U.S. Policy Changes and Across the Board Trickery Fuel
the Rise in Risk Assets
By Victor
Sperandeo with the Curmudgeon
Introduction:
Victor and the Curmudgeon agreed that an explanation of U.S.
government and Fed policy changes since 2008 would be appropriate for this
week’s column. Those changes have
changed the secular trend of many markets, defied the business cycle (“no
recessions allowed”) and produced what seems to be an endless stream of global
liquidity that has fueled the rise in risk assets (e.g. stocks and gold) to new
all-time highs.
Post 2008
U.S. Policy Changes Explained:
After Barack Obama was elected President in November 2008,
the U.S. began a transformation into a more controlled country bordering on
socialism. In a major way, this was to prevent another “Great Recession” of
December 2007-June 2009.
Interest rates went to zero (ZIRP) and the QE cult (keystroke
entries/money printing to buy bonds) became a dedicated and permanent part of
Fed monetary policy.
This type of money printing greatly inflated the price of
financial assets (stocks and bonds) and other hard assets (mainly real estate)
but did not increase consumer prices (the CPI).
There were two main reasons for the low CPI after 2008:
1. The Fed paying its member banks interest on
reserves, which incentivized banks to NOT make loans.
2. The “Dodd-Frank Law”
which changed the swap margins on commodities, thereby lowering Pension Funds
desire to buy them.
A January 1946 article, “Taxes For Revenue Are Obsolete” by Beardsley Ruml,
Chairman of the Federal Reserve Bank of New York, offered four reasons why
modern nation-states didn’t need taxes to fund operations — they had other
tools at their disposal. Reason #3: “To express public policy in subsidizing or
in penalizing various industries and economic groups.”
Indeed, this tactic was applied after 2008 as the U.S.
federal government started to pick winners and losers!
Also, the BLS started to manipulate the CPI and job numbers
to allow the federal government to execute a political agenda.
- One such BLS
change is substituting “Owners’ Equivalent Rent (OER)” for actual
rent (compiled by Zillow) to make the CPI higher than it actually was.
That BLS skullduggery gave the Fed cover to keep interest rates
“higher for longer,” even though the Fed prefers the PCE index to the CPI.
- Another BLS subterfuge
is to make the job numbers look better than forecast, then revise them
down the following month.
We have described BLS chicanery at length in several
Curmudgeon posts, like this one on OER and this one on finagling
the job numbers.
Global Liquidity Fuels Risk Assets:
We’ve previously discussed the hocus pocus that’s led to increased
global liquidity, despite the Fed’s higher for longer interest rates and
Quantitative Tightening (QT) in this
post.
According to Michael Howell's Cross Border Capital “Global
Liquidity Watch” weekly update for the week ending May 7th,
global liquidity increased by $510 billion to $171.85 trillion. The
increase was due to a rise in the Shadow Monetary Base and a decrease in
volatility in key collateral markets.
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Long Term Macro Economic Changes:
In 2015, the markets’ economic themes included: low CPI, zero
interest rates, stable gold and commodity prices and secular up-trends in both
stocks and bonds.
In 2020, the economic and market themes changed due to
government ordered shutdowns in response to the Covid-19 pandemic. The response was an unprecedented and
enormous U.S. government stimulus with the Fed buying all sorts of
non-government assets including junk bond ETFs.
Government stimulus and unconventional monetary policy led to
a massive increase in the money supply which caused inflation to accelerate. It
also started a bear market in bonds (low in yields) and the beginning of a new
bull market in most risk assets.
Huge government spending and never
before seen peacetime U.S. government deficits ($3.132 Trillion
in 2020, in $2.772 Trillion in 2021, $1.376 Trillion in 2022, and $1.694
Trillion in 2023) forced the U.S. Treasury to auction a tremendous amount
of new debt each year, most of which has been monetized by the Fed.
That’s Modern Monetary Theory (MMT) in action (see End
Quote below).
Below is a chart showing U.S. budget deficits from 2001 to
2023. Note that the U.S. had a budget SURPLUS of $0.24 Trillion in fiscal 2000!
Source: U.S. Treasury
Dept
Please visit the Monthly Treasury Statement (MTS) dataset to explore and
download this data.
Increased Demand for Gold:
The former biggest foreign buyers of U.S. debt - China and
Japan - are no longer the sucker at the table buying depreciating U.S. bonds.
Instead, Gold is being bought by global central
banks. Overall, gold demand from central
banks totaled 1,037.4 metric tons in 2023, just below the record high set in
2022 at 1,081.9 metric tons, according to the World Gold Council. Gold demand
among central banks has been at more than 1,000 metric tons for the last two
years.
Also, the 2017 Basel III Endgame rule change
reclassified physical gold as a Tier 1 asset, making it comparable to cash and
government bonds on bank balance sheets. This change requires banks to hold
less capital against their gold holdings, which has made gold more attractive
to banks as a reserve asset.
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Victor’s Current Observations:
1. The Bank of Japan (BoJ) Is buying ETFs to
revitalize Japan's corporate sector, lowering the cost of capital by making
more funds available and encouraging more risk-taking activity in the economy.
BoJ sees stocks as a very effective way to stimulate Japan’s economy which has
been in the doldrums for decades.
2. The U.S. economy is deteriorating fast, but the economic
numbers are mixed.
a.] GDP is strong due to robust U.S. government spending. The
Atlanta Fed's GDP Now [1.] is annualized at +3.6% as of
May 16th.
Note 1. GDPNow is not an
official forecast of the Atlanta Fed. Rather, it is best viewed as a running
estimate of real GDP growth based on available economic data for the current
measured quarter. There are no subjective adjustments made to GDPNow—the
estimate is based solely on the mathematical results of the model.
b.] The Conference Board Leading Economic Index® (LEI) for the U.S. decreased by 0.6% in April 2024 to
101.8 (2016=100), after decreasing by 0.3% in March. LEI’s April decline was
driven by consumer sentiment, new orders, a negative yield spread and building
permits. Over the six-month period between October 2023 and April 2024, the LEI
contracted by 1.9% vs its 3.5% decline over the previous six months.
“The LEI for
the U.S. declined for the thirteenth consecutive month in April,
signaling a worsening economic outlook,” said Justyna Zabinska-La
Monica, Senior Manager, Business Cycle Indicators, at The Conference Board.
“Weaknesses among underlying components were widespread—but less so than in
March’s reading, which resulted in a smaller decline. Only stock prices and
manufacturers’ new orders for both capital and consumer goods improved in
April. Importantly, the LEI continues to warn of an economic downturn this
year. The Conference Board forecasts a contraction of economic activity
starting in Q2 leading to a mild recession by mid-2023.”
3. The key point I
continue to emphasize is “no U.S. recession” this year as the
politicians in power will pull out all stops to prevent it. This is
accomplished by fudging the employment data, using “Seasonal Adjusted” data and
the “Birth/Death model (BDM)” to make the real economy look better than it actually is.
4. Last week, the precious metals went on a tear with Copper,
Platinum, and Silver breaking out to new intermediate term highs. Gold followed and is very near an all-time
new high.
Silver above $30/troy ounce is a big deal technically (spot
silver price is currently $31.49/troy ounce)!
The breakout in metals to new highs coupled with the
Biden administration’s escalation of tariffs on imports from China, portends
more inflation ahead along with a weaker U.S. dollar.
End Quote:
The sentiments of a world-renowned tyrant ring true today:
“The best way to destroy the capitalist system is to debauch
the currency.” Vladimir Lenin
Be well, success and good luck. 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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