Excesses; Fed Chair Has Skin in the Game!
By the Curmudgeon with Victor Sperandeo
At Jackson Hole, WY on Friday, Fed Chair Jerome Powell reiterated the Fed could start tapering its asset purchases this year and short-term interest rates aren't changing anytime soon. Stocks hit record highs (on very low volume) during the speech as investors yet again shrugged off fears of an early pullback in Fed support.
Powell didnt provide a specific timeline for starting scaling back the Feds $120 billion-per-month in bond buying, a program started last year in response to the Covid-19 crisis. While the economy is on a strong path forward, the Fed will be carefully assessing incoming data to see how risks like the delta variant of the virus might impact progress toward its goals, Powell said.
How many times have we heard that gobbledygook? Its amazing to this old timer how events that were supposedly discounted weeks ago are celebrated by the market when they play out as expected. Worse, is when the often-celebrated event doesnt live up to expectations or is a bust (like the U.S.-China trade deal), there is never a sell-off to return to reality!
In addition to the Fed being the ultimate wealth inequality machine, new research suggests that its policies have discouraged productive investments in the real economy. Also, theres an inherent conflict of interest for Fed Chair Powell never disclosed. Much, much more, including Victors incisive comments and conclusions.
Fed Decries a Wealth Gap It Helps Perpetuate, by Lisa Abramowiczs of Bloomberg:
The longer the central bank continues ultra-easy monetary conditions, the more the richest families benefit disproportionately.
Federal Reserve officials often decry the unprecedented disparity between the wealthy and poor. But they usually avoid mentioning the direct role they have played in widening these financial disparities over the past few decades.
The Fed is actively making the wealth gap more pronounced. Its policy of keeping interest rates near zero and buying trillions of dollars of bonds has suppressed volatility and turbocharged asset prices, fueling some of the biggest stock and bond returns in history. As of March, the top 10% of wealthiest U.S. households owned an unprecedented 89% of all corporate and mutual fund shares outstanding. That compares with 84% 15 years ago, before the central bank embarked on any of its quantitative easing programs, Fed data show.
(And what weve argued for years): February research, The Savings Glut of the Rich by Atif Mian of Princeton University, Ludwig Straub of Harvard University and Amir Sufi of the University of Chicago, suggests that the lopsided distribution of wealth is more than a social issue; its dissuading productive investment. Instead, the study shows that wealthy people are parking more of their cash in debt funds, which account for a significant proportion of lending to U.S. governments and households. Basically, the U.S. and lower-income families are becoming more indebted, rich people have more money tied up in debt funds, and less money goes toward fostering innovation and prosperity.
(Powell has) Skin in the Game: FOMC Style, by Dylan Grice
According to disclosures required by the Orwellian-sounding Office of Government Ethics, FOMC Chair Jerome Powells private incentives are for continued inflation of asset prices.
The OGE requires members of the executive to file 278e forms disclosing the source of all income and assets beyond their public pay. The precise dollar value of holdings isnt disclosed in the reports, but broad ranges are.
Its difficult to see where Jerome Powells incentive is to remove the punch bowl as the party is getting started (William McChesney Martins October 1955 speech). It's very easy, in contrast, to see his incentive to add an extra kick to it. Why? Powells net worth is heavily invested in financial assets as per this chart:
We find it noteworthy that around 60% of Powells net investable worth is in (primarily U.S.) equities, a share which is likely much higher today given the stellar performance of U.S. equities since the filing (+39% for the S&P 500).
Equally important is what is absent from the portfolio. In particular, we find it interesting that Powell owns no Treasuries. True, theres an exposure to a more tax-efficient version municipal bonds , but if Powells portfolio is a variant on the classic 60-40, theres a very clear under weighting of nominal assets relative to that framework.
Fed Chairman Powell is no different than any other public official connected to the U.S. government. They all use their knowledge of inside information for personal gain. While Martha Stewart went to jail for insider trading, no one in the U.S. government went to jail for over 12 years.
I submit that the Fed Chair and any member of the FOMC should have their assets managed by a Blind Trust! That would eliminate any conflicts of interest.
Reserve bank credit, or interest-bearing assets on the Fed balance sheet, rose to $8.32 trillion, up $26 billion from a week ago. That $8.32 trillion figure represents a 19% year-over-year increase, and 122% higher than the Feds holdings in August 2019.
The Peoples Bank of China warned in its quarterly monetary policy report earlier this month that the U.S. faces the most severe inflation risk of any major economy, thanks to the fast-growing gap between the money supply and economic output. A bearish pivot from the Middle Kingdom would be no small development: China itself holds some $1 trillion in Treasury's, equivalent to 4.5% of total supply. Foreign creditors as a whole hold a record $7.2 trillion, or one-third of the public debt (The Fed owns ~ 25% of all Treasurys outstanding).
Curmudgeon Comment: So, any way you cut the cake, recent U.S. Federal Stimulus programs have been greater than New Deal government spending after the Great Depression and 7 times spending for the 2009 Recovery and Reinvestment Act!
In 2021 so far, U.S. M&A deals have already nearly reached 2020 levels, with 2,320 deals through Q221 compared to 2,933 in all of 2020.
Most mergers in the U.S. are never looked at by regulators! Slightly more than 2,000 deals were filed to government antitrust enforcers between October 2018 and September 2019, the most recent period reported by the FTC and the Justice Department, which share antitrust duties. The government reviews account for about 10% of nearly 22,000 acquisitions or company investments announced in that period involving a U.S. company, according to data compiled by Bloomberg.
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CB Insights- VC Bull Market (via email):
Startups had a blockbuster quarter for funding in Q22021, raising $156B in funding. Investors piled onto mega-rounds the $100M+ deals accounted for roughly 60% of total dollars invested globally.
An outpouring of mega-rounds has helped drive the surge in venture dollars, with mega-rounds accounting for 58% of total funding in the second quarter.
In fact, in Q22021, the number of $100M+ rounds nearly tripled, hitting an all-time high of 390. This is the second quarter to surpass the 300 mark, with the previous record held by Q12021s 367 mega-rounds.
Exits in the quarter also reached an all-time high, with 2,893 IPOs and M&As a 109% YoY increase. Didi Chuxings IPO at a valuation of $73B was the largest exit of the quarter.
August 2021 Elliott Wave Global Market Perspective:
We have little doubt that it will take a long period of austerity to correct the world's multi-generational debt binge...
The chart below illustrates the interest-rate environment that holds together this global house of cards. In July, the average interest rate across 20 [advanced] economies fell to 0.5%, a new low (by far) dating back at least a century.
This chart below is a version of one published by Sidney Homer and Richard Sylla in their 2005 book: A History of Interest Rates. Astoundingly, it shows a potential 5,000-year low in both short-term interest rates and long-term interest rates.
When interest rates start to rise, and it becomes difficult to service debt, a brutal austerity will be the order of the day.
Curmudgeon Comment: As Victor and I have stated so many times, there will be a huge price to pay for the Feds debt monetization that has repressed interest rates for so long and inflated so many bubbles. See Victors Conclusions below.
Research shows that hangovers tend to worsen over time during periods of heavy drinking. Yet the Fed has disregarded that maxim as it continues to figuratively spike the punch bowl with high proof alcohol!
At some point in time, foreigners will lose confidence in the U.S. dollar, sell Treasurys in droves and crash the greenback. That will cause interest rates to skyrocket along with U.S. debt service costs. That, in turn, could set of more dollar selling.
--> Its inevitable that the U.S. dollar will lose its great privilege as the worlds reserve currency. DoubleLines Jeffery Gundlach certainly agrees.
Victor - Its All About the Money:
Lets review some recent financial history:
Fast forward to July 2021: Due to the incredible, stupendous increase in bank reserves, monetary base and M2 (since March 2020 when the Fed intervened as credit markets froze), the CPI has averaged 6.6% for the first seven months of this year. Thats an annual inflation rate of 7.9%!
MMT proponents say a country can print any amount of money (fiat currency) it desires to pay for huge government spending and budget deficits. [For reference, please read MMT When Theories Collide with Reality]
As weve clearly seen, the major consequence of such money created out of thin air is soaring investment markets and bubbles inflating everywhere. That benefits the owners of the FED, Chairman Powell, and other asset holders, but it doesnt do much for the real economy (see Fed Decries a Wealth Gap It Helps Perpetuate above).
The current mix of U.S. government fiscal policies and Fed monetary policies are a systemic risk to everyones way of life. Its a game of musical chairs where the Fed finances huge government budget deficits seemingly without consequences, while asset prices rise nonstop to ever greater bubbles.
Sadly, it has to end with an eventual collapse of the financial system and the U.S. as a Constitutional Republic, then warping into a dictatorship when hyperinflation or bankruptcy conclude this madness. But no one can predict when that might happen?
History shows that the overturning of a government structure also comes with the death of the people who have most benefited from it. A great example is the French Revolution as per the following quote.
Little by little, the old world crumbled, and not once did the king imagine that some of the pieces might fall on him.
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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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