Inflation, Debt Monetization, MMT; “Earnings are Pesky
Details”
By the Curmudgeon with Victor
Sperandeo
Introduction:
Regretfully, we've run out of fresh insights to share with
readers about the totally dysfunctional U.S. monetary/fiscal policies, corruption and "off the wall" markets.
All that Victor and I have learned about the economy and markets
(combined 110 years of experience) now appears to be obsolete, useless and mostly
counter-productive.
Therefore, we present illuminating charts and excerpts
of what others are saying about the extent of the overt manipulation of
markets, the resulting distortion of their values, and the "Alice in
Wonderland" way they now work. Victor
weighs in with a few choice comments.
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WSJ OpEd - How the Fed Is Hedging
Its Inflation Bet:
The Fed has bought (or offset by buying similar maturity mortgage backed
securities) 76.4% of all the federal debt issued during the pandemic, almost
nine times the share of federal debt purchased by the Fed during World War II.
The Fed now holds 33.6% of all publicly held federal debt, roughly the same
percentage of the debt held by all other American investors combined. The Fed
also holds 35% of all federally insured mortgage-backed securities.
Victor: Is Inflation Transitory?
The discussion of inflation being “transitory" or
not is laughable if it wasn’t so important. Since inflation is a monetary
phenomenon, this question should be based on the CAUSE of prices moving
higher or lower. Therefore, the question
of will price increases slow from the current level should be restated as:
“Will Fed Chairman Powell slow the quantity of QE/money printing?"
Of course not! Thereby, inflation will NOT BE
TRANSITORY!!! Yes, prices in some areas
will slow and some will increase, but that is not inflation.
If the stock market rises and house prices (not included
in the CPI calculation) increase 17% next year will that be considered
“inflation?” No, but many non-stock owners will be priced out of buying a home. Do you think that's good
for main street?
Biden's Neo-Populist Economic Doctrine, by Nouriel
Roubini:
The United States has moved into a de facto, if not de
jure, state of permanent debt monetization – a policy that began under
President Trump and Fed Chair Jerome Powell.
Under this arrangement, if inflation were to rise
moderately, the Fed would have to adopt a policy of benign neglect, because the
alternative – a tight anti-inflation monetary policy – would trigger a market
crash and a severe recession. This change in the Fed’s stance represents
another sharp break from the 1991-2016 era.
Furthermore, given America’s large twin deficits, the
Biden administration has given up on pursuing a strong-dollar policy. While it
does not favor a weaker greenback as openly as Trump did, it certainly would
not mind a currency shift that could restore US competitiveness and reduce the
country’s surging trade deficit [1.].
Note 1: The U.S. international trade deficit in goods and services increased to $75.7 billion in June from $71
billion in May (revised), as imports increased more than exports. (August 5,
2021). Year-to-date, the goods and services deficit increased $135.8 billion,
or 46.4 percent, from the same period in 2020. The trade deficit was $451
billion for all of fiscal year 2020.
Real Investment Advice MacroView: MMT – When Theories Collide With Reality:
There is no doubt that since 2020 both Republicans and
Democrats alike have shunned fiscal responsibility for the short-term
gratification of MMT (Modern Monetary Theory).
From the $2.2 trillion CARES Act to the $900 billion
HERO Act, to President Biden’s $1.9 trillion American Rescue Plan, the
government has plunged into MMT with both feet.
If you are unfamiliar with MMT, Stephanie Kelton,
PhD and Stony Brook University Professor, describes it as a macroeconomic
school of thought or paradigm that explains how a sovereign country that
controls its currency behaves. Stephanie explains:
“MMT starts with a simple observation, and that is that
the U.S. dollar is a simple public monopoly. In other words, the United States
currency comes from the United States government; it can’t come from anywhere
else. So, what that means is that the federal government is nothing like a
household.
For households or private businesses to spend they’ve
got to come up with the money, right? And the federal government can never run
out of money. It cannot face a solvency problem with bills coming due that it
can’t afford to pay. So it never has to worry about finding the money to be
able to spend.”
However, while the Government can indeed “print money
to meet all obligations,” it does NOT mean there are no consequences.
Victor's MMT Rebuttal:
Let me reiterate that in the history of the world
(since 900 AD), all fiat currencies die. I've discussed this in detail here and here. Thereby, Stephanie Kelton's thesis on unconstrained money printing
with no consequences is false. MMT will eventually cause hyperinflation, as It always
has. To think differently is the definition of “insanity.”
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Here are a few charts to illustrate the false premise of "money
printing" to finance budget deficits without any negative effects:
Curmudgeon Note:
In a presentation published on August 5th, the Congressional Budget Office detailed its recent projection that the federal budget deficit would hit $3
trillion this year and average $1.2 trillion per year through 2031.
The allure of MMT is strong amid the current
economic upheavals. Such is particularly the case since it makes possible every
progressive program from unlimited public works, federal jobs, uneconomic green
energy schemes, “Medicare for all,” free college, free housing, and a host of
others. However, as the Mises Institutes correctly notes:
“The promise of something for nothing will
never lose its luster. So MMT should be viewed as a form of political
propaganda rather than any real economic or public policy. And like all
propaganda, we must fight it with appeals to reality. MMT, where deficits don’t
matter, is an unreal place.”
We will likely continue to pay the price of misguided
economic policies that only work in the mathematical formulas generated in
“Ivory Towers.” Still, in the “real world,” these theories, while well
intentioned, always yield a negative result for those it was supposed to
help.
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Citi's Economic Surprise Index: Straight line decline and now negative!
The Citi Economic Surprise Index measures the
pace at which economic indicators are coming in ahead of or below consensus
forecasts. When the index is negative, it means that the majority of reports
are coming in below expectations, while a positive reading indicates that most
data is coming in ahead of expectations.
Having peaked at 275 in the 3rd Quarter 2020, a straight line decline
took the index negative this week. The
current reading is -3.4, as of August 7, 2021.
Bloomberg Opinion: Weak U.S. Economic Growth
for Decades
Curmudgeon Comment: It's ironic that this
period of exceptionally slow economic growth has coincided with the longest and
strongest U.S. equity bull market of all time.
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SOGEN's Albert Edwards in a note to clients:
Real yields continue to collapse
to new record negative lows, falling in the US below MINUS 1.2%.
Chairman Powell was at a loss to explain the drivers behind this recent decline
in yields, so attributed it to technical factors (always a cop-out when you
have no idea) as he thinks the fundamentals remain strong. Really? I know central
banks tend to live in a parallel universe where they hear no evil, see no
evil and speak total nonsense, but just look at the collapse in the
Citi economic surprise index (charts above) for hard data (even including
the more upbeat survey data, US economic surprises have slumped into negative
territory). This together with the increasing threat of imminent tapering -
which usually leads (perversely) to falling bond yields - leads me to think
that the U.S. bond market rally is actually wholly explicable (i.e. it's
forecasting a U.S. recession).
John Dizard's FT column
(on line subscription required) is always worth a read. This week he discussed
the potential for an old-fashioned inventory-led recession next year
when the current bottlenecks affecting container shipping dissipate. All that
“delayed stuff, when it finally lands where it is supposed to, looks as though
it will create a big enough pile to trigger a bad inventory recession.
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Stock Market Valuation: Shiller P/E for S&P 500:
The Shiller P/E (or CAPE ratio) is a valuation measure
that uses real earnings per share (EPS) over a 10-year period to smooth out
fluctuations in corporate profits that occur over different periods of a
business cycle. At 38.54 (as of August 6th close) it's now at the
second highest level in history:
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According to Bloomberg,
$27 trillion has been added to equity values in a little over a year.
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The New Era of Investing and Meme Stocks:
To the best of our knowledge, we've never seen such
greedy, reckless speculation rewarded for such a long period of time. Whatever happened to the saying "Bulls
and bears make money, but pigs get slaughtered?"
Trading volume and the number of trades from
"retail investors" in the first half of 2021 surpassed all of
2020. “The retail revolution that began last
year marked the beginning of a new era of investing—and we saw that
continue throughout the first half of 2021,” said Bob Cortright, founder and
CEO DriveWealth.
So called “meme stocks" were top-of-mind
with global retail investors, as AMC Entertainment Holdings Inc. (AMC)
was one of the most traded symbols across all regions. GameStop Corp. (GME)
also continued to garner interest across the globe. A newcomer to the scene,
Coinbase (COIN), also made an impact with retail investors as
cryptocurrency trends continue to pick up steam.
In June alone, "retail investors" bought
nearly $28 billion of stocks and exchange-traded funds on a net basis,
according to data from Vanda Research’s VandaTrack.
More than 10 million new brokerage accounts are
estimated to have been opened in the first half of this year, according to JMP
Securities. That's more than in all of 2020.
Robinhood Doubles in Price in 3 Days......by Pam Martens and Russ Martens
Robinhood (the enabler of
meme stocks) is the poster boy for the craziest, most unregulated
stock market era since 1929. That one ended in tears. This one will also.
Robinhood is the trading app used by millions
of young, inexperienced retail investors to trade stocks and options on their
mobile phones. The company went public last Thursday on the Nasdaq stock market
(the wonderful folks who brought us the dot.com crash in 2000). Robinhood
closed the trading week last Friday with a share price of $35.15 – an
embarrassing 7.5 percent below its IPO price of $38. Curiously, so far this
week, through Wednesday’s closing price of $70.39, the stock has soared 100.256
percent from Friday’s closing price.
In an efficient, regulated stock market that is
capable of engaging in its core function of price discovery, Robinhood would
not have doubled in price in three trading sessions. The company lost $1.4
billion in the first quarter of this year and has yet to report its second
quarter earnings or even announce the date that it will report those earnings –
or lack thereof.
But in this crazy stock market era, earnings are
just pesky details. The business media actually reports on how many times a
company’s name is mentioned on Reddits’ Wall Street Bets forum. For example,
Reuters – an international business wire – reported yesterday that Robinhood
“was the most mentioned stock on WallStreetBets, the Reddit platform at
the center of this year’s ‘meme stock’ rally, over the past 24 hours, according
to sentiment tracker SwaggyStocks.”
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Charlie Munger, vice-chairman of Berkshire Hathaway on the run up of Game Stop and other meme stocks:
“That's the kind of thing that can happen when you get
a whole lot of people who are using liquid stock markets to gamble the way they
would in betting on race horses. And the
frenzy is fed by people who are getting commissions and other revenues out of
this new bunch of gamblers. And of course, when things get extreme, you have
things like that short squeeze."
"It's not generally noticed by the public, but
clearinghouses clear all these trades," he said. "And when things get
as crazy as they were in the event you're talking about, there are threats of
clearinghouse failure. So it gets very dangerous."
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Closing with a Cartoon:
We close with a cartoon which we hope you enjoy.
ILLUSTRATION: DAVID GOTHARD
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Stay healthy, enjoy life, success, good luck and till
next time….
The Curmudgeon
ajwdct@gmail.com
Follow
the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has
been involved in financial markets since 1968 (yes, he cut his teeth on the
1968-1974 bear market), became an SEC Registered Investment Advisor in 1995,
and received the Chartered Financial Analyst designation from AIMR (now CFA
Institute) in 1996. He managed hedged equity and alternative
(non-correlated) investment accounts for clients from 1992-2005.
Victor
Sperandeo is a historian, economist and financial innovator who
has re-invented himself and the companies he's owned (since 1971) to profit in
the ever changing and arcane world of markets, economies
and government policies. Victor started
his Wall Street career in 1966 and began trading for a living in 1968. As
President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the
firm's research and development platform, which is used to create innovative
solutions for different futures markets, risk parameters and other factors.
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