It? – Republished from May 2008 – with Addendum

3 CommentsBailouts, Banking, Bond Market, Debt Ceiling, Geoeconomics, Government Statistics, Interest Rates, Monetary Policy, The Completely Absurd, , , , , ,

Webster’s defines complacency as “1.satisfaction or contentment 2. smug self-satisfaction” There is probably not a better word to describe the current state of perception with regard to economic and financial malady. I had an interesting conversation the other night about exactly this topic and the individual I was speaking with had an overriding belief that we cannot suffer economically simply because the current generation is not prepared to deal with it. While I certainly agree with the latter assertion, the former continues to baffle me. I am certainly not prepared to deal with a lengthy hospital stay as the result of a horrific car crash, but that alone doesn’t cloak me in immunity from having an accident. The reasoning is so broken and flawed, yet it is often all we get in terms of a perception of what is going on.

This disconnect begets a discussion of why exactly it is that society has chosen to believe itself to be immune from bad things. It is odd in itself that when you talk to individuals, they seem to be acutely aware of many of the challenges facing us, but when you put all the individuals together and create a society, we act as though the party will indeed last forever. We are certainly dealing with a situation in which the intelligence of the whole is by far less than the sum of all its parts. Here’s a little bit of déjà vu for you, compliments of Wikipedia:

“In the 1920s, Americans consumers and businesses relied on cheap credit, the former to purchase consumer goods such as automobiles and furniture and the later for capital investment to increase production. This fueled strong short-term growth but created consumer and commercial debt. People and businesses who were deeply in debt when price deflation occurred or demand for their product decreased often risked default. Many drastically cut current spending to keep up time payments, thus lowering demand for new products. Businesses began to fail as construction work and factory orders plunged.”

Sound familiar anyone? See any price deflation going on? The Wilshire 5000 has only lost about 2.5 TRILLION dollars in value in the last two months or so. What about the loss in home equity? Another trillion or two? Who knows, but I think you get the point. We are seeing almost to the final utterance the same play we saw unfold in 1929. Were those folks any more prepared for the Great Depression than we are today? I’d argue that while they were perhaps a bit better equipped to provide for their own sustenance, that American society in the 1920’s was as complacent as we are today. When the realization of history’s coup de grace hits, we will be caught as unaware as our ancestors were back in 1929.

Here are some other examples of what Alan Greenspan likes to call ‘irrational exuberance’ in the 1920’s:

“We will not have any more crashes in our time.”

John Maynard Keynes in 1927 (The authenticity of this one is a little suspect) DOW ~ 175

“There will be no interruption of our permanent prosperity.”

Myron E. Forbes, President, Pierce Arrow Motor Car Co., January 12, 1928 – DOW ~ 200

“There may be a recession in stock prices, but not anything in the nature of a crash.” – Irving Fisher, leading U.S. economist, New York Times, Sept. 5, 1929 – DOW ~ 375

“All safe deposit boxes in banks or financial institutions have been sealed… and may only be opened in the presence of an agent of the I.R.S.” – President F.D. Roosevelt, 1933 – DOW ~ 65

Tuesday morning we received news that according to the Institute of Supply Management, the service portion of our economy underwent a significant contraction during the month of December. This is alarming given the fact that December is normally one of the busiest times of the year. Even still, a trip past the local mall provides a busy scene. People are streaming in and out, carrying boxes and bags of imported trinkets to their imported cars. They will then use imported gasoline to drive to their home, the mortgage of which is likely to be owned by a foreign investor. Yet the average American citizen sees nothing wrong with this picture. Or could it be that they don’t even see the picture at all? The media has certainly been playing the role of absentee informant in recent years, choosing to focus on such insipid topics as Britney Spears’ latest rehab stint rather than the important business at hand.

Here now, are some quotes from this generation’s 1929..in 2007 and 2008:

“It is encouraging that inflation expectations appear to be contained,” Fed Chairman Ben S. Bernanke – Testimony to Congress – March 28 th , 2007 – DOW ~ 12,500, Headline CPI-U ~ 2.8% Y/Y

“As I think you know, I believe very strongly that a strong dollar is in our nation’s interest, and I’m a big believer in currencies being set in a competitive, open marketplace,” – Henry Paulson – Secretary of the Treasury – USDX ~ 81.50

““We are making history. What has passed the Congress in record time is a gift to the middle class and those who aspire to it in our country.” House Speaker Nancy Pelosi on the $168 Billion tax ‘rebate’ while the middle class is spending their Wal-Mart Christmas gift cards on food and other necessities.

They’re making history all right. Too bad it will end up being the WRONG kind. How can we ever hope to focus the population on the urgency of our current predicament when our leaders are willing to make it worse by handing our freebies, bailing out those who willingly make poor investment choices and telling us everything can be ‘free’ if we’ll only pull their lever on election day?

Or am I putting the cart in front of the horse? Perhaps a contrarian opinion might be that our leaders are giving the public exactly what it wants. In either case, I am quite certain that our state of unpreparedness will not constitute a free pass from the negative effects of a recession or a retraction of any of the financial excesses we’ve enjoyed over the past few decades.

Addendum – June 2023

Most people today don’t even remember Hank Paulson – or his ridiculous statements regarding the US Dollar. If a strong dollar was truly in our national interest, then we have no national interest left thanks to those fine, unaccountable feathered friends at the not-so-USFed. Poor Hank was like a financial piñata – no matter how many hits he took for this grossly erroneous statement, he kept right on spilling out candy.

15 years later and only the names have changed. The vocabulary-challenged Paulson is long gone, replaced by less than erudite Janet Yellen. Evidently one of the requirements of a Treasury Secretary or a not-so-USFed Chairman is to be able to speak for an hour and say absolutely nothing. Jay Powell is definitely at a disadvantage; he actually tries to explain things.

Economics isn’t rocket science. Or anywhere close. It’s a rather simple topic to understand. It is made complex by institutions who benefit when the population is clueless. When it comes to obfuscation, most policymakers get a AAA – ironically the same grade assigned to those worthless MBS back in the heydays of 2005-2007.

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US Banking System Update – 5/9/23

4 CommentsBailouts, Banking, Bond Market, Debt Ceiling, Government Statistics, Interest Rates, Monetary Policy

Andy Sutton / Graham Mehl

One of the biggest problems with a lack of transparency is that, especially during times of panic, fear spreads like a contagion. This past week saw multiple banks get into ‘trouble’. This ‘trouble’ was diagnosed by looking at share prices instead of actually looking for the real symptoms.

Sadly, there is so little transparency in the Great Financial Crisis – rebooted – that it has become extremely difficult to figure out who has the most exposure, so the entire financial sector is getting creamed. A look at regional banking stocks produces a serious case of deja vu. The charts are almost identical. Does this mean that every single regional bank is overexposed? Not likely. Today we’ll discuss the actual cause of the recent troubles and forget about stock prices, charts, and the mainstream financial press for a while.

Bank Failures

As mentioned above, the entire commercial banking sector has been hammered from a market capitalization point of view. However, we have to point out strenuously that (especially now) stock prices do NOT necessarily reflect the health of banks. From a fundamental standpoint, every money center bank is already upside down, by definition. The same goes for the regionals as well. Why? Because they’re all leveraged. They’ve borrowed insane multiples against their Tier 1 capital. Again. This is what triggered the 2008 crash. Their bond portfolios were killed by the not-so-USFed’s interest rate hikes. Given that commercial banks own the fed – yes they do – it’s a curious situation. This bit of Kabuki Theater is likely going to end in the US going to a central bank digital currency (CBDC). FedNow, and other pilots have already been run.

Furthering the mess, several mainstream media outlets are now spreading the ‘news’ that the US may suspend cash withdrawals from banks. Of course when people read this there will be some kind of a mad dash to the banks to withdraw cash, therefore causing the cessation of withdrawals.

A bit of background on the money supply is in order. Most of the US Dollar supply is already digital. Not in the sense of a CDBC, but these dollars don’t exist in the form of cash. They make rounds through the economy, never being withdrawn. Roughly $800 billion is in cash and coin. The total money supply is no longer supplied by ‘official’ sources, but it can be reconstructed and it’s north of $25 trillion. Our point is that only a very small portion exists in cash. Bank deposits shrank by nearly a trillion dollars just in March. There is still plenty of cash available, so where did it go? We know precious metals dealers are getting hammered with orders. Where else did it go? Cryptocurrencies got some of it. Most of the dollars that moved out of bank deposits were digital. Thanks to the two month window in getting actual numbers we won’t have a clear picture until later this month or early June.

Points to Ponder

Be careful going into weekends. Even a cursory look back at the 2008 crisis demonstrates that most of the carnage happens on weekends for the simple reason that it gives the FDIC, etc. the weekend to clean the mess up before the markets open Monday. Midweek failures are extremely rare. That said, keep a close eye on any securities you may hold. We will not give specific advice here, other than to exercise caution, especially on Friday afternoons.

Don’t run the banks. If we (and many others) are correct, it will make matters worse and honestly, if we go to a CBDC that cash will likely be worthless. At minimum it’ll be recalled if you want to exchange it for the new token.

Deleverage. Now. Get out of debt if you can. We realize that this economy with roaring inflation has put so many marginal income households into the red. If you’re fortunate enough to have the resources to get out from under, do so. The money supply charts over the past 2 months have shown a modest deflationary (not a typo) trend. This is what put farms into foreclosure during the Depression. There wasn’t enough money for debt service. We could start seeing that here fairly soon if the trend continues. Again, we’re running two months in arrears on the data as mentioned above.

Leverage is what got the banks in trouble and it will do the same to individuals.

Until next time, stay well and well-informed,

Andy / Graham

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A Quick Check-In, the Farce of GDP Reporting and a New Monetary Regime

Banking, Consumer Finance, Currencies, Debt Ceiling, Economics, Geoeconomics, Government Statistics, Modern Monetary Theory, Monetary Policy, National Debt

Hello friends,

Yes, we are still alive! And kicking too – at least most days! It’s been two years since we published anything, but we’ve been very busy, nonetheless. We’d like to take a moment to point out a few indisputable (and very provable) facts. 

Let’s play connect the dots, shall we? This is a bit off-topic of the day but might be instructive for some in your spheres of influence.

1) MMT (Modern Monetary Theory) is in full force. The ‘Fed’ – and the rest of the world’s central banks – are printing funny money like crazy. Hence no more M2 here in the US. For reference, M3 was discontinued in March 2006.

2) That funny money is pushing consumer prices at an admitted rate of 4+% annualized. Let’s assume that’s true even though we know it’s much higher.

3) GDP in every major economy is measured in currency, NOT units of goods and services produced/purchased/sold.

Therefore, even if every single American business, middleman, and consumer conducted the exact same amount of economic activity (produced/sold/purchased) as last year, GDP will STILL rise by more than 4% on an annualized basis. What exactly is going on here?

We all know. The international bankers are doing exactly what Thomas Jefferson said they would do – robbing us blind first by inflation, then by deflation. Lest I digress too much, GDP is NOT an accurate way to measure any kind of economic growth in its current form, especially because one of the components is government spending (look at the deficit spending last year alone!). 

The Cobb-Douglas production model that Graham and I tweaked to include more modern components of the global economy and have been running for the last decade STILL shows America in a protracted recession. It’s not a perfect model, but it’s a lot better than the one that is spouted about 4 times a year on CNBC, etc. If you haven’t already, feel free to download, read, and spread our 2019 commentary on Modern Monetary Theory. The link is at the end of the email.

Spread it far and wide. Delete our names if you wish. We want neither credit nor accolades. We just want people who are looking for a little common sense to know there’s some out there. The article isn’t perfect, but it’s the effort of two guys who love their country and feel stewardship of the blessings we’ve been given is very important. 

Next up? The ’new’ Bretton Woods and an analysis of Schwab’s ‘Great Reset’. Purely in economic terms.

Best,

Andy & Graham

Click to access MMT.pdf

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A Picture Worth a Trillion (and then some) Words?

Consumer Finance, Debt Ceiling, Economics, Government Statistics, Monetary Policy, National Debt, , , , , ,

Andy’s Notes: Inflation, the Debt Ceiling, and the Dow Jones mentioned in the same sentence. They all have one thing in common – they’re going up. Asset bubbles are much more palatable by the average person than cost of living bubbles. In other words, when inflation blows up stock indices, the world cheers. When it blows up the cost of things like food, gas, and other necessities, that is not acceptable. (Click the thumbnail below to see the whole image).

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Feburary 2019 Retail Sales ‘Tank’ – CNBC

Consumer Finance, Economics, Government Statistics, Media Bias
  • The weak report from the Commerce Department on Monday joined a raft of other soft data, including housing starts and manufacturing production that have left economists anticipating a sharp slowdown in growth in the first quarter.
  • Retail sales dropped 0.2 percent as households cut back on purchases of furniture, clothing, food and electronics and appliances, as well as building materials and gardening equipment.
  • Data for January was revised higher to show retail sales increasing 0.7 percent instead of gaining 0.2 percent as previously reported.

U.S. retail sales unexpectedly fell in February, the latest sign economic growth has shifted into low gear as stimulus from $1.5 trillion in tax cuts and increased government spending fades.

The weak report from the Commerce Department on Monday joined a raft of other soft data, including housing starts and manufacturing production that have left economists anticipating a sharp slowdown in growth in the first quarter.

The loss of economic momentum also reflects higher interest rates, slowing global growth, Washington’s trade war with China and uncertainty over Britain’s departure from the European Union. These factors contributed to the Federal Reserve’s decision last month to abruptly end its three-year campaign to tighten monetary policy.

The U.S. central bank abandoned projections for any interest rate hikes this year after increasing borrowing costs four times in 2018.

Retail sales dropped 0.2 percent as households cut back on purchases of furniture, clothing, food and electronics and appliances, as well as building materials and gardening equipment. Data for January was revised higher to show retail sales increasing 0.7 percent instead of gaining 0.2 percent as previously reported.

Economists polled by Reuters had forecast retail sales rising 0.3 percent in February. Retail sales in February advanced 2.2 percent from a year ago.

The surprise drop in sales in February could partly reflect delays in processing tax refunds in the middle of the month. Tax refunds have also been smaller on average compared to prior years following the revamping of the tax code in January 2018. Cold and wet weather could also have hurt sales.

The February retail sales report was delayed by a 35-day partial shutdown of the federal government that ended on Jan. 25. March’s retail sales report, which was scheduled for publication on April 16, will be released on April 18.

The dollar slipped against a basket of currencies after the report. U.S. Treasury prices pared losses.Broad weakness

Excluding automobiles, gasoline, building materials and food services, retail sales fell 0.2 percent in February after an upwardly revised 1.7 percent surge in January. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.

They were previously reported to have rebounded 1.1 percent in January. Consumer spending accounts for more than two-thirds of economic activity. The sharp upward revision to core retail sales in January was insufficient to reverse December’s more than 2.0 percent plunge, leaving expectations for tepid GDP growth in the first quarter intact.

Growth estimates for the January-March quarter are as low as a 0.8 percent annualized rate. The economy grew at a 2.2 percent rate in the fourth quarter after expanding at a 3.4 percent clip in the July-September period.

In February, sales at building materials and garden equipment and supplies dealers tumbled 4.4 percent, the biggest drop since April 2012. Receipts at clothing stores fell 0.4 percent and those at furniture outlets dropped 0.5 percent.

Sales at food and beverage stores declined 1.2 percent, the biggest drop since February 2009. Receipts at electronics and appliances stores fell 1.3 percent, the largest decline since May 2017.

But consumers bought more motor vehicles, with sales at auto dealerships rebounding 0.7 percent after declining 1.9 percent in January. Households also spent more at service stations, likely reflecting higher gasoline prices.

Online and mail-order retail sales rose 0.9 percent. Sales at restaurants and bars edged up 0.1 percent and spending at hobby, musical instrument and book stores increased 0.5 percent.

Retail SalesMonthly sales for retails and food servicesJan ’18Jul ’18Jan ’19Apr ’18Oct ’18-1.5-1-0.500.511.5Source:CensusJanuary 2019● Retail sales: 0.2%

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