A weekend topic starting with the Idaho Mountain Express. “In advance of the busy summer tourist season, Ketchum city officials briefly considered allowing a ‘tent city’ on the edge of town to provide temporary housing for workers. In a place where the median sales price of a home was recently pegged at $775,000 and riches abound, some in the community were shocked at the desperation.”
From Bloomberg. “The Bloomberg US Treasury Index has returned minus 2.5% in 2021, poised for the first yearly slump since 2013. In records stretching back to 1974, it’s never fallen two years in a row. With yields still so low by historical standards and the Federal Reserve poised to jack up interest rates to battle inflation, some investors are bracing for more losses this year. ‘There is a first time for anything, and the chances of a second straight negative year for Treasuries is higher given the limited room for yields falling,’ said George Goncalves, head of US macro strategy at MUFG.”
“Another aspect of the Fed’s tightening cycle during 2022 that may well push up long-dated Treasury yields and impair returns is how the central bank manages its vast balance sheet, which has more than doubled in size to nearly $9tn during the pandemic.”
From Politico. “Between 2008 and 2014, the Federal Reserve printed more than $3.5 trillion in new bills. To put that in perspective, it’s roughly triple the amount of money that the Fed created in its first 95 years of existence. Three centuries’ worth of growth in the money supply was crammed into a few short years. Thomas Hoenig was the one Fed leader who voted consistently against this course of action, starting in 2010. In doing so, he pitted himself against the Fed’s powerful chair at the time, Ben Bernanke. Hoenig lost his fight.”
“While Hoenig was concerned about inflation, that isn’t what solely what drove him to lodge his string of dissents. The historical record shows that Hoenig was worried primarily that the Fed was taking a risky path that would deepen income inequality, stoke dangerous asset bubbles and enrich the biggest banks over everyone else. He also warned that it would suck the Fed into a money-printing quagmire that the central bank would not be able to escape without destabilizing the entire financial system.”
“On all of these points, Hoenig was correct. And on all of these points, he was ignored. We are now living in a world that Hoenig warned about.”
Two reports from the Globe and Mail. “Bank of Canada officials spent much of 2021 assuring people that this period of high inflation would be relatively short-lived. The shape of monetary policy next year could depend to a significant degree on whether Canadians continue to believe this narrative. This situation requires deft communications from the central bank. Inflation has become a major topic of everyday conversation. That provides a volatile backdrop to attempts by the bank to change its narrative about inflation and lay the groundwork for interest-rate hikes, which it expects to begin in the middle quarters of next year.”
“As he launched into a spirited defence of the massive economic stimulus the Bank of Canada and the federal government have provided during the COVID-19 pandemic, Stephen Poloz leaned on two of his favourite weapons. The metaphor – an explanatory tool for which he became famous during his seven years as Bank of Canada governor, from 2013 to 2020. And the photon torpedo. ‘When you’re using your photon torpedoes to counter the black hole that’s drawing the Enterprise in, you don’t send out one or two. You use as many as you think will, for sure, get it done,’ Mr. Poloz said. ‘When it’s done, you say, ‘There, we’re out of it, we’re good now. Let’s get back on course.’”
“‘Some of the forces that [Galbraith] was wrestling with are present again, and some of them are reversed – the big one being demographics,’ he added. ‘One of the big things that was disrupting the 1970s was the arrival of people like me into the work force, from the baby boom. Now, one of the things that will disrupt it is our exit. This sort of 50-year experiment – economic growth and interest rates and so on were boosted for 50 years. Most of us think of that as normal, that 50-year period, but actually, it was quite abnormal, in the broad sweep of history.’”
From Bloomberg. “It’s been a record year for China’s internet moguls, but not in the way most would have hoped. The country’s 10 richest tech tycoons lost $80 billion in combined net worth in 2021, according to the Bloomberg Billionaires Index, amid widescale crackdowns by Chinese regulators. The drop represents almost a quarter of their total wealth and is the largest one-year decline since 2012, when the index started tracking the world’s richest people.”
“‘The best days for China’s tech sector are behind us for now,’ said Chen Zhiwu, director of the Asia Global Institute at the University of Hong Kong. ‘Without access to American capital markets, the history of China’s tech sector would have been very different. I think good days will return at some point after some soul searching and reassessment of what drove the golden days of the past two decades.’”
From GM Authority. “A new report published by multinational financial firm KPMG indicates used car prices could decline by 30 percent in the near future as the effects of the global chip shortage wanes. The report predicts chip suppliers will eventually catch up with demand for new vehicles, allowing automotive manufacturing to shift back into high gear. If this happens, KPMG believes the used car market ‘could collapse,’ sending average used car prices plummeting by about 30 percent from today’s elevated values.”
“While elevated used vehicle prices have caused stress for many Americans, a sudden crash in used car prices could also spell trouble for the average working-class family. KPMG says that roughly 17 million consumers currently own ‘vastly overpriced used vehicles,’ and that many of these purchases were finances, leading to potential risks in the auto lending business. Dealers would also be stripped of some profit as inflated prices normalize, which could cause financial strain among auto retailers, as well.”
From Frank Giustra. “For the better part of 20 years, I have been pointing to the actions of the U.S. Federal Reserve as the root causes of market and housing bubbles, inequality and, more recently, high inflation. What started out as the occasional Fed reaction to a series of financial crises in the late ’90s, evolved into a permanent ‘free money’ policy that has only benefited Wall Street and the very wealthy.”
“When the inevitable happened and the housing bubble burst in 2008, the Fed and the government’s misguided attempts to bail out the financial system led us into a much more dangerous place. I believe we are now at a point of no return that is unprecedented in history. By keeping rates at near zero and adding several trillions of dollars to the Fed’s balance sheet, the math now makes any return to normality literally impossible. There is simply too much debt in the global system. Normalizing rates would implode the entire system and most asset classes.”
“But if you listen to Fed chair Jerome Powell, along with almost any of the Wall Street talking heads, you would be led to believe that the current $120-billion (U.S.) monthly QE can be tapered, and that rates can eventually be normalized. In turn, the markets trade as if these words are gospel. It’s as if everyone wishes to be blissfully ignorant of several annoying facts.”
“U.S. federal debt has tripled since 2008 and is now touching on $30 trillion. In 2020, the U.S. government spent $371 billion on interest payments on its debt. And that’s at near zero interest rates! If the Fed allowed interest rates to rise in any material way, the U.S. government would either default or — more likely — enter an endless cycle of money printing. Even at current rates and with the ongoing multi-trillion dollar annual budget deficits, the die is cast. We have clearly sailed past the event horizon of an enormous black hole.”
“After 60 years of Fed fund rates averaging five to six per cent, when the 2008 crisis hit the Fed’s monetary policy then landed us in a permanent range that hovers between zero and slightly above two per cent. All attempts to raise rates above two per cent have failed, mostly due to Wall Street market tantrums. Meanwhile, inflation is hovering around six per cent, which means that real interest rates are deep in negative territory to the tune of -4.5 per cent, if you use the 10-year treasury bonds as a measure.”
“So why does the Fed lie and why do market players believe them? Quite simply, the truth would create a panic that nobody wants. They are in an inescapable trap and they know it. The best the Fed can hope for is some divine intervention or, at the very least, that they can kick the can down the road and pray history won’t remember their names. As for Wall Street, they are happy to live day by day encouraging easy money policy to keep the party going.”
“So the Fed pretends. They choose their words very carefully to ensure that fragile markets don’t get spooked, while appeasing the inflation critics with promises of normalization. These are intelligent people who know exactly what they are doing. Greenspan, Bernanke, Yellen and Powell, while in power, will all do what is expected of them and, as we have witnessed, only become critics once they retire.”
“In Yuval Noah Harari’s book ‘Sapiens: A Brief History of Humankind,’ he points out that ‘human beings differentiate ourselves from other life forms by our ability to tell each other (and believe in) stories. These collective delusions — ethics, religion, rule of law, etc. — enable co-operation and progress. One such collective fiction, and a particularly successful one, is money.’ It looks as if we are currently living in a collective delusion of money and markets, aided and abetted by a loosely aligned club of players. God help us.”