The Fed is handing out money in massive amounts provided:
- Your debt is big enough to matter
- You are struggling to service it
If you have been prudent or you are not big enough to matter, well, sorry. That’s just too bad.
That is the message Marcus Stanley accurately put together in this thread.
- In our comment to the Federal Reserve last week we pointed out how the Fed is handing out money almost no effective conditions. Public credit can be tapped for all kinds of deal funding, by private equity, and without retaining employees
- Now the Fed has outlined new credit rules for $600 billion in “Main Street Lending” that will make things even worse.
- First, they added a new avenue for heavily indebted companies to access public credit. Many of these companies will be private equity owned. These companies can borrow up to six times their adjusted 2019 earnings — we know these “EBITDA” metrics are often manipulated
- Then, they watered down the already minimal requirements for borrowers to promise to retain workers when they get loans, and removed any requirement for companies to attest they need the money because of the pandemic crisis.
- Finally, note that basing borrowing limits on 2019 earnings allows oil companies to borrow based on their revenue when oil prices were much higher. 2019 oil prices – $55 a barrel. Oil prices today — $12 a barrel.
Musical Tribute
Readers are no doubt wondering if I can put this to music. Indeed I can.
Did I hear you say that there must be a catch? Will you walk away from a fool and his money?
You better hurry cause it’s going fast.
Please note Carnival Deemed Too Big to Fail, Rescued by the Fed.
Inflation or Deflation?
This sounds highly inflationary, and in a vacuum it is. But we are not in a vacuum.
A Very Deflationary Outcome Has Begun
Why?
It’s the debt stupid!
Moreover, a Collapse in Demand Trumps Supply Shocks and the Fed is struggling with a problem of its own making.
Mish
Perfect answer. How then to predict any outcome other than revolution?
Who is going to revolt? Remember Occupy Wall St?
Ain’t gonna happen. Murica is Best Country in the World.
What happens when he wants to sent everybody every month the $1200/person, and maintain elevated UEI benefits. I see this happening.
Basically what the message is here is that this is just more of the same, more balance sheet created and thrown at the asset holders while the consumers pay for servicing it via the stealth inflation tax. Result ever more wealth inequality. Which is fine as long as you are in the top 10% and especially if you are in the top 1%, but sort of sucks for everyone else. It seems they could greatly simplify the entire process and avoid accidental ignition of another global war if they simply stratify society into social status that is up front about your position in life as being directly related to your net worth. Nobility = billionaires. Aristocracy = millionaires. Free commoners below a million but with enough reserves to weather 12 months of no income. Indentured servants = those not yet bankrupt but less than a year of reserves. Slaves = less than $500 net worth they can tap in an emergency.
That basically sums up the current stratification albeit without the honesty to just put it plainly. Then we had 2016 and a very dubious election, now with Covid we might not even have elections in 2020, if there is a second wave and polls are closed or only done by confused and inadequate mail in ballots. Such an election would have no meaning, just look at the unemployment mess, possibly a majority of people entitled to funds are not getting them, being arbitrarily rejected, or never able to get through to unemployment offices to start with. If there is an election in which you must go to the polls many will insist that it is meaningless because so many reasonable people put their health/survival above the duty to vote. If it is mail in there will be claims that mail was suppressed, and every election year they find bags of mail in warehouses that are filled with ballots, so in the end elections are ever more meaningless even where there are political differences between candidates. Most of the time there is not. They all serve the 1%.
I scanned the article from Zero Hedge which you referenced. His story has a lot of heavy breathing but very little serious analysis. What are the facts which can be seen and understand as truthful which support his allegations that the rich control the central bank? What are effective alternatives to the collapse which the author could examine? Dramatic conclusory statements leave me cold. I want facts and competent analysis.
Just curious as to who other than “the rich” you think control the central bank?
You do know that all the member banks of the Fed are privately owned corporations, right? Do you think they are owned by the ordinary Joe Schmoe’s of the country/world?
Below is just one link of many thousands on the Fed … I won’t even begin to insist upon its degree of accuracy because I plain don’t know … I just know that I have never read any article on the Fed that mentions a single ordinary Joe Schmoe as having any kind of controlling interest in the Federal Reserve Bank(s).
Based on simple common sense, do you even think it is feasible that anyone other than “the rich” control the central bank?!
CMG
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On My Radar: Deflation Now, Inflation Later – The Sell of a Lifetime for Bonds
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May 1, 2020
By Steve Blumenthal
“The net effect will further worsen the debt overhang. We know from similar efforts here,
in Japan, Europe, and China this provides no more than a fleeting boost to economic
activity at the expense of additional weakness in future economic activity.
This shift results in an even greater misallocation of capital and other resources.”
– Lacy Hunt, Ph.D.,
Executive Vice President of Hoisington Investment Management Company
One of my closest friends, Wade, is a senior manager at JPMorgan. We’ve golfed together for years, and on the course our talks are often around the markets. We’re addicted to both: golf and markets. Wade reads my weekly letter and is one of the funniest people I know. We take jabs at each other and, yes, his jabs are the best. For example, he refers to this missive not as On My Radar, but as Out of My Rear End (actually Rectum, but that word is less fit for print—though I guess I’ve just printed it). Frankly, no one makes me laugh more and, boy, we could all use a little laughter right now. Wade called me this week to chat about the discussions we should have with our clients and our children.
I’m of the belief that we must defend our wealth first and foremost. Why? It all comes down to how money compounds.
Compounding is awesome on the way up, but it is merciless on the way down. If your investment account goes up 30% and then goes down 30%, your $1,000,000 grew to $1,300,000 before it declined to $910,000. Meanwhile, most people think up 30, down 30 takes them back to even; that’s just not the case. Lose 50%—something that happened during the last two recessions—and you need a subsequent 100% return to get back to even. Wade and I agree: This should be the first rule we teach our kids about investing. Today I share a piece I wrote some years ago called “The Merciless Mathematics of Loss.” I hope you find it helpful.
Over the weekend, I read John Hussman’s latest research letter. It was long. He talked about “Containing the Crisis,” and you can find the full post here. What grabbed me most were his comments about how the Fed’s purchasing of corporate bonds and junk bonds is in clear violation of the law, which appear about two-thirds of the way down in his letter. It’s what sent me sideways a few weeks ago when they made their announcement. Everything in me screams its wrong.
What the Fed and the Treasury have done is something of an amazement. The Fed prints money and buys bonds from the Treasury. The government bonds then sit as an asset on the books at the Fed. The Treasury then takes the money and uses it to fund something they call a Special Purpose Vehicle, or SPV, each of which is named something that has a warm and friendly feel to it. Next, the Treasury appoints the Fed to take charge of the SPV, and the Fed hires a firm like BlackRock to execute on purchases. This is a really good gig, if you can get it.
But is it legal? No. After much discussion and healthy debate with trusted friends, I’m certain the Fed’s actions are in violation of the Federal Reserve Act.
So what? Who is going to stop it? The fight will take a patriot with a capitalistic heart, deep pockets, a favorable court (the odds are not as good in NYC or DC) and the fight will be long —including appeals, more battles, and years before it reaches the Supreme Court.
The conclusion? Hussman is right: it isn’t legal. But the rules will be amended. Precedent was set when the Fed bought the AIG portfolio in early 2009. Remember that? Pour another helping of that pink Pepto-Bismol into mom’s extra-large spoon and swallow hard. The cat’s back out of the bag and it’s bigger and more enabled than ever.
Here’s my two cents on what we will see and what’s important to keep in mind in terms of your investment positioning. In short: Deflation now, inflation later. This is the sell of a lifetime for bonds.
I was on an ETF Trends webcast on Wednesday titled, “High Yield: Strategies for Volatile Markets” this week, hosted by good friend Dave Nadig, CIO and Director of Research ETF Trends and ETF Database. Joining us were Sonja Hildebrandt, Vice President and Co-Head of CIO Office at DWS, Marc Pfeffer, CIO at CLS Investments and Sean Edkins, Head of ETF Sales and Strategic Partnerships, DWS. More than 800 people from around the country tuned in. If you are an advisor, send me a note and I’ll get you access to the replay. And they provide CE credits, if you need them.
In preparation for the webcast, I shared some of my thoughts in an email exchange with Dave and his team. I thought I’d share them with you today, as I believe these really are the important questions on the table right now. I want to begin the story by saying that I too am trying to figure them out.
Following are my bullet-point notes shared with ETF Trends prior to the webcast (and a few new additions):
Fixed income: We have a deflationary shock to the system. Generally, in recession, the Fed cuts rates 400–600 bps in order to get us out of the default cycle. The system clears.
There is no room to cut rates much further. Our starting point this time around was 1%. Take that to -3%, or to -5% in order to jump-start the economy? Not going to happen.
So, the Fed is inventing other solutions: QEs and SPVs.
Due to the pandemic’s economic hit, U.S. capacity utilization is likely down 7% to 10%. There is no way the Fed can create inflation. With such excess capacity (to make and service things) in the system, prices will remain low and likely go even lower.
If there is a McDonalds on one corner of an intersection and a Burger King on the other, and then three more fast-food chains set up shop right next to them, all of those players crowd the system, affect gross sales, price and profits. And if more than a few are in debt and mismanaged, they should The strong survive and sales and profits pick up. But ultra-low Fed policy chased many investors into riskier funds, and that money was invested into the bonds of those less-than-responsible stewards. By bailing out bad actors, we are keeping them in business. In a sense, those bad actors are stealing from the business revenues of the good actors. And by keeping them in business, we are not allowing the system to clear.
Inflation is not today’s problem. The Fed can’t create inflation. They are enabling dis-inflation by keeping the bad actors in business. The bad actors continue to survive on debt, not sales or revenue. Debt keeps them afloat.
My friend Lacy Hunt told me that an increase by 7% to 10% in excess capacity will knock the inflation rate down 4%, and we are currently at 2%. Inflation will go to -2%. That’s negative 2%.
We’ve just had a nuclear hit to the global business system. Therefore, in the next few years, deflation remains Enemy Number One and Treasury yields are likely headed even lower.
But ultimately, how attractive are Treasurys yielding 1% or less? And what problems sit beneath the surface that we don’t yet see due to the shock? Can’t bail everyone out. Problems will present.
This is the sell of a generation for most bond markets. Long-term dated Treasury bonds will likely still do well, but there is not much more room for rates on the downside and the upside risk of loss is big if the rates do rise.
My two cents: Think entirely differently about your bond exposures – trade bonds, don’t buy-and-hold.
Just how much love sits in Chairman Jay Powell’s heart? A lot!
The Fed’s balance sheet is at $7 trillion. It may grow to $15 to $20 trillion. But we can’t know this for sure.
Each injection is designed to hold the system together and provides immediate benefit (a temporary sugar high), but the long-term effect on the economy is bad.
The Fed’s buying assets under temporary ownership keeps alive entities that should fail… bailing out the most egregious companies, the most indebted, the bad actors… it is bad for the economy in the long term.
Businesses are more leveraged and the quality of the debt has never been worse (as measured by the Moody’s Covenant Index).
Every large economic fire will be followed by more sugar from the Fed. When will enough be enough? How do they exit? No one, including the Fed, knows. I suspect too much central bank sugar will ultimately affect our health.
This is not a new experiment.
We are following the Japanese path, which the ECB chose to follow, and which China is now following.
The money provides support but steals from productivity because it enables bad actors to survive.
As my friend Wade put it, “We are capitalists on the way up and socialists on the way down.” We best be careful.
It’s competition that helps us all grow.
Do you want all the teams in the NFL to get the trophy each year, regardless of their performance, or do you appreciate how the platform for competition—and the fact that not everyone can win—provides the potential for all teams to get better in their pursuit of success?
It’s not easy when your child gets cut from a team. But that sad day may just be what inspires her to improve, work harder, practice more, and eventually get better. Maybe our greatest gifts in life come from things that didn’t feel much like a gift at the time. Such is the platform in sports and in business.
Losing is a gift that helps us improve and advance. We are enabling bad actors when they should be benched.
And frankly, sometimes it’s timing and luck. So be it. Colonel Sanders failed something like five times before establishing Kentucky Fried Chicken, which has become an amazing success.
Did the Colonel learn from his failures? Did he help others advance, thanks to his ideas? Yes!
I know some people don’t like capitalism but look around and show me a socialist country that is a great success. If I’m going onto the field to play, while not perfect, ours in the U.S. is a pretty great field to be on. Not everyone gets a trophy and that’s a good thing. We hurt, learn, and get better. We have to remember that.
We are not letting the bad actors fail. We must.
Since that’s not going to happen in the immediate future, the die is cast for now.
Bottom line: Lacy summed it up this way and I think he’s right: “The net effect will further worsen the debt overhang. We know from similar efforts here, in Japan, Europe, and China this provides no more than a fleeting boost to economic activity at the expense of additional weakness in future economic activity. This shift results in an even greater misallocation of capital and other resources.” BTW: If you are not reading his Hoisington Quarterly Letter, you should be. Lacy’s brilliant.
So how will this play out in the financial markets?
I don’t care who your favorite expert might be, no one knows for sure, including me. With that said, there are markers to watch out for and it’s important to think in terms of probabilities and risk management. Global capital flows, central bankers, politicians, currency battles, and the depth of debt and mismanagement in businesses and governments. No one knows because we don’t yet know how the players in the game will respond. We don’t know who the players will be. But we can guess.
Here are some things to keep in mind:
Much depends on the activity of central banks.
Much depends on fiscal policy response. For example: I believe it is probable that the Fed moves from a $7 trillion balance sheet to $15 to $20 trillion. What if they stop at $10 trillion or go to $50 trillion? We don’t yet know.
How will this affect your portfolio?
With the above caveats, I see three potential scenarios and believe scenario 2 to be most probable:
Scenario 1. Depression. We are going to get deflation; that’s a given. The risk in this scenario is we go into a depression. If depression happens, interest rates on the U.S. Treasury 30-year bond will drop to 50 bps or lower. Depression is bad for corporate bonds, mortgage bonds, and municipal bonds due to default risks. But such a move is a home run for long-term Treasury bonds.
Can the Fed, via an SPV, buy up the entire debt market? Doubt it. But for the immediate future, Fed and government support may keep this from getting too deep. That’s my belief at the moment, so I put very low odds on depression. Scenario 1 is bullish for U.S. Government Treasury bonds, and bearish for most other risk assets.
Scenario 2. The most probable scenario at the moment is the U.S. equity market stays within a trading range with highs held in check and a re-test of the March 2020 low—my best guess is 2,850 to 2,200. The Fed fires its bazooka and then steps aside to let the markets stand on their own. There’s a burst of flames and the Fed rushes back in to put them out. Markets trade higher, the Fed lets things function on their own, new fire, new Fed response.
Recall December 2018, when the Fed raised rates and the market crumbled until Powell reversed course the day before Christmas. It will be like that, except the Fed is now trapped. They won’t be able to tighten conditions. Debt is too big. They will attempt to control the yield curve. More fires, more sugar, more fire, more sugar. So, unfortunately, I see long-term diminishing returns unless we let bad actors fail and defaults occur. This would have the positive effect of letting the system clear and start anew. The current players won’t let it clear. Scenario 2 is bullish for trading strategies and active stock pickers (value plays for the more conservative and transformational businesses for the more aggressive). It is bullish for long-term Treasury bonds over the next few years, but bearish for Treasury bonds beyond that. With high equity market valuations, the returns will be flat for equities over the coming 10 years and a bumpy ride with peaks and valleys on our way to flat. Not too dissimilar to the 1966-1982 secular bear market, and perhaps somewhat similar to the go-nowhere-for-two-decades Japanese equity market.
Scenario 3. A loss of faith in the developed world governments. This is about a loss of trust in governments. If the EU fails, imagine where that money might flow. If your bank was going to fail and you knew it, you’d rush to get your money out of that bank. You’d move it to a safer place. Same if your currency were to fail. Risks in Europe are great because they don’t have a common bond market. Italy defaults and the system crashes.
The problems are everywhere. Debt is more than 300% to GDP in most countries. It is 361% in Italy, 513% in France, and the debt-to-GDP ratio is 464% in the Eurozone as a whole. It’s 327% in the U.S., but the U.S. has a central bank and common Treasury market. The immediate risk is Europe. Watch the EU banks, keep watch on Italy. In the EU, you need all 19 members to agree on things. Will Germany agree to be on the hook for Italian and French debt? Would New York agree to bail out California’s debt, or vice versa? I don’t think so, but in the U.S. there exists the Fed/Treasury marriage and a Congress in full support of the plan. Blink, print, new SPV. The EU structure is flawed because there is no common government bond. In scenario 3, capital flows to the U.S. and with rates on bonds so low… U.S. equities are the beneficiary, no matter what the valuation is. Scenario 3 favors U.S. equities, real assets, and gold.
I see a low probability of scenario 1 (depression), and perhaps a slightly higher probability for scenario 3. But ultimately, I think we get scenario 2. Overweight to trading strategies.
Globally, money creation will continue, and the pandemic further enables and accelerates policy response. Do you trust that the authorities don’t go too far? I don’t. We are in the first or second inning of solving a global debt mess. The pandemic was a nuclear bomb to the global business system. It hit at a time when the global economy was already moving toward recession. The fight now is to prevent deflation/depression. The monetary response is massive. I don’t see depression. Deflation? Yes. But the future risks will tilt to inflation. I don’t think the world authorities, all creating money out of thin air, can pull back on the reins when it’s time. The cat is out of the bag. Deflation now, inflation later.
The early to mid-1980s were the buy of a lifetime for bonds. Rates were very high. We are at the other side of that story now: This is the sell of a lifetime for bonds.
The Mauldin “Virtual” Strategic Investment Conference, May 11-21, 2020
I have been attending my friend and CMG’s chief economist John Mauldin’s Strategic Investment Conference for nearly 15 years. It is simply the best investment conference anywhere, period. Due to the virus, he had to cancel the in-person gathering this year. Instead, though, he has put together a virtual conference with the ultimate dream team of economists, geopolitical thinkers, technology and futurist experts, and sociological and political insiders. They will be covering literally everything happening not only in the investment world, but also in the political/geopolitical/social/technology worlds. There will be almost twice as many speakers. Many are famous investors and economists you will know. Some you’ve never heard of before. All of them are brilliant. And as John so famously does, the conversations are carefully crafted to figure out how were going to get through the next six months and what the post-vaccine world will look like. And the virtual conference is relatively inexpensive.
John wrote a very personal letter describing the entire conference, the speakers, and why he chose them. I highly recommend you read it. You are really going to want to participate. From John:
Better to have a roadmap with an idea of where to go than simply to walk into the future without a plan. Join me. You know you not only want to, but you need to. This will be a once-in-a-lifetime event, and you don’t want to miss it.
I agree. The SIC has always been the highlight of my year. This year, I’ll be watching it from the comfort of my home. Post conference, you and I will have access to the video recordings and the transcripts, so you can tune in live or catch up later.
Here is the link to his letter. I hope you can join John and me as we journey together into a fabulous and tumultuous future.
Coffee in hand? It’s go time. You’ll find the link to “The Merciless Mathematics of Loss” piece and Trade Signals below. And a picture of a masked IPA lover in the personal section. Have a great weekend and thanks for reading!
If a friend forwarded this email to you and you’d like to be on the weekly list, you can sign up to receive my free On My Radar letter here.
Follow me on Twitter@SBlumenthalCMG
Included in this week’s On My Radar:
The Merciless Mathematics of Loss
Trade Signals – NDR CMG Long/Flat Model Remains a Buy; Investor Sentiment Signaling Extreme Pessimism (S/T Bullish)
Personal Note – Golf
Learn More
The Merciless Mathematics of Loss
“It’s a little-known but startling fact: The average buy-and-hold stock market investor spends 74% of his or her time recovering from cyclical downturns in the market (from 1900 – May 2015).” That’s according to well-respected Ned Davis Research, Inc. in Venice, Florida.
It raises a big question: How is it possible that investors spend three quarters of their time just getting back to the starting line? The answer is explained by the unforgiving mathematics of loss: When investments lose ground, they must make up more ground, percentage-wise, just to get back to even.
In a picture it looks like this:
Please click HERE for the full whitepaper. Please share it with your children.
Trade Signals – NDR CMG Long/Flat Model Remains a Buy; Investor Sentiment Signaling Extreme Pessimism (S/T Bullish)
April 29, 2020
S&P 500 Index — 2,938
Notable this week:
I often say that the Ned Davis Research CMG U.S. Large Cap Long/Flat model is my favorite weight of trend evidence indicator for U.S. large company equities/funds/ETF indices. It is an intermediate-term trend indicator with the objective of identifying the primary market trend. Because it uses a mix of trend indicators with a bias towards intermediate- and longer-term price trends, as well as a mean reversion indicator, the sharp and quick market decline did not cause the process to trigger a sell signal. While the weight of trend evidence caused the overall strength of the indicator to weaken, the starting level was a market at a record high with advancing stocks vs. declining stocks, the advance/decline line, also at a record level. Of course, the global pandemic suddenly hit and the fastest crash on record followed. Today, the model score is 60. When it drops below 50, that’s the signal to protect against the downside. Should stocks decline into May/June, as is my best guess, I suspect the NDR CMG U.S. Long/Flat signal will turn to a sell. Time will tell.
Interestingly, the NASDAQ Index 200-day Moving Average Trend never signaled sell. It remains in a buy and tech has been one of the biggest sector gainers. You’ll find the balance of equity indicators below.
The Zweig Bond Model remains in a buy signal, suggesting long exposure to high quality bonds (lower yields), the CMG Managed High Yield Bond Program remains in a sell signal and gold continues to shine.
Not a recommendation for you to buy or sell any security. For information purposes only. Please talk with your advisor about needs, goals, time horizon and risk tolerances.
Click here for this week’s Trade Signals.
Personal Note – Golf
“If I see a fin in the water, I’m not going swimming.
I don’t care what the lifeguard or the governor says. I’m not going in.
I’m 250 lbs., who do you think the shark is going to go for? ME!”
– Wade (my best friend)
Wade concluded by saying, “Just like it is with the virus, I’m not going in.” I think that is how a lot of people are feeling. It will take a long time for the pandemic fog to clear and business to get back to normal.
The golf courses are opening up in Pennsylvania today. The weather looks good and I’m planning on playing. No caddies allowed and other distancing rules in place, but I’m happy and I know my kids are happy too.
As you probably know by now, I do love red wine and a good IPA. I rented a U-Haul truck and drove to NYC to help daughter Brianna move out of her apartment yesterday. A large couch and some other things needed to be sent home. I drove up with little traffic and apologized to the clients I spoke with by cell. It was loud in that U-Haul.
All went well with the move but NYC sure did feel odd—a little zombie-apocalypse like. We are social beings and the distance challenges remain. After dropping off the U-Haul, I hit my favorite craft beer store on the way home.
If you like IPA, track down Fire, Skulls & Money, from Toppling Goliath Brewing Co. Perhaps a bit on the nose for the times. It’s new to my top ten! Yummy.
Wishing you a cold IPA, tasty Manhattan, fine red wine, or whatever you like best.
Have a great weekend!
We will win! Stay safe, stay well, hang tough!
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Warm regards,
Steve
Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Executive Chairman and CIO. Steve authors a free weekly e-letter entitled, “On My Radar.” Steve shares his views on macroeconomic research, valuations, portfolio construction, asset allocation and risk management.
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Follow Steve on Twitter@SBlumenthalCMG and LinkedIn.
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A good explanation why deflation may be our first stop even though this is counterintuitive to what the fed is currently doing.
Very interesting and a good read, but could it have been posted elsewhere and a link provided instead? This is a lot of scrolling to get past.
Sorry , technical difficulties. I thought I copied the link only.
“But ultimately, how attractive are Treasurys yielding 1% or less?”
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Pretty damn good, Blumenthal.
He is underestimating the incoming negative impact. And worrying about return ON principal rather than return OF principal highlights it.
Anyways, he never heard of capital gain on bonds before, I suppose.
I’m digging that old school stereoization: percussion hard left, bass hard right.
Interesting: McCartney wrote that song, recorded a demo, then gave it to Badfinger.
I’m still in the inflation camp with the FED throwing more money at the problem. The FED was unloading their balance sheet 2 years ago and had to stop doing this last summer and fall.
My question to those who believe the FED handing out money is deflationary, when do you expect the FED to sop up this excess liquidity?
I think the more appropriate Musical tribute is from “Who’s Next”, the song ‘Won’t Get Fooled Again’.
Com’on Mish!
Summary Bailout History
Mid 90’s- 98 billion bail out
2008 – 0.85 trillion bail out does not include 4 trillion taken by FED balance sheet so say about 5 trillion total.
2020 2.2 T+ 0.5 T + 9 T FED(??) = ?? 12-14 trillion doesn’t make me flinch sounds about right.
2026 35-50 Trillion bailout.
2031 100 Trillions bailout….. This will be the one that really has an impact and will start to change things. How? not sure…..
We are still one solid bailout away from really running into trouble!
Yea baby soon we will not be paying taxes. Why pay taxes when it’s only about 5 trillion they collect that is nothing in the scheme of bailouts!
Kudos for the Badfinger link, they were underrated.
The TARP bailouts of 2008 eventually ballooned to over $16T. This round of bailouts sees us throwing around even larger amounts up front, which makes me wonder what the final tally will be.
As debt default begins to steamroll, money destruction will be massive. Debt default in dollars is not just limited to the US. Many countries worldwide have debt which is borrowed in dollars which will be defaulted on. The government is attempting to slow the effects of debt destruction by inducing give away money into the system in the hope that the economy will pick up following the lifting of lock downs. The problem is the government programs amount to a small fraction of the money destruction, and in the long run will be insignificant other than political value.
The downside is that it is adding massively to the debt, and the debt has to be serviced. Current US debt service amounts to nearly 20% of the current budget. It would not surprise me to see that number double over the next couple of years. Especially when you factor in the loss of government revenue due to lower tax receipts.
It does not take a physic to see where this is heading. We are in a very similar situation to 1929 depression when the government went deeply into debt while simultaneously losing massive revenue. The only available course of action was a massive tax hike. Top tax rates went to 90% but tax increases were felt by all taxpayers.
The bad news is your home and investments are going to be worth a lot less in the future, and that you will probably have to work for lower wages, and your taxes will be going up.
But the good news is you are getting a free $1200, and a few months of unemployment before reality begins to set in……..
Actually, everybody is handing out money, no conditions attached: upstairs and downstairs. The only consistent policy is; the prudent get screwed.
Not just “the prudent.” The competent in general.
Anyone with the aptitude to create value, is screwed when the last remnants of any connection between creating anything of value, and being in a position to consume value, is 100%, completely severed.
In America today, someone living under a freeway bridge shooting smack, is almost certainly a MORE productive member of society, than anyone running a company and living in a ten million dollar house. Illegal border jumpers are much more valuable to America, than anyone living in Manhattan penthouses. Any given inmate, in any American prison, have done much more productive and valuable work in their lives, than the US president and administration, the US Congress and all fortune 500 CEOs; combined.
Pith
RE: “The Fed will make the claim that future economic growth and good government policy decisions will make it possible to service whatever debt they issue”
I’m not a “finance guy” like so many here, but it seems to me that when interest on the debt they issue exceeds GDP … game over in some absolute sense. And I’m sure the game is effectively over way before that point. Isn’t the only debate about how much before that point?
Any economically meaningful interest on debt have been higher than “GDP” (whatever cocked up, arbitrary construct that is) for a long time. Cue lower interest rates. Then negative ones. Then jubilees. The point of theft, is the stealing. The rest is simply obfuscation.
I think it is safe to say the interest on US Dollar denominated federal debt will never exceed GDP as long as the Fed buys the debt with new credit and has the goal of suppressing interest rates. People talk about the long end of the curve going up as an indicator of problems, but can’t the Fed buy the long end and everything in between? Their credit is limitless and costless to them. My point to@Mish is that if the Fed does enough of this during a severe economic contraction which cannot be fixed by overpaying for stuff, then there could possibly be hyperinflation because the value of the dollar is ultimately underpinned by economic activity. Grow the supply of dollars fast enough and long enough without economic growth, and there will be a surplus of dollars chasing little economic activity. In a severe economic shock with limitless dollar creation, dollars might become toilet paper (especially if there is a shortage of actual toilet paper at the time).
Not a “finance guy” myself. One can find convincing arguments on both sides. I think it all depends on what the Fed and Treasury decide to do. If social norms prior to COVID-19 do not return for a generation, then no amount of fresh money will fix that and the Fed will either buy many assets with fresh money to support prices (lots of dollars and little economic activity – stagflation or worse depending how aggressive they are), or else there will be massive defaults and foreclosures (shortage of dollars and little economic activity – deflation). So far the Fed has promised to buy everything that needs buying. Is there a limit? Could be. In that case I can see how@Mish would be correct.
I would like to know why@Mish thinks there is a limit to Fed intervention in asset prices. I think he may have a more complete understanding of the situation than I do.
The FED and central banking cabal’s obsession with buying everything really negates the very reason for their existence, to put an arms length between government expenditures and money creation.
It would be just as well if the treasuries printed as much money as they needed, and got rid of the superfluous central banks.
I guess the discussion comes down to price vs. market value vs. intrinsic value. And again, finance/accounting/markets are not really my thing so I’m just tossing out thoughts, not speaking as any kind of “expert” …
I don’t know what would stop the Fed from buying the entire stock market at any prices and pushing its market value to a googolplex. Any party can always choose to pay whatever they wish for any asset … if they have the “currency” … setting the market value of that asset. Only the Fed can “create” whatever “currency” they wish to pay …
But sooner or later everyone realizes there is a gigantic fraud at work (even the Fed which knew it all along), that market value has lost any relationship at all to intrinsic value, and then nobody will buy the stock market at current prices. The stock market has been inflated to the point that it is useless beyond whatever “intrinsic” value someone else might see in it.
I guess that’s when asset deflation takes place … if the Fed which owns the entire stock market wants dollars or some other asset or commodity rather than stock.
End of rambling …
Not really deflationary vs gold.
Too big to fail and can’t service accumulated debt? The Fed now lends limitless money through its illegal SPV (illegal in the spirit of the law but not the letter of the law). Can’t service that debt either in the future? Why wouldn’t the Fed just keep handing out more credit to service what was previously issued? Since the money is being washed through debt issued by the US Treasury, the Fed is free to create as much debt as it likes to keep servicing what was previously issued. Nobody other than the Fed/Treasury SPV needs to buy it. Mortgage backed securities going into default? Have the Treasury buy those at face value and hold them with the assurance they will be worth more eventually (in nominal terms). The Fed will make the claim that future economic growth and good government policy decisions will make it possible to service whatever debt they issue and all the “temporarily” distressed assets will recover (in nominal price) no matter how much was overpaid at the time. What is stopping them from going down this path? How does a large debt overhang force a deflationary outcome in this context?
“You better hurry cause it’s going fast.” (Yeah, but it has a production cost of zero and will never run out, so that might be a factor.)
“you make it sound as though the Fed is going to run out of money or stop QE. “
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Japan
Where is their inflation?
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“How does a large debt overhang force a deflationary outcome in this context?”
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Federal Reserve operations do not leak out into main street economy. QE operations are sterilized by excess reserves … which Federal Reserves pays interest on to keep them there. Debt MUST be serviced … which detracts from current / future consumption.
Now, if you are proposing some sort of helicopter money to prop inflation, must come fiscally. UBI – if everyone were to get a monthly check in the mail – would crater business as only “dopes” would be stupid to enough to work.
NO sustainable inflation till debt addressed.
Yeah, but Mish’s definition of deflation only concerns balance sheets, not general prices as I understand it. See this:
“Deflation is not really about prices. It’s about the value of debt on the books of banks that cannot be paid back by zombie corporations and individuals.”
Based on that definition, there’s been ZERO deflation in Japan. As long as you have the ability to print infinite money to prop up zombie companies, by definition deflation can not happen.
I’m not exactly on same page as Mish (but close) regarding definition.
For years, I’ve said Federal Reserve monetary policy is disinflationary …. and ultimately deflationary when asset bubbles burst (we’re at onset NOW).
You or Mish haven’t explained how this burst is supposed to happen. If we are doing free markets, then YEAH, it’s super EASY to imagine how it could happen, but if the Fed were to buy every single debt out there, throw them into their vault, and never marked them up to market, by definition, deflation can NOT happen.
I’ve said it before. Who will take the Fed up to task? Until a credible answer is given, your thesis is impossible.
Well your answer might be: people will lose confidence in the US Dollar. Still not a deflation event. Because the value of those bonds in the Fed’s books would still be at par.
With the Fed around doing whatever they want, deflation is IMPOSSIBLE.
“but if the Fed were to buy every single debt out there, throw them into their vault, and never marked them up to market, by definition, deflation can NOT happen.”
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Won’t happen.
The Federal Reserve’s “power” resides in players illusion that its powers are omnipotent. Its balance sheet now > $6 trillion … and will likely double before its over. So what? US stock market > $30 trillion, US total debt > $70 trillion. That is over $100 trillion. Do you seriously think Federal Reserve balance sheet will get near there? Currency ($US) will be destroyed well before.
At SOME point the Federal Reserve will say “no mas” … and then repricing will commence in earnest.
As I suspected in my previous statement, you went into that well of “The US Dollar will be destroyed, etc”. You are talking about an entity that’s missed all the stock market bubbles, engaged in dubious policy driven by 2% inflation, and yet now you are expecting that they know the exact dollar amount at which hyperinflation will happen or not.
Well America is the most exceptional country on earth even after this disaster no? This country is well and truly f***ed.
Well, you didn’t answer the question you posed. Will the Federal Reserve buy up everything?
Found it quite interesting the comment other day from Jeff Gundlach that the Federal Reserve has not bought a single corporate issue yet. Federal Reserve jawbones with the best.
I’ll await your answer.
Japan is still one of the biggest creditor nations on trade and has a large positive asset balance with other countries (especially the US). The US is the largest debtor nation and has a negative asset balance with other countries.
I.E., Japan owns net assets outside their country and is busy producing more than they consume. The US is selling its assets and is consuming more than it produces.
Are you saying that does not matter as US Debt/GDP approaches Japan levels?
Japan has been running mostly trade deficits past 10 years.
US is THE reserve currency on the planet.
Being a “reserve” has its privileges. One, being mercantile economies work to keep their currency cheap in relation to fuel exports.
US gets the benefit of “cheap” stuff … while other countries get $US … and jobs.
“Japan has been running mostly trade deficits past 10 years.” Deficit from 2011-2015. Fairly neutral balance 2016-2020? Constant surplus prior. I give you they are not what they used to be.
Isn’t continuation of the US Dollar reserve status what is at issue here? Central banks can either decide to keep it that way or not. I do think they will keep it that way until there is a replacement for the US Dollar on deck. So, I do agree with you and Mish they will opt for a deflationary contraction given a choice between that and destruction of the Dollar. They would have to surrender their “support asset prices at all costs” policy before that could happen, wouldn’t they?
“So, I do agree with you and Mish they will opt for a deflationary contraction given a choice between that and destruction of the Dollar.”
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$US = Alamo
Germany had excessive war debt and hyper inflated its way out. Trump will force cash into the system whether we need it or not. Already most people are making more not working between the stimulus and UE benefits. Most of those I bet will defer paying any of their obligations despite having more money than if they worked.
2 things.
$US is THE reserve currency in the world. Has its privileges. (Not to mention other major country / currency are doing what US is doing … or worse.)
Whatever the Federal Reserve is doing is NOT leaking out to main street. Where are the Weimar wheelbarrows? The bottom 80% has no cash and hanging on by finger nails.
“Whatever the Federal Reserve is doing is NOT leaking out to main street.“
I keep reading this. The money was spent by government when the treasury bond was issued in the first place. Financed by savers. That was the original purpose of the issue, to provide government with spending money.
Then the Fed comes along and buys those bonds by issuing more debt (USD) and returns the money to the savers. So no new government spending at the QE stage. The argument then goes those savers (being savers) spend it on financial assets, forcing up prices and yields down. (Asset price inflation).
However governments & politicians are realising this is a good trick. They can now issue bonds in the realisation that they do not need tax revenues to repay either the bonds or the interest. All they need to do is arrange for the central bank to repurchase them at a later date with new debt (being USD). This is how they will repay furlough costs, bail outs, hand outs etc. So you’re correct there haven’t been any Weimer wheelbarrows so far, because QE has been a response.
Going forward however, more spending & bond issuance than otherwise will take place, solely because they know they can use QE to purchase the bonds. To the politicians it would seem the Government is onto a win, win, a free lunch. They can can spend as much as they need or want without having to worry about raising taxes and get inflation up to their 2% target. One day they’ll overshoot.
“Then the Fed comes along and buys those bonds by issuing more debt (USD) and returns the money to the savers.”
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When the Federal Reserve conducts its QE operations it purchases bonds on the open market from primary dealers (Big Banks) … who then deposit the proceeds at the Federal Reserve as excess reserves … which FR pays interest on to keep them in check.
“who then deposit the proceeds at the Federal Reserve as excess reserves”
Thanks for that, I’ve learnt something, is that mandatory? Supposing they had ample reserves already, & the treasuries they had held weren’t part of their reserves.”
I get tired explaining how the price of chicken breasts or hamburger at one grocery store, in one town in the United States is not a basis for arguing there’s rampant inflation occurring.
And lest we forget the basics of the laws of supply and demand: The buyer always sets the price.
But the price of stocks in one stock market, in one town in The United States, is exactly such basis.
“A Very Deflationary Outcome Has Begun
Why?
It’s the debt stupid!”
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Class Dismissed
I am still not convinced. Do I need a reeducation camp? What the fed is doing in unprecedented and will do even more Enron style accounting gimmicks to pump in liquidity. Remember they said they have “unlimited” resources. They will do anything and everything to prevent deflation. To painful for the govt and elitists. Inflation is their friend as the indebted benefit the most from it while fucking the financially responsible. The seeds for a civil war are being sewn.
They are desperate and completely out-of-control.
What they are doing is utterly insane (as well as UNLAWFUL) and will ultimately lead to their own demise.
There is a brilliant article by Sven Henrich over on Zero Hedge which sums this all up, entitled “The Fed Has Poisoned Everything”.
I would like to think that this would only lead to the Feds own demise. But who’s money are they using?
“The Fed Has Poisoned Everything”.
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They have destroyed value / fundamentals.
I haven’t – for years – bothered to put pencil to paper to work out cash flow on any investment. “Investment” now is dependent on Greater Fool Theory.
We are going to have ZERO organic capital formation from now on because they will NEVER be able to raise interest rates. Think about what that means for productivity, GDP growth and income/wealth inequality. None of it is good.
I read Henrich’s piece. Excellent work, and absolutely true. And the Powers That Be don’t give a damn because they know it’s funny money. I get a kick out of people who say “The Fed doesn’t have the authority to do X”. They either will ignore the law or simply go to Congress and get a new one that allows them to do whatever they want. It’s the Crisis, don’t you know. Anything goes.
I wonder how many of these companies will still go down, but meanwhile the execs can get a big payday with borrowed money? I doubt if the upper management is to be held accountable in the event of a failure later.
The entire point of this, is to steal on behalf of the stupid, idle connected leeches. There is no other, supposedly more justifiable, purpose. The theft is all there is.
It appears that the song writer has time traveled into the future to 2020 and then went back into the seventies.
The musical tribute couldn’t be more fitting.
Never forget that whenever Fed hands out money to corporations, it’s the tax payers who bear the cost.
Handing out a portion of our future earnings. How generous of them.
Tax payers, AND even those who don’t pay taxes.
The Fed is even robbing 5 day old babies of possibility of a life.
Please explain how the “taxpayer” bears the cost? Taxes are constantly being reduced. Interest rates (and cost of carry) are being reduced to zero. The Fed can conjure up as much money as they want with a few keystrokes. There is no limit and it doesn’t matter. The debt will never be paid and everyone on planet Earth knows it.
If its to good to be true….
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Please explain how the “taxpayer” bears the cost?
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It’s “taxpayer” not in the “paid for with nominal taxes” sense. But rather “taxpayer” as in “someone doing some work to produce some value” sense.
There’s only so much real value produced and in existence. The Fed putting Washington’s face on paper pieces, nor adjusting zeros, don’t add to that pile.
Ergo, any gain “corporations”, junk bond owners and other FIRE Racket leehces get from this (which is quite a lot, since many/most would otherwise go bankrupt and lose it all), by simple arithmetic has to be taken from those not directly receiving the fresh print.
As long as The Fed is not actually creating real value, they simply cannot “help” some, without at the same time robbing others. That’s, literally, as obvious as 2+2.