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.

Pro Perspectives 8/16/22

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August 16, 2022

Yesterday we talked about the setup for Walmart, to positively surprise on earnings.  They did.  The stock was up 5% today. 
 
As we've discussed here in my daily notes many times, never underestimate the appetite of corporate America and Wall Street to set the bar low, so they can beat expectations. 
 
What's the perfect time to dial down expectations?  When the broad market is suffering, and broad confidence is low.  
 
Walmart used that playbook in late July, just two days ahead of a Fed meeting, where the Fed was expected to raise rates another 75 points, and was expected to continue hammering home the vision of "aggressive" rate hikes. 
 
What is the perception that comes with this Fed outlook?  Higher and higher rates => more restrictive economic activity and less risk taking => lower stock market. 
 
So, on July 25th, just three weeks before their scheduled Q2 earnings release, Walmart decided to "provide a business update," and "revise the outlook."
 
They blamed inflation (food and fuel costs), an easy culprit to place blame, for what they warned would be lower margins.  And they updated their guidance to an EPS decline of 8% to 9% for Q2 (compared to the same quarter last year).
 
The stock did this …
Again, this was on July 25th, two days before the Fed meeting.  
 
CNBC ran this headline on July 26th: "The Fed could surprise markets by sounding even more aggressive as economy teeters."
 
But as we know, July 27th didn't go according to the consensus view.
 
Instead, Jay Powell signaled the near end (if not the end) of the tightening cycle.
 
The S&P 500 has rallied 9% since.  And that brings us to today's Walmart earnings announcement. 
 
Just three weeks ago, they told us EPS would decline by 8-9% (yoy). 
 
Today, they reported 23% growth in EPS.
 
There is classic "earnings management" and there is outright earnings manipulation.  This looks like the latter.
 
If we were to take a signal from this, it could be that Walmart shares in our interpretation that both the July Fed meeting and the bazooka of fiscal stimulus that has followed, gave the greenlight for a resumption of a hot economy and the rise in asset prices. 

Pro Perspectives 8/15/22

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August 15, 2022

Stocks start the week shrugging off some negative news data out of China.
 
Tomorrow, we’ll get Walmart and Home Depot earnings.  Remember, Walmart “pre-announced” late last month, cutting the profit outlook, and setting a low bar.  This sets up for, if anything, a positive surprise for markets. 
 
Now, with that in mind, let’s take a look at the technical picture on the broader market as we also head into two important Fed events coming over the next ten days.
 
Remember, we looked at this chart last week of the S&P 500.  
As we discussed, the stock market decline in the first half had everything to do with the fear of draconian global central bank action (led by the Fed), as they threatened to crush inflation with aggressive interest rate hikes.
 
And now stocks have made an 18% run in just two months, triggered by:  central bank inaction. 
 
The bark was far worse than the bite.  After a lot of talk, the Fed Funds rate sits 600 basis points under the rate of inflation.  They were bluffing.
 
As you can see in the chart, these central bank moments have clearly been catalysts for stocks on the way up. 
 
And here we are again, heading into another central bank moment with the Fed minutes coming on Wednesday — just as stocks are running into a big trendline, and the 200-day moving average.  Both the yellow line (the trendline from the all-time highs) and the 200-day moving average (the purple line) come in around 4,325 — just above today's highs.
 
That said, the minutes of the July Fed meeting shouldn't mean much for markets.  It was comments made by Jay Powell, in the post–meeting press conference, that carried all of the weight.  He let the genie out of the bottle. 
 
Remember, he called the new Fed Funds rate of 2.25%-2.5% neutral (no longer accommodative)! 
 
And he said they would no longer "guide" on policy, but rather take things meeting by meeting, depending on the data.
 
Again, this is revealing.  If they had any intention on containing inflation with interest rates, they would have done it by now.  They haven't.  Powell admitted as much (that it's near the end of the cycle) with the above statements.
 
This sets up for another big central bank moment next week. 
 
The most powerful central bankers in the world gather in Jackson Hole, Wyoming at the annual Kansas City Fed's Global Economic Symposium.
 
Jay Powell will be the show.  He will deliver a prepared speech, and a Fed insider at Reuters has suggested he will talk about the Fed's balance sheet (the quantitative tightening program).
 
Remember, the short history of central banks reversing quantitative easing (QE) hasn't been a good one.  Things tend to break in the financial system, and central banks tend to find themselves back in the business of QE.  
 
To this point, Jay Powell and company have suggested that the plan they are executing to shrink the balance sheet is "on track."  Yet their own reports (as of the last Fed meeting) show they've sold just a third of the assets they had planned to at this point in the program.
 
So, even as the Bank of Japan has continued its unlimited QE, as the provider of global liquidity to the world, the ECB has still had to resurrect a plan to backstop eurozone sovereign debt markets, and the Fed has only been able to do a fraction of its planned "liquidity extraction."
 
With this in mind, there's a decent chance that Powell could use this speech at Jackson Hole, to reset expectations on the entire QT plan.
 
That would, of course, be very bullish for asset prices.