by Greyson Geiler | February 27, 2023
Regular readers of our post are familiar with our dislike of the Federal Reserve and their policies in general. Their “mandates” from Congress of shepherding the economy into full employment with inflation stability and being lender of last resort sound good on paper. But first of all, even on paper when did their “mandate” include accruing a $9 trillion balance sheet? When did the mandate include protecting Wall Street from market cleansing selloffs in stock and bond prices? The obvious answer to those questions is the mandates never included the sort of size, power and control over the world’s economy that the Fed has taken on…
But more importantly, we would submit that the Fed is not necessarily comprised of nefarious and/or incompetent actors. Our opinion is that free market economies cannot be managed by small all-powerful groups – and such attempts are doomed to eventually fail. There should not be one group of Fed governors dictating to the world the most important price in the entire global economy – the interest rate on the U.S. dollar. There should not be one small group determining how many trillions of dollars of assets should be bought to support asset markets during times of duress. Our economy, monetary and fiscal policies are a LONG way away from the free- market utopias many of us dream of. So far away that the term “free market” is a strange misnomer of the world that we live in…
So now the Federal Reserve has backed itself into a corner. They conjured so many currency units out of thin air during the Covid debacle that now inflation is running hotter than it has in four decades. On top of that, supply chain issues, international political turmoil and short-sighted government policies attempting to correct previous short-sighted government policies have all contributed to an economic backdrop that is not sustainable. Yet the Fed continues to push interest rates higher because of the stubborn inflation numbers – take a look…
So, if the Fed is going to stick to its target of 2% inflation and the tools it is going to use to get there remain raising short term interest rates and reducing the size of their balance sheet, then we clearly have a way to go…
Our thoughts are that the Fed will, sooner or later, have to admit that they don’t have control of the supply side of the world economy and that they will have to accept a higher rate of inflation. They will likely come out in the financial press and reset their inflation target at maybe 3 or 4% rather than the existing aim. Of course, we have no insight clue as to the timing of such an announcement. The Fed may wait until they break something in the financial realm in the US or they may announce this in short order. When they do the asset markets will likely rocket higher as that will effectively be an announcement that interest rate hikes will slow down. As it is now, the Fed is scheduled to raise rates at their March meeting and the marketplace is anticipating a hike of 25 basis points with a 25% chance that it will be a 50 basis point hike. That will remain a weight on asset markets which had a very bad week last week. Where stocks go is still very dependent on the Federal Reserve so stay tuned.
Regards and good investing!
Greyson Geiler
by Greyson Geiler | February 13, 2023
Crypto currencies have been an enigma to the vast majority of the investing public – the public in general for that matter since their inception a decade plus ago. The meltdown of multiple online cryptocurrency trading exchanges over the last couple of months has added to the confusion. Of course, the FTX meltdown and the political overtones of it have a lot of observers skeptical of the future of cryptocurrency in general. Of course, Bitcoin is the centerpiece of the whole crypto world, and it is holding together for now. Time will tell…
The original competency of Bitcoin has to do with decentralization of it. There was no way that a central power that could control the flow of the “money” or could take control of the accounting of it the way our Federal Reserve does for the U.S. dollar. The idea was that it could transfer purchasing power instantly anywhere without any third-party intermediaries- an attractive proposition indeed…
We have commented from time to time about the prospect of Bitcoin and the other cryptocurrencies as far as taking over the U.S. dollar as the world’s reserve currency. We find that proposal indefensible as we discussed here https://andorracapital.com/currency-experiments/ – and the markets have supported our arguments since we wrote them. The cryptos have really just become another table at the Wall Street casino.
However, something else that we referenced in the above linked article was the central bank involvement in the crypto currency space. The CBDCs or Central Bank Digital Currencies are the flip side of the same coin as the existing cryptos (pun intended.) Rather than being uncontrollable by a central authority as Bitcoin cannot be controlled, they are using the same digital blockchain technologies to be COMPLETELY controllable by the issuing bank.
Right now, you can go to the bank and get a stack of U.S. dollars. You could then go and spend them on any vices you may have and there would be no tracking or control of your spending. Not so with the CBDC. Your money could be 100% tracked, controlled, timed out, erased etc. On top of that the bank could set a negative interest rate on your balance so it would erode with time if not spent. The issuing central bank has the ultimate power in this scenario, and we don’t like it. We don’t think it is irrational to question whether a central authority should have this much control.
One example is simply the performance of CBDC that the Nigerian central bank rolled out. It is a complete failure compared to the widespread use of crypto and the government appears to be desperate. Citizens are NOT inclined to use the bank-controlled currency and the government is going to force them to. The Nigerian government is trying to eliminate all cash usage and crypto usage and they may even make them illegal. The economy is crazy oil rich – but struggling nonetheless – and at least partly due to the mismanagement of their central bank…
That’s in a third world country you say? That could never happen in a place like the United States? According to the Atlantic Council’s CBDC tracker, 114 countries, representing over 95 percent of global GDP, are exploring a CBDC. That’s up from 35 countries in May 2020. Eighteen of the G20 countries are now in the advanced stage of development. Of those, 7 countries, including China and India, the world’s two most populous nations, are already in pilot. Eleven countries have fully launched a digital currency, with the latest being Jamaica, and China’s pilot is set to expand to most of the country in 2023. It sure looks like this is an accelerating trend and recent comments from one of the oldest financial institutions on the planet, the Bank of England put an exclamation point on that statement. John Cunliffe, Deputy Governor for Financial Stability of the Bank of England said:
Our assessment is that on current trends it is likely that a retail, general purpose digital central bank currency — a digital pound — will be needed in the UK.
On top of that, it is the IMF (International Monetary Fund) and the BIS (Bank for International Settlements) that are pushing/supporting these central banks down the path of the CBDCs and you can be sure that they will be instrumental in the development of a transferring mechanism between different country’s currencies.
Backing away from the sea of change that is happening in international currencies, we do want to reiterate what we said a year and a half ago with regard to the U.S. dollar going down this path of CBDC. The Federal Reserve is doing pretty much as they please in monetary policy decision making. They have raised rates forcing other central banks to raise rates and so far they haven’t broken anything in the U.S. economy. As things get dicey around the globe due to tightening credit policies/situations we believe that there will be a continued flow into the U.S. dollar for safety. We have the most sophisticated capital markets in the world and are the predominant reserve currency. The Federal Reserve may start a beta test of a CBDC in the next few years, but they are slow rolling this whole process. Why wouldn’t they? The system as it is has been built to the advantage of America. Let’s take a look at the U.S. dollar value as measured by other currencies – mostly the Euro…
The dollar has given up a portion of the rally that it embarked on when the Fed started raising rates last year. But it has bottomed at least for the short term, and in our estimation will likely stay firm to higher as safe haven status continues to play out. We have mentioned repeatedly over the last few months that, although economic numbers are pulling back quite significantly, the negativity in the financial press got overdone. That has played out in financial markets holding together quite well. There are still serious imbalances in everything monetary and fiscal the whole world over, but we continue to believe that the U.S. will not take the brunt of the pain in the near to medium term. Make sure your portfolio isn’t overly risky in case we are wrong…
So back to the question of the CBDCs – we will reiterate what we wrote almost a year and a half ago. No dismantling of the U.S. dollar as the premier world currency is imminent. But don’t sell your gold and make it a point to FREQUENTLY USE CASH in your day-to-day spending. I know, you wont get your airline miles if you don’t use the credit card, but cash is economic freedom and we don’t want to lose such a precious luxury with regulators worldwide anxious to garner more control of us.
Regards and good investing,
Greyson Geiler
by Greyson Geiler | January 30, 2023
Last week we talked about the Debt Ceiling and alluded to what an amazing mass of debt has been piled up by specifically the U.S. government– but also the world’s governments, businesses and individuals in general. Some of world’s debt numbers start to look ridiculous when you really start analyzing them and there is no shortage of financial commentators that, recognizing the unsustainability of the system, predict some sort of a reset.
In criticizing these reset claims, let’s take a look at some of the fundamentals of our monetary system that may not be all that obvious. First and foremost, we need to realize that the entire world’s monetary system is based on the U.S. dollar. Every other currency is a derivative of the U.S. dollar. There will be no “reset” that takes the form of the world’s economy dropping the dollar and using just Euros or the Chinese Yuan or Japanese Yen. That will not happen.
The foreign currency trading exchanges have a market cap of nearly $2 quadrillion. That’s nearly 2 thousand trillion dollars. The forex market trades some $7 trillion in valuation daily and is 30 times the combined value of the U.S. publicly traded stocks and bonds COMBINED. In this marketplace, 88 percent of all trades are denominated in U.S. dollars.
International trades are using the U.S. dollar more than 60% of the time. Leveraged trades requiring collateral are using the U.S. dollar again in the form of U.S. Treasuries. The more treasuries that are poured onto the world economy, the more leverage there is because counterparty risk is reduced. Most people aren’t even familiar with the Eurodollar system, but it is essentially U.S. dollars deposited in overseas banks. The Eurodollar system began after World War II when the Marshall Plan distributed dollars all around Europe to aid in the reconstruction after the devastation of the war. Now the Eurodollar market is a key ingredient in world finance. We don’t need to worry about competition from an AmericanEuro marketplace springing up and taking Eurodollar business. That won’t happen. The Euro is a drastically flawed currency…
Another point about the monetary system that we think is important to understand is that everything is based on debt – everything. Even those paper dollars in your wallet are on the debit side of the Federal Reserve’s balance sheet. The only financial asset on the planet right now that isn’t someone else’s liability is gold. U.S. dollars are borrowed into existence. If everyone paid off all their debt, there would be no dollars – only gold would be left… Sit with that for a while…
Back to the idea that a reset is coming… We don’t see a viable alternative to the current system. Argentina and Brazil cannot manage a legitimate currency for South America. As we frequently mention, Argentina has restructured or defaulted on their debt NINE TIMES since their emancipation from Spain. They don’t know what they are doing and just because the current system that we have is drastically flawed that doesn’t mean they can fix anything. The Chinese Yuan is NOT a viable alternative to a world reserve currency status. China does not even have GAAP (generally accepted accounting principles.) The Chinese have capital controls and don’t let their own citizens wire money overseas. China has a debt bubble that DWARFS ours in America. Europe and Japan are in a much worse monetary situation than the U.S. We recently heard that the Saudis are backing off demanding U.S. dollars for oil, therefore the petrodollar system is at risk. This is NOT good news; however this is not the death knell of the U.S. dollar. Foreigners are buying energy from the Russians right now in rubles where they used to buy in dollars. But they aren’t storing their wealth in rubles before or after the trade. Buyers won’t be holding their wealth in Saudi bonds in front of buying oil from them either.
Cryptocurrencies aren’t the new reset coming at you either. Cryptos have simply become new tables at the Wall Street casino. If you want to speculate on Cryptos – go ahead – you may very well make a lot of money. But cryptocurrencies are NOT a monetary system. NO ONE is borrowing Bitcoin to buy a house, or to build a new factory, or to open a pizzeria. Monetary systems need consistent pricing to allow participants to plan for the long term. That is not how the Bitcoin world is built – and of course the U.S. government would never sanction a monetary system that it has no control over…
At the end of the day, we can come up with many different analogies – the U.S. dollar is the least dirty shirt in the pile or the U.S. dollar is the prettiest girl in the leper colony… Whatever you want to say, we have a flawed system – but there is no obvious alternative right now so let’s not get bamboozled by doomsayers that want us to join their tribe. We are certainly not telling you to sell your gold – in fact we are always fans of investors buying gold – but until this chart looks different, we will tell you that the U.S. dollar will continue world reserve currency status.
This is a chart of the amount of U.S. treasuries that are owned by foreign governments and investors. Question for the “reset” people… So, you say the U.S. dollar is about to give up its world reserve currency status – is that why everyone internationally keeps buying U.S. treasuries? Big international players are preparing to jump off the U.S. dollar train and yet they keep buying these U.S. Treasuries? Nope – don’t think so. The treasuries are simply long-dated dollars that pay interest, and the foreigners are buying in droves. If you take a look at the results of recent treasury auctions from the last few weeks, there are plenty of buyers and we don’t expect that to change. By the way, the aggregate of foreign ownership of U.S. Treasuries is somewhere in the neighborhood of $8 trillion. According to the St Louis Federal Reserve website, total ownership by the Fed of foreign assets is about $20 billion.
We are not fans of the way our government spends money and we don’t think that the current system can survive indefinitely without serious restructuring. Any monetary system where the premier debt issuer – in our case the U.S. government – is borrowing money that it has NO INTENTION of ever repaying – is dishonest. But the concept that the world is prepared to jump to a whole new monetary system is absurd and we need to reel in the panic. Many years will transpire before the dollar dominance over the world’s economy is even at risk. As time goes on, however we do feel the ice thinning below our feet. Make sure to keep your financial house in order – and that includes owning some “alternative” assets including gold. We see volatility continuing in financial markets throughout 2023 – so stay tuned…
Regards and good investing!
Greyson Geiler
by Greyson Geiler | January 23, 2023
Happy Chinese New Year and welcome to the year of the rabbit!
Even a decade ago, not one reasonable individual would have said that it was even possible – but here we are…
The U.S. government is bumping up against its borrowing limit that is now set at $31.4 trillion, and they have just raised short-term interest rates four hundred basis points. The Federal Government is in debt roughly 120% of the U.S. GDP. Interest payments on the debt alone are now north of half a trillion dollar per year and ROCKETING higher. Soon we will be staring at debt payment totals that are rivaling the biggest budget items of social security and Medicare. This is not sustainable in the long term.
Historically there seems to be something about a government that gets to 90% of its GDP in sovereign debt. Growth slows and some sort of debt restructuring, or default happens in short order (see Reinhart and Rogoff’s “Growth in a Time of Debt.”) So, we are obviously beyond that point and it doesn’t take a rocket scientist to understand that the U.S. liabilities on top of that debt (social security and Medicare for an aging population) take an accounting standard’s estimation of total debt to near $100 trillion. That is a dark cloud of liability hanging over America that would have even made Bernie Madoff blush at the height of his profligacy. The only historical example that we could find of a large economy growing its way out of anything like this kind of debt is the British government after the Napoleonic Wars. Some estimates say they were north of 200% of their GDP in debt – but the industrial revolution and some financial discipline powered them out of that tough situation. Obviously, they didn’t have the sort of social spending burdening their government budget the way we do though. And our government discipline is clearly getting worse at an alarming rate – take an historical look at our National Debt as a percentage of GDP…
But before anyone panics and sells everything they own and move to the mountains into a compound with bomb basements, razor wire and machine gun turrets around the perimeter – let’s look at the other side of the ledger.
Of course, on top of the list is the situation of the U.S. dollar as the world’s reserve currency in an environment that has debt-based currencies rather than backed by gold – and this time there is no new frontier or different alternative. The concept of “this time is different” is of course very dangerous. We like to say that history rhymes rather than repeats and there will be drastic differences in situations that on the surface may appear to be mostly parallel. But as the Federal Reserve clearly still leads the entire world in monetary policies, we see that there may be a quite some time remaining in the U.S. dollar’s advantage. As we have mentioned many times before, Japan and Europe are much further down the bad debt trail than the U.S.
The near term is not super doom and gloom contrary to what the financial news wires are saying. As a matter of fact, some of the money managers are starting to push money back into risk-based assets. Inflows to stock funds have picked back up over the last couple weeks. While earnings and future forecasts from the S&P 500 are relatively soft, fund managers see inflation coming down and are assuming the Federal Reserve will back off on interest rate rises. This is obviously good news for the near term. For the medium term we still see some large headwinds and the debt load that the U.S. government, businesses and households have with rising interest rates is the biggest. We like that the stock and bond markets are holding together well, but if the financial news media starts to get more comfortable like some of the fund managers, we will start to get more nervous.
As far as the debt ceiling – it has been hit and the Treasury Department is maneuvering through payables and receivables – even playing some shell games to keep things going with the Federal Government. They say that Congress is going to have to figure something out by summer or the gig is up. Political grandstanding will probably continue in DC on both sides of the isle until that crunch time hits – so stay tuned…
Regards and good investing,
Greyson Geiler
by Greyson Geiler | January 9, 2023
Happy New Year everyone!! Welcome to 2023 and our weekly financial market updates!!
Anyone paying attention to the Federal Reserve’s emergency COVID-19 policies knew that they were WAAAY too loose with financial conditions carrying all the way into the spring of 2022. They kept short-term interest rates at essentially zero and they were buying $120 billion monthly in the bond markets. When inflation started to hit, the Fed said that it was “transitory” and kept the proverbial hammer down. Now that inflation has screamed to 40-year highs the Fed is finally getting religion. For the past 8+ months, they have stopped propping up the bond markets to stratospheric levels and they have put a legitimate “cost to capital” on the front end of the yield curve with legitimate interest rates. Now the million-dollar question is whether they go too far and tighten monetary condition initiating a recession. Many financial pundits are wildly bearish saying that the Fed is initiating a financial Armageddon. We are certainly not in that camp, but we are concerned and here are the reasons why…
Siân Jones, Senior Economist at S&P Global Market Intelligence wrote:
“US private sector firms brought 2022 to a close signaling marked obstacles to overcome with relation to the health of the economy. Contractions in output and new business were broad-based and gathered pace in December as customer unease led to dwindling demand and order postponements.
Clearly that is just one person’s opinion – but here is some empirical evidence leading up to those comments
- The S&P Global U.S. Manufacturing Purchasing Managers’ Index (PMI) fell at the fastest rate since May 2020 in December, a continuing sign that the manufacturing sector is on the decline. The U.S. Manufacturing PMI posted a 46.2 in December, down from 47.7 in November and solidly below 50, which signals that the sector is contracting, according to S&P Global. Production levels contracted in back-to-back months, with new sales plummeting at the end of December at the fastest pace since 2007, as companies cited weakening demand amid “economic uncertainty” and inflation weighing on customers.
- January 5th – The final print for December’s Services PMI was 44.7 representing the 6th straight month of decline
A combination of the Manufacturing and Services indexes produces a picture that looks like this…
That picture speaks for itself and looks very negative. Some other concerning stats include…
- The Baltic Exchange’s dry bulk sea freight index crashed last Tuesday…Baltic Dry Good Index is a measure of global shipping and economic health. The overall index, which tracks rates for capesize, panamax, and supramax shipping vessels carrying dry bulk commodities, plunged 17.5% to $1,250, the most significant daily decline since 1984.
- In 2022, U.S. auto sales were down 8% year-over-year to the lowest that we have seen for a full year since 2011.
- Existing home sales in the United States have fallen for 10 months in a row and are now down a whopping 33% year over year.
- The tech industry has already laid off more than 150,000 workers over the last year.
Some of these things could clearly be one-off data points that we shouldn’t over emphasize. An obvious example is the home sales numbers. The real estate market was white hot in front of the Fed raising interest rates, so a big pullback is of course expected – which we have – but how long does it continue? We certainly see circumstances around the world that are more dire than they are here in America – and our asset markets are already reflecting some “flight to safety” from investors around the world.
On a positive note – and we have mentioned this repeatedly in recent weeks. All our capital markets are holding together remarkably well with interest rates on the short end so much higher than the last decade and with all the negativity in the financial media. This doesn’t mean that we don’t think asset markets – especially stocks – can’t go lower. We feel less risk in the market when a lot of fear is already baked into the current prices.
Regards and good investing!
