Pro Perspectives 8/11/22

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August 11, 2022

As we discussed yesterday, the monetary policy fuel for stocks doesn't seem to be going away.
This is becoming even more clear, as the Democrat controlled Congress has been, at breakneck speed, blowing out even more massive deficit spending.  Just in a couple of weeks, we have $280 billion for the Chips Act.  We have $400 billion for the PACT Act.  And by Friday, we will have $740 signed into law for Build Back Better (laughably framed as "inflation reduction").
This, as it has become increasingly clear that both global QE and low rates are a "you can never leave" scenario.  The financial system is too fragile to extract global liquidity, and sovereign debt is too fragile to raise interest rates.  They are being exposed as having no tools to fight inflation in this environment, just as Congress is blatantly pouring more fuel on the fire.  
The combination of the above has consequences.  And if history is our guide, the outcome will be a new currency system and a global restructuring of debt.  That's the eventuality. 
What likely will come first, are the consequences
Expect the continued devaluation of currencies, relative to real assets (eroding buying power, and lower quality of life).   
Another (related) consequence, which has been a looming threat, for a long time:  Capital flight from the world's most liquid and trusted government bond market in the world (U.S. Treasuries).
Who owns nearly a trillion dollars of U.S. Treasuries, and has just watched the U.S. (and allies) freeze Russian assets (including its currency reserves)?  China.
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