China M2 Drops Below Stall Speed in April

China's M2 growth rate slowed to 8 percent in spring 2018 and briefly (barely) had a 7-handle at one point leading into 2020.

The Fed Should Not Do QE or QT

The best policy for the Fed here is to freeze the balance sheet and normalize interest rates. Instead of doing QT, announce there will never be QE again like was done the past 13 years. Throw it out of the toolkit except as a one-off bailout mechanism (nobody would believe they'd freeze the balance sheet forever). Instead, QT will inevitably lead to more QE and the economy will remain trapped on the Fed's wheel of suffering.

Another Deflationary, DXY 160 Moment Begins

Going back a decade or more, I've been blogging about the possibility of yuan depreciation, that the yuan can fall. That the global financial system burns from the periphery to the core. Think of the Exeter pyramid: USD is above other fiat and gold above the dollar:

A dollar crash scenario involves blowing up all fiat simultaneously.

No country wants reserve status and no fiat currency can take the place of the U.S. dollar.

The U.S. dollar supply expands with credit growth, it is the base of inflation.

If the world is rapidly inflating with credit growth, USD should fall. The dollar normally falls during economic booms for this reason. Nearly everyone wants a weaker dollar.

Most countries inflate against USD.

To get an isolated crash in USD where it collapses far more than foreign currencies requires removing the US economy from the world, via civil war or something similarly disastrous like a communist revolution.

In conclusion, falling USD is the system working as intended. A dollar-centric crash is highly unlikely. If the dollar implodes, all fiat implodes with it. The system survives, one could imagine all exchange rates stay constant, but all fiat is now worth far less compared to gold, oil and so on.

To destroy up the system requires breaking it. Extinguishing credit money and making USD fail to function.

Rising USD causes credit defaults and devaluations of foreign currencies. No govt wants this.

Devaluation wipes out foreign debts, cleans the balance sheet of non-USD economies.

If USD is still rising, defaulted countries must issue debt in local currency or some alternative money.

Default in one nation creates contagion that spreads to more nations.

The euro is an artificial currency with no national backing. The yen has inflated credit more than any developed nation on Earth.

China's financial system requires U.S. dollars and it has inflated as much as the US relative to the economy. It has a closed capital account to keep the currency from collapsing.

The path to the dollar losing reserve status flows from a deflationary collapse that wipes out Japan, Europe and China's credit bubbles.

These nations would be "freed" from the dollar at that point if they wish.

The US would become the most indebted nation in the world, with an unsustainably high currency. It could not afford to bailout Japan, China or Europe even if it wanted to.

The US economy would collapse along with the world economy.

At this moment, the U.S. will either let a 1930s-style deflation wipe out the debt, saving the dollar as a currency, or it would actually press CTRL-P. Not swap debt for debt like with QE, and not issue treasuries, but instead the U.S. Treasury would bypass the Fed, directly print fiat dollars into the economy and reflate the system.

The path to a collapsed dollar goes through DXY 140 or maybe 160 or higher. The higher DXY goes, the more likely and more spectacular the ensuing inflation/collapse. DXY 120 would probably constitute a near miss that causes a bigger panic than 2008 and bear market on par with at least the doctom bust of the early 2000s.

Almost everyone in the world is on the wrong side of this trade. They don't believe it can happen or don't expect it will happen, or they are too large. A billionaire cannot preserve their wealth, only their assets. Maybe Bill Gates understands because he's been buying up farmland. Wealth based on numbers will evaporate. Wealth measured in physical capital: farmland, oil wells, factories and so on, they will retain relative value in the transition. Gold and crypto are there for preserving some "number" wealth during the transition. The wealth gap will close because poor people with nothing will still have nothing, but everyone counting wealth in digits, in things like stocks, bonds and so on, will see their wealth converge with zero.

This is an extreme outcome if a series of events keep triggering. A lot of dominos have to fall in the same direction. China housing bubble has to burst for example, something they've avoided several times the past decade. Even if all these dominos start falling, the trend can be aborted at any time by governments doing good things and more likely, doing bad things. Wars could halt the deflation and cause inflation. But this process is getting started again and knowing how these dominos fall will keep investors one step ahead of what will largely be clueless competition. Most investors do not think any of this is possible. They think dollar devaluation is inevitable. 

Even if all that happens is another mini-cycle like 2014-2016 and 2018 kicks off, most are wrong footed. Stocks will crumble, bonds rally. Things like gold and crypto fail in lower order versions of these events and then experience explosive rises in extreme, system-breaking scenarios. Crypto is far more vulnerable to losses than gold, a reflection of its speculative rise. If all that happens is a bear market, cryptos and NFTs could lose 90 to 100 percent of their value. 

The Cowardly Hen Pecked Fed

David Einhorn: We Have War, Pestilence, Famine, And Plague

But is the Fed doing whatever it takes or is it just talking tough, while in reality implementing a weak initial response that could exacerbate the problem?

We think it is clearly the latter. In the Fed’s Monetary Policy Report to Congress from February 2021, it highlighted something called the “balanced-approach (shortfalls) rule” that is designed to calculate what an appropriate Fed Funds rate would be given various inputs including unemployment and inflation. Currently, this would indicate an appropriate rate of about 7%.

There is endless debate about raising interest rates by a quarter percent or a half percent. With the Federal Funds Target Rate still at 0.25%-0.5%, this feels like trying to figure out whether it’s best to clear a foot of snow from your driveway with a soup ladle vs. an ice cream scooper. This certainly isn’t doing whatever it takes.

The market is beginning to price in its doubts about the Fed’s resolve and likely failure to return inflation to its 2% target. Even as the Fed resets the market’s expectation to a faster tightening cycle, inflation expectations are increasing and long-term bond prices are falling.

The Fed should have hiked rates to 3 percent or 4 percent in March. Then depending on market reaction, unleashed its quantitative tightening in the following months. Instead, the Fed is slow walking rate hikes because it fears making the market mad. It has abandoned both of its mandates and instead worries about stock prices. The Fed is destroying its credibility in the process.

If the Fed slow walks hikes and QT and the market tanks this summer, what will the Fed do if inflation is still 6 percent in October? Stop the hikes and QT? They can't if they want to prevent a double-digit CPI. They'll have to keep hiking and doing QT all the way through next year. If instead they hike a huge amount and shock the market, it will cause a panic, but it will also restore Fed credibility because the market won't ever think the Fed can't, or won't, suddenly hike rates again. The worst case scenario for Fed credibility is they give up before hitting 2 percent on the Fed funds rate again and abandon maximum QT after a few months. That will further harden the idea of a weak, cowardly Fed that can no longer fight inflation because it'll make the stock market upset. One way or another, the market will force the Fed into crashing financial markets because runaway inflation is worse than a deflationary panic triggered by rate hikes.

Adding to this looming central bank policy disaster is an entire generation of investors who have no idea how markets function. Many investors with decades of experience have also forgotten how markets worked before the Fed was there back stopping every correction and bear market in stocks. On the whole, I see little evidence that investors have learned anything from the past four months. Most think this is yet another dip to buy. Even if they are correct in betting on Fed weakness, they don't know how to bet on it. No matter what happens a disaster is coming for the stock market.

AS I PASS through my incarnations in every age and race,
I make my proper prostrations to the Gods of the Market Place.
Peering through reverent fingers I watch them flourish and fall,
And the Gods of the Copybook Headings, I notice, outlast them all.

We were living in trees when they met us. They showed us each in turn
That Water would certainly wet us, as Fire would certainly burn:
But we found them lacking in Uplift, Vision and Breadth of Mind,
So we left them to teach the Gorillas while we followed the March of Mankind.

We moved as the Spirit listed. They never altered their pace,
Being neither cloud nor wind-borne like the Gods of the Market Place,
But they always caught up with our progress, and presently word would come
That a tribe had been wiped off its icefield, or the lights had gone out in Rome.

With the Hopes that our World is built on they were utterly out of touch,
They denied that the Moon was Stilton; they denied she was even Dutch;
They denied that Wishes were Horses; they denied that a Pig had Wings;
So we worshipped the Gods of the Market Who promised these beautiful things.

When the Cambrian measures were forming, They promised perpetual peace.
They swore, if we gave them our weapons, that the wars of the tribes would cease.
But when we disarmed They sold us and delivered us bound to our foe,
And the Gods of the Copybook Headings said: “Stick to the Devil you know.”

On the first Feminian Sandstones we were promised the Fuller Life
(Which started by loving our neighbour and ended by loving his wife)
Till our women had no more children and the men lost reason and faith,
And the Gods of the Copybook Headings said: “The Wages of Sin is Death.”

In the Carboniferous Epoch we were promised abundance for all,
By robbing selected Peter to pay for collective Paul;
But, though we had plenty of money, there was nothing our money could buy,
And the Gods of the Copybook Headings said: “If you don’t work you die.”

Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew
And the hearts of the meanest were humbled and began to believe it was true
That All is not Gold that Glitters, and Two and Two make Four
And the Gods of the Copybook Headings limped up to explain it once more.

As it will be in the future, it was at the birth of Man
There are only four things certain since Social Progress began.
That the Dog returns to his Vomit and the Sow returns to her Mire,
And the burnt Fool’s bandaged finger goes wabbling back to the Fire;

And that after this is accomplished, and the brave new world begins
When all men are paid for existing and no man must pay for his sins,
As surely as Water will wet us, as surely as Fire will burn,
The Gods of the Copybook Headings with terror and slaughter return!

QE, QT and Why Stocks Will Implode

Every time QE happens, stocks went up.

Every time QE ended, there was a significant correction in stocks, commodities or both. Stopping QE tanked markets.

The one time QT was tried, Volmageddon hit and then a 20% correction occurred when QT maxed out at $50 billion per month from Oct-Dec 2018.

This time the Fed will try ultra-QT of $95 billion per month, QE in nearly full reverse.

The only outlier time period was Nov 2016-Jan 2018, Trump's election led to huge corporate tax cuts. Jan 2018 is when QT starting picking up and Volmageddon hit in early February.

I see the inverted H&S pattern on the chart, but for the life of me I cannot think of any reason why it should complete other than a Black Swan emerges after or bulls have gone totally insane. I don't see anything visible that says a bullish resolution is coming in the next six months, at least not until the bottom of what I see as an inevitable QT correction. Any bullish scenario with the market at new highs involves at least a 20-percent correction from here.

Federal Reserve Erects Fence Ahead of Operation Crash Everything

The Marriner Eccles

Good timing no, right as the 10-year yield is threatening to break a 40-year trend?

Collapsing Velocity of Money

Are You Ready for the Bear Stearns or Lehman Moment of this Cycle?

What triggered the 2008 financial crisis? There were many factors involved, but at heart is the flaw underlying the credit-money financial system: maturity mismatching.

If I lend you money today and you agree to pay me back in 30 years, only extreme failure and extreme outlier events will cause bankruptcy. If you run into trouble in year 5, am I going to worry that you won't repay me in 25 years? Hardly. I may become concerned and get involved with your business to make sure I am paid, but if you have backed that loan with assets, then I'm not going to be worried much at all. I might offer no interest this year. Pay me year 5 and 6 interest next year, plus a little penalty. Both of us survive and thrive.

Banks borrow short and lend long though. If I take out a 1-year loan that I have to roll every year, and I lend you that money for 30 years, then your problem in year 5 is a big deal. It becomes my bankruptcy in year 5 because my lenders want their money now and if they decide they can't get it back from me this year, they (or another lender) might not lend to me for year six. My liquidity goes from 100 to 0 instantly. Game over. Financial crisis for me, and the whole economy if everyone is doing the same.

Now think about someone who is selling commodities in the future and sources the supply later. When markets are functioning, it is easy. Sometimes prices are volatile, but manageable. What happens when it becomes illegal to buy from the main supplier?

What Happens If It's Not Enough Inflation?

Measured by some funds and stocks, the entirety of the commodities bear market was erased in two years.

It's a theoretical question at the moment, though not entirely with the yield curve inverting. What if all the inflation seen from 2020-2022 (and technically still inflation with rates below the CPI) wasn't enough?

Fed's Balance Sheet Expands by $8 Billion

QE is done, but the accomodation continues for now.

Darkest Before Dawn? Charts Start Screaming Inflation Again

Is there a similar pattern elsewhere? Yes, in December 2017. XME had formed a small base and then broke out to the upside. It would go higher in January, then chop sideways before falling with the market in the autumn, continuing its slide into the March 2020 low.

My outlook is the same: the broader stock market is in bad shape no matter which way this chart resolves. XME is 40 percent steel, 14 percent aluminum and 18 percent coal and consumable fuels. Gold and silver are only about 17 percent of the fund. This is an industrial ETF sensitive to the economy.

Below is GDX divided by XME. QE has been negative for gold relative to industrial commodities, while the end of QE and has often marked a relative low.

The fact that gold has been looking relatively strong of late tells us what "the market" is starting to price in: another bout of monetary volatility. The pattern since 2008 has been inflationary melt-up followed by deflationary bust and a new round of monetary stimulus. The direction of XME in the coming month or two will tell us if that pattern holds or not.

Round 2 of Selling Ahead

Sooner if assets like palladium have failed breakouts. Later if it comes via crude oil rattling the bond market.

I've also noticed analysts are starting to notice the rise in credit risk. Up until this point, most of Wall Street was spewing backwards looking bullish points such as credit risk being low, corporate earnings strong and so on. The bear case has always been forward looking and, from my perspective, nearly inevitable. How are company earnings going to fare with wages, energy and interest rates rising? The bulls aren't going to see any of this coming. It'll be a steady drip of bad news as each of their bullish narratives fail. ALl their reasons for buying the dip are actually reasons to short the rip because reality is the exact opposite of their narratives. Inflation is bad for stocks, corporate earnings are going down, financing costs are going to skyrocket because interset rates and credit risk will rise simultaneously. The kicker is the Federal Reserve cannot stop it except by tightening, which is bad news for the stock maket because the stock market was the greatest beneficiary of quantitative easing. Whether the Fed knows it or not, and it seems like not, they don't actually have a choice if their goal is saving the stock market because all roads lead to lower equity prices. When you reach the top of Mount Everest, every direction is down.

Kill the Federal Reserve Before It Kills You

The Fed is Pumping Crude and Suppressing Bonds

For whatever reason, the Fed is still buying asserts at a $100 billion monthly clip. When they finally stop, crude should tumble or the 10-year yield will pop about 1 percent. All stock market rallies are technical until the Fed finally tapers and/or crude oil declines. If crude doesn't decline, then lights out for the stock market.

The Federal Reserve Hiked Interest Rates During 1970s and Early 1980s Recessions

Their policy was too loose until Volcker, but even the pre-Volcker Fed hiked interest rates during recessions. What do you think the current Fed will do? Unleash inflationary hell on a stagnating economy or use the recession along with rate hikes to kill inflation?

It's Happening: QE is Fueling Crude

The Fed lied about tapering. They're still pumping money into the markets like before, except it is flowing into crude oil. They are destroying the markets from the inside out. It is beautiful.

My Watch Outperformed My Portfolio

This is a great post that gets to the heart of the current bubble.

GlobalStockPicking: “Everything” is a bubble

Let’s go back to my watch, which outperformed my stock portfolio in 2021 (and probably in 2020 too). I thought a lot about this, not really from the context of watch prices per see, but how risky assets re-priced in the past years. I have tried to look for patterns and would like to share some of the bread crumb clues I looked at. My conclusion is that what has sky rocketed in value the past two years, they all play to the tune of the same factor. In the past they didn’t necessarily really have that much to do with each other, but in the past two years, suddenly they did.

...its impossible that things so very different like Rolexes, Magic cards, fine wines and bitcoin all have something so fundamentally in common that they should all reprice to multiples of what they traded on before at the same time. There must be an underlying frenzy/inflation or similar driving these gains. And although we have seen inflation it has not been anything near these levels of gains. Many of these assets like Rolex, Magic cards and fine wines, have 20+ years of price history showing very stable pricing, how is it possible that they all should reprice at the same time?

It's All Crude Now and Does the Fed Get Normalized?

I've said it before and will keep saying it until it isn't the case: crude is everything now. If crude goes up, the Fed is behind the curve. If crude goes down, the Fed can be patient. If crude collapses, the Fed can do another round of QE.

I do not expect crude oil to rip higher following the Fed meeting this week, but that is a probability not a certainty. To put my thinking in different terms, if I was Powell (not me in Powell's shoes as Fed Chair, but actually Powell and trying to manipulate everything), I'd announce a 100bps hike on Wednesday and then say we do not plan any more hikes this year and will not hike again unless inflation moves significantly higher. I would even get specific and say something such as, "if crude is below $100, we do not see the need for more rate hikes." This would be done with the intention of making a one-and-done hike and also restore Fed independence from the stock market.

The biggest risk for markets is the Fed gets dovish too early, or is perceived as too dovish. My gut tells me they don't want to be dovish, but Powell's terrible messaging since November, clipping the hawkish pivots with his dovish press conferences, gives me pause. The Fed ended QE in 2010, 2011, 2014, and ended QT in 2018 after several months of pain. The wait-and-see attitude prevalent at the Fed says they should let things play out for several months no matter what. However, Powell reversed course in January 2019 after hiking in December 2018. Powell negated the Fed's hawkish turn in November 2021 and December 2021 with his dovish-sounding press conferences. Even his Senate confirmation hearing in January 2022 sent oil higher. Every time he opens his mouth, he has undercut the Fed's inflation fighting. That's why I'm less confident about this Fed meeting. On policy, I think they will meet expectations. Stocks could go either way off that news. The big risk I see is that Powell screws up again in the press conference and turns the meeting into a dovish event that sends oil ripping.

The Fed's best course is to err on the side of hawkishness because there is no February meeting. Whatever the Fed initiates on Wednesday is the official policy until the next meeting in 7 weeks.

Here is a chart of ZB, long-term treasury futures, to drive home the apocalyptic market action that will follow a breakout in crude and inflation expectations: the only thing separating stock market bulls from total destruction is the ZB horizontal at 152'28 and a long-term support line around 148 currently.

To view that another way, if ZB completed that pattern and hit the measured move, and the 10-year treasury yield went to the same place as it was the last time ZB was at that target price, it would be at the blue horizontal above 3.50 percent.

Thinking about things in a grander sense, consider how the public is rapidly rejecting pandemic policy. Masks, forced vaccinations and lockdowns are starting to being abandoned at a rapid clip. What the charts are telling me is that the Federal Reserve is at great risk of being normalized, of having the market reject quantitative easing. Of forcing normalization of rates because the 10-year yield was at 3.50 percent in 2011 at far lower inflation rates, and why shouldn't it be there with a CPI at 7 percent? The market is a force unto itself, it is Nature. It doesn't care about Uncle Sam's finances, of a sub-unit such as the housing market, or whatever other thing will be "destroyed" by higher rates (assuming that predictions of doom are even accurate) any more than a hurricane cares about the structural integrity of a building. If the market wants to normalize, it will normalize. The Fed cannot stop it. Rate hikes and rate cuts take the market to the same place once the market decides it has had enough of the Fed's intervention. We are again at a crossroads.

QE is Finished

Normally I'd buy the glitch argument, but when bonds are aiming for a breakdown, it tells me teh Fed may be accelerating the taper.

ZH: Fed Cancels Bond-Buying Plan Today, Blames 'Technical Difficulties'

Crude Oil and Resource Currencies

The Speculative Investor looks at the Canadian dollar versus oil. The divergence with the Australian dollar is even more pronounced and looks similar to the prior Fed tightening periods.