Friday, February 15, 2019

The Golden Solution to America’s Debt Crisis

by Jim Rickards, Daily Reckoning:

Right now, the United States is officially $20 trillion in debt. Over half of that $20 trillion was added over the past decade.

And it looks like annual deficits will be at the trillion dollar level sooner than later when projected spending is factored in.

Basically, the United States is going broke.

I don’t say that to be hyperbolic. I’m not looking to scare people or attract attention to myself. It’s just an honest assessment, based on the numbers.

Now, a $20 trillion debt would be fine if we had a $50 trillion economy.

The debt-to-GDP ratio in that example would be 40{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528}. But we don’t have a $50 trillion economy. We have about a $19 trillion economy, which means our debt is bigger than our economy.

When is the debt-to-GDP ratio too high? When does a country reach the point that it either turns things around or ends up like Greece?

Economists Ken Rogoff and Carmen Reinhart carried out a long historical survey going back 800 years, looking at individual countries, or empires in some cases, that have gone broke or defaulted on their debt.

They put the danger zone at a debt-to-GDP ratio of 90{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528}. Once it reaches 90{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528}, they found, a turning point arrives…

At that point, a dollar of debt yields less than a dollar of output. Debt becomes an actual drag on growth.

What is the current U.S. debt-to-GDP ratio?

105{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528}.

We are deep into the red zone, that is. And we’re only going deeper.

The U.S. has a 105{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} debt to GDP ratio, trillion dollar deficits on the way, more spending on the way.

We’re getting more and more like Greece. We’re heading for a sovereign debt crisis. That’s not an opinion; it’s based on the numbers.

How do we get out of it?

For elites, there is really only one way out at this point is, and that’s inflation.

And they’re right on one point. Tax cuts won’t do it, structural changes to the economy wouldn’t do it. Both would help if done properly, but the problem is simply far too large.

There’s only one solution left, inflation.

Now, the Fed printed about $4 trillion over the past several years and we barely have had any inflation at all.

But most of the new money was given by the Fed to the banks, who turned around and parked it on deposit at the Fed to gain interest. The money never made it out into the economy, where it would produce inflation.

The bottom line is that not even money printing has worked to get inflation moving.

Is there anything left in the bag of tricks?

There is actually. The Fed could actually cause inflation in about 15 minutes if it used it.

How?

The Fed can call a board meeting, vote on a new policy, walk outside and announce to the world that effective immediately, the price of gold is $5,000 per ounce.

They could make that new price stick by using the Treasury’s gold in Fort Knox and the major U.S. bank gold dealers to conduct “open market operations” in gold.

They will be a buyer if the price hits $4,950 per ounce or less and a seller if the price hits $5,050 per ounce or higher. They will print money when they buy and reduce the money supply when they sell via the banks.

The Fed would target the gold price rather than interest rates.

The point is to cause a generalized increase in the price level. A rise in the price of gold from $1,350 per ounce to $5,000 per ounce is a massive devaluation of the dollar when measured in the quantity of gold that one dollar can buy.

There it is — massive inflation in 15 minutes: the time it takes to vote on the new policy.

Don’t think this is possible? It’s happened in the U.S. twice in the past 80 years.

The first time was in 1933 when President Franklin Roosevelt ordered an increase in the gold price from $20.67 per ounce to $35.00 per ounce, nearly a 75{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} rise in the dollar price of gold.

He did this to break the deflation of the Great Depression, and it worked. The economy grew strongly from 1934-36.

The second time was in the 1970s when Nixon ended the conversion of dollars into gold by U.S. trading partners. Nixon did not want inflation, but he got it.

Gold went from $35 per ounce to $800 per ounce in less than nine years, a 2,200{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} increase. U.S. dollar inflation was over 50{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} from 1977-1981. The value of the dollar was cut in half in those five years.

History shows that raising the dollar price of gold is the quickest way to cause general inflation. If the markets don’t do it, the government can. It works every time.

But what people don’t realize is that there’s a way gold can be used to work around a debt ceiling crisis if an agreement isn’t reached in the months ahead.

I call it the weird gold trick, and it’s never seen discussed anywhere outside of some very technical academic circles.

It may sound weird, but it actually works. Here’s how…

When the Treasury took control of all the nation’s gold during the Depression under the Gold Reserve Act of 1934, it also took control of the Federal Reserve’s gold.

But we have a Fifth Amendment in this country which says the government can’t seize private property without just compensation. And despite its name, the Federal Reserve is not technically a government institution.

So the Treasury gave the Federal Reserve a gold certificate as compensation under the Fifth Amendment (to this day, that gold certificate is still on the Fed’s balance sheet).

Now come forward to 1953.

The Eisenhower administration actually had the same debt ceiling problem we have today. And Congress didn’t raise the debt ceiling in time. Eisenhower and his Treasury secretary realized they couldn’t pay the bills.

What happened?

They turned to the weird gold trick to get the money. It turned out that the gold certificate the Treasury gave the Fed in 1934 did not account for all the gold the Treasury had. It did not account for all the gold in the Treasury’s possession.

The Treasury calculated the difference, sent the Fed a new certificate for the difference and said, “Fed, give me the money.” It did. So the government got the money it needed from the Treasury gold until Congress increased the debt ceiling.

That ability exists today. In fact, it is exists in much a much larger form, and here’s why…

Right now, the Fed’s gold certificate values gold at $42.22 an ounce. That’s not anywhere near the market price of gold, which is about $1,330 an ounce.

Now, the Treasury could issue the Fed a new gold certificate valuing the 8,000 tons of Treasury gold at $1,330 an ounce. They could take today’s market price of $1,330, subtract the official $42.22 price, and multiply the difference by 8,000 tons.

I’ve done the math, and that number comes fairly close to $400 billion.

In other words, tomorrow morning the Treasury could issue the Fed a gold certificate for the 8,000 tons in Fort Knox at $1,330 an ounce and tell the Fed, “Give us the difference over $42 an ounce.”

The Treasury would have close to $400 billion out of thin air with no debt. It would not add to the debt because the Treasury already has the gold. It’s just taking an asset and marking it to market.

Read More @ DailyReckoning.com

Catching Up With Ned Naylor-Leyland

by Turd Ferguson, TF Metals:

On Wednesday, we had a chance to get caught up with our old pal, Ned Naylor-Leyland of Old Mutual Investors in London. Ned’s job as fund manager puts him in front of institutional investors worldwide so it’s always extraordinarily valuable to hear from him directly.

Over the course of this 40-minute call, Ned and I discuss a variety of topics, including:

  • overall sentiment in the precious metals sector
  • the growing interest in the sector from asset allocators and money managers
  • any sign or signal in London of a pending crisis of confidence in the LBMA system
  • how the level of real interest rates affects asset allocation decisions
  • the technical picture in the metals and why it appears that a new bull market is underway
  • and much, much more!

It was great fun to connect again with Ned as we’ve both been quite busy lately. I think you’ll find this call to be very informative and well worth the wait. We promise to speak again soon on these subjects.

TF

p.s. My apologies for the audio quality as Ned and I were plagued by some Skype issues through the call.

Click HERE to listen.

Read More @ TFMetals.com

US threatens to ‘cut China off’ from dollar if it does not uphold sanctions against N. Korea

from RT:

The US could impose economic sanctions on China if it does not implement the new sanctions regime against North Korea, the US Treasury Secretary has warned. Steven Mnuchin said the restrictions could involve cutting off Beijing’s access to the US financial system.

“North Korea economic warfare works,” Mnuchin said Tuesday at the Delivering Alpha Conference in New York City. “We sent a message that anybody who wanted to trade with North Korea – we would consider them not trading with us.”

The Treasury Secretary echoed the words of the US envoy to the UN, Nikki Haley, by calling the fresh round of sanctions against Pyongyang “historic.” Mnuchin added “if China doesn’t follow these sanctions, we will put additional sanctions on them and prevent them from accessing the US and international dollar system.”

Washington has, so far, been reluctant to impose economic sanctions on China over concerns of possible retaliatory measures from Beijing and the potentially catastrophic consequences for the global economy.

Washington runs a $350 billion annual trade deficit with Beijing. China also holds $1 trillion in US debt, which amounts to 28 percent of US Treasury bills, notes and bonds held by a foreign government.

US lawmakers, however, seemed to be more inclined to exert pressure on Beijing and other countries striking deals with Pyongyang as they demand a “supercharged” response to North Korea’s nuclear tests, including imposing sanctions on companies from China and any other country doing business in North Korea.

“I believe the response from the United States and our allies should be supercharged,” said Ed Royce, chairman of the House of Representatives Foreign Affairs Committee during a hearing Tuesday.

“We need to use every ounce of leverage… to put maximum pressure on this rogue regime,” he said, adding that “time is running out.” Royce also called on Washington to target major Chinese banks, including the Agricultural Bank of China and the China Merchants Bank for dealing with Pyongyang.

He also said China was apparently reluctant to follow through on the sanctions adopted by the UN Security Council (UNSC) against the North. “It’s been a long, long time of waiting for China to comply with the sanctions that we pass and, frankly, with the sanctions that the United Nations passed,” he said.

The committee chair went on to say the US could give Chinese banks and companies “a choice between doing business with North Korea or the United States.” He added that the US should also “go after banks and companies in other countries that do business with North Korea the same way.”

Committee members also expressed unease over the fact that the sanctions imposed on North Korea have so far been ineffective in preventing Pyongyang from developing its nuclear and missile programs.

“We’ve been played by the Kims for years,” Republican Representative Ted Poe said, referring to North Korean leader Kim Jong-un and his predecessors, as reported by Reuters.

President Donald Trump also downplayed the role of the newly adopted sanctions later Tuesday. ”We think it’s just another very small step, not a big deal. I don’t know if it has any impact,” he told reporters at the start of a meeting with Malaysian Prime Minister Najib Razak.

Trump also said he already discussed the issue with his State Secretary of State Rex Tillerson. He ominously added that “those sanctions are nothing compared to what ultimately will have to happen” without specifying what he meant by that.

Read More @ RT.com

Equifax Sacks 2 Executives, Turns Devious to Stop You from Demanding a Credit Freeze

0

by Wolf Richter, Wolf Street:

They’re terrified a mass credit freeze will crush revenues.

Shares of Equifax dropped another 4{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} today, including after-hours, to $92.70. They’re now down 35{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528}, or $50, from the happier era that ended at 5pm EST on September 7, with the confession that it had found out six weeks earlier that the most crucial personal data – “primarily names, Social Security numbers, birth dates, addresses and, in some instances, driver’s license numbers” – of 143 million consumers had been stolen.

This was promptly followed by chaos and egregious missteps, such as trying to profit from its victims. So far, at 120.4 million shares outstanding as of June 30, the six trading days have cost investors $6 billion. No one cares about consumers. They’re just the product. But $6 billion matter.

Now heads are rolling. Oh no, not CEO Richard Smith. He is not leaving the company to spend more time with his family. Instead, Equifax announcedFriday evening that it sacked two lower level executives. I mean, not sacked. Chief information officer, David Webb, and chief security officer, Susan Mauldin, “are retiring,” it said, “effective immediately.”

And they had it coming.

Much was made of Mauldin’s degrees in music. But for a person her age, and with as much corporate experience as she had, college is irrelevant. Gates, Jobs, and Zuckerberg didn’t even graduate from college. What matters is how they perform their work.

And they failed to patch a vulnerability in Apache Struts, an open-source and therefore free software. The vulnerability had been “identified in early March” but wasn’t patched. The hack occurred from May 13 through July 30, 2017.

According to Equifax Friday evening:

The attack vector used in this incident occurred through a vulnerability in Apache Struts (CVE-2017-5638), an open-source application framework that supports the Equifax online dispute portal web application.

Equifax’s Security organization was aware of this vulnerability at that time, and took efforts to identify and to patch any vulnerable systems in the company’s IT infrastructure.

While Equifax fully understands the intense focus on patching efforts, the company’s review of the facts is still ongoing.

ArsTechnica was a little clearer:

The flaw in the Apache Struts framework was fixed on March 6. Three days later, the bug was already under mass attack by hackers who were exploiting the flaw to install rogue applications on Web servers. Five days after that, the exploits showed few signs of letting up. Equifax has said the breach on its site occurred in mid-May, more than two months after the flaw came to light and a patch was available.

After this software fiasco, two other people were promoted into those slots, both from within Equifax’s vaunted IT operations, now best known for not patching their Apache Struts software. The statement:

Mark Rohrwasser has been appointed interim Chief Information Officer. Mr. Rohrwasser joined Equifax in 2016 and has led Equifax’s International IT operations since that time.

Russ Ayres has been appointed interim Chief Security Officer. Mr. Ayres most recently served as a Vice President in the IT organization at Equifax. He will report directly to the Chief Information Officer.

Read More @ WolfStreet.com

Venezuela Begins Publishing Oil Basket Price In Yuan

from ZeroHedge:

Two days after the WSJ confirmed Maduro’s earlier threat that he would stop accepting US Dollars as payment for crude oil imports, Venezuela has done just that.

As a reminder, and as we reported previously, in an effort to circumvent U.S. sanctions, Venezuela told oil traders that it will no longer receive or send payments in dollars. As a result, oil traders who export Venezuelan crude or import oil products into the country have begun converting their invoices to euros.

Furthermore, Venezuela’s state oil company Petróleos de Venezuela SA, or PdVSA (whose bankruptcy is fast approaching), told its private joint venture partners to open accounts in euros and to convert existing cash holdings into Europe’s main currency, said one project partner. The new payment policy hasn’t been publicly announced, but Vice President Tareck El Aissami, who has been blacklisted by the U.S., said Friday, “To fight against the economic blockade there will be a basket of currencies to liberate us from the dollar.”

Fast forward to today, when according to a statement on the Venezuela oil ministry, the country’s weekly crude oil and petroleum basket “will be published in Chinese Yuan” – oddly, not in Euros as the WSJ hinted – going forward. We can only assume that Venezuela avoided the European currency on concerns that Brussels may follow in D.C.’s footsteps and impose financial sanctions on the Maduro regime next. Which meant that the only “safe” currency to transact in, was that of the country’s two big sources of vendor (and commodity) financing: China and Russia. For now Venezuela has picked the former.

The ministry also unveiled a price of 306.26 Yuan per barrel for the week of Sept. 11-15, up 1.8{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} from the 300.91 in the previous week, saying “the more favorable outlook on world oil demand and reports of lower global production contributed to the strengthening of crude oil prices this week.”

As for the more relevant topic, Venezuela’s abdication of the US dollar, whether permanent or temporary – until the US finds a way to intervene and restore normalcy – Nomura debt analyst Siobhan Morden warned that “you can say whatever you want for your domestic propaganda and make it look like you’re retaliating against the U.S…. this political posturing will only be to their detriment.

It remains to be seen if president Trump will use today’s official switch by Venezuela to a PetroYuan as justification for a more “aggressive” foreign policy posture.

* * *

Meanwhile, recall that the decision by the nation with the world’s largest proven oil reserves to eliminate the dollar, comes just days after China and Russia unveiled the latest Oil/Yuan/Gold triad at the latest BRICS conference.

“Russia shares the BRICS countries’ concerns over the unfairness of the global financial and economic architecture, which does not give due regard to the growing weight of the emerging economies. We are ready to work together with our partners to promote international financial regulation reforms and to overcome the excessive domination of the limited number of reserve currencies.”

Read More @ ZeroHedge.com

UNPRECEDENTED GLOBAL RISK – NO ONE CARES

by Egon von Greyerz, Gold Switzerland:

“Risk involves the chance an investment’s actual return will differ from the expected return. Risk includes the possibility of losing some or all of the original investment.” (Investopedia)

So there we have it. Risk means that you can lose part or all of the investment. Normally valuations take risk into account. But is the world really valuing the following risks accurately:

A VERY RISKY WORLD

Wars

  • North Korea – South Korea – USA – Japan – China – Russia incl. nuclear war
  • Ukraine – USA – Russia
  • Syria – Israel – USA – ISIS – Al-Qaeda – Saudi Arabia, Yemen – Iran, Iraq etc.
  • China – India – Pakistan – Afghanistan – USA
  • Plus many more

Civil war and terrorism

  • In most countries including USA and Europe

Economic risk

  • Global debt $230 trillion – can never be repaid, nor financed when rates normalised
  • Unfunded global liabilities $250 trillion – will never be honoured
  • Central banks’ balance sheets $20 trillion – all insolvent
  • USA insolvent – only supported by overvalued dollar and military
  • China’s debt explosion from $2 trillion to $40 trillion since 2000 – massive bubble
  • Most industrialised and emerging countries only survive with QE – untenable
  • Interest rates at zero or below in 20 countries – unsustainable
  • Paper money system – currencies going to zero.

Financial risk

  • Global derivatives of $1.5 quadrillion – will all implode as counterparties fail
  • Bankrupt European banking system – unlikely to survive
  • Over-leveraged global banking system 20x to 50x leverage
  • Bubbles in most asset classes – Stocks, bonds, property

Political risk

  • USA has a lame duck president – risk of irrational or no actions
  • EU elite – unelected and unaccountable – destroying Europe
  • Trend of globalisation and socialism – very dangerous for global stability

The above list of risks is certainly not conclusive.

To summarise in one sentence: The world is facing risk of major (nuclear) wars, economic and financial collapse, as well as political and social upheaval. The realisation of just one of these risks would be enough to change the world for a very long time. We live in a totally interconnected world and the danger is that the domino effect will trigger one event after the next until all the risks become reality.

But the world has become totally immune to risk. No market has priced in these risks. If they did, we would not have stock, bond and property markets at historical highs and overvaluations. Central banks have succeeded in alchemy for such a long time that markets totally ignore risk. It seems that unlimited money printing, credit expansion, interest rate manipulation and currency debasement is the permanent solution for a world living above its means. But to totally fool the people, news must also be manipulated and this is where fake news comes in. Financial and economic figures must be massaged and the basis of the calculations constantly changed.

A NEW PARADIGM OR THE BIGGEST CRISIS IN HISTORY?

So here we stand in front of the biggest crisis that the world has ever encountered and no one is the slightest bit concerned. If market participants understood risk, they would already have taken cover in some deep (Swiss) bunkers. Instead the world is continuing to buy massively overvalued tech stocks, properties, crypto currencies and other assets. They will soon have the shock of their lifetime.

But this speculative mania is usually the norm at the end of a bubble era. Before the 1929 crash and 1930s depression, optimism was at a peak and both market participants and politicians were certain that this was a new paradigm which would continue for ever.

CURRENCY MARKETS REVEAL THE TRUTH

Whilst most financial markets are not worried about risk currently, the currency market is quietly reflecting the world’s view of the US economy and markets as well as the US political situation.

The Forex market is very difficult to manipulate. With daily global volume of over $5 trillion, no single central bank can move this market. Concerted central bank forex manipulation has worked in the past. But the days of cooperation are gone. Today every country wants to debase its currency. This is why we are seeing constant competitive devaluations in a race to the bottom. In the last 100 years, all currencies have lost 97-99{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} of their purchasing power. The final move to zero will probably take place in the next 5-8 years. And that involves another 100{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} loss from here.

Most Americans don’t worry about the value of their currency. Therefore they are not aware, for example, that if they visited Switzerland in 1971, they would have received 4.30 Swiss Francs for 1 dollar. Today they receive 0.95 Swiss cents. This is a loss of 80{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} in purchasing power against the Swiss Franc since Nixon stopped the gold backing of the dollar. Currency moves reveal the economic (mis-) management of a country. The constant loss of value of the dollar against most other countries in the last few decades clearly depicts that the US is on the road to ruin. The dollar tells the truth and it tells an ugly truth. The remaining days of the dollar as the reserve currency of the world are very limited. The world doesn’t need a reserve currency and certainly not one which is in a chronic decline due to economic mismanagement. The days of the petrodollar are coming to an end. China and Russia will see to that.

Read More @ GoldSwitzerland.com

“Markets Are Wrong”: Hugh Hendry Shuts Down His Hedge Fund; Here Is His Farewell Letter

from ZeroHedge:

In the beginning, Hugh Hendry was the consummate contrarian bear, which helped him make a killing a decade ago when everyone else was blowing up. Unfortunately for him, he did not realize just how far the central planners were willing to take their monetary experiment, so after the market troughed in 2009, he kept his bearish perspective, which cost him dearly in terms of missed gains and lost capital under management, until one day in November 2013, he capitulated and turned bullish, infamously saying I cannot look at myself in the mirror; everything I have believed in I have had to reject. This environment only makes sense through the prism of trends.”

Since then, the reborn Hendry who would never again fight central banks, gingerly made his way, earning his single digit P&L…

…. even as many of his formerly loyal LPs deserted the former bear. It culminate with July and August, when Hendry posted some of his worst monthly returns on record which ultimately sealed his fate, and as he writes in a letter sent to investors today, Hendry decided to shut down his Eclectica hedge funds after 15 years, following a 9.8{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} YTD loss and massive redemptions, which left the fund which as recently as a few years ago managed billions with just $30.6 million as of August 31. As he best puts it “It wasn’t supposed to be like this.”

The final P&L:

So what is Hendry’s parting message to his investors and fans? Surprisingly, perhaps, he disavows the original Hugh Hendry, and goes out long (if not quite so strong). Below we repost his full final letter in its entirety, and wish Hendry good luck in his next endeavour.

CF Eclectica Absolute Macro Fund

Manager Commentary, September 2017

What if I was to tell you I wasn’t bearish on anything? Is that something you would be interested in?

It wasn’t supposed to be like this and it is especially frustrating as nothing much has gone wrong with the economy over the summer. If anything we feel more convinced that our thesis of a healing global economy is understated: for the first time in an age all parts of the world are enjoying synchronised economic momentum and I can’t see it ending for some time. It’s just that our substantial risk book became strongly correlated over the short term to the maelstrom of President Trump and the daily news bombs emanating from the Korean Peninsula; that and the increasing regulatory burden which makes it almost impossible to manage small pools of capital today. Like I said, it wasn’t supposed to be like this…

But let me bow out by sharing my team’s views. For the implications of a sustained bout of economic growth are good for you. It’s good because it should continue to underwrite a continuation in the positive performance of global equities. I would stay longIt’s also good because I can’t see interest rates rising abruptly to interrupt the upward path of equities. And commodities have already acknowledged the upturn in the fortunes of the global economy and are likely to trend higher still. That’s a lot of good news.

But it is bad news for me because funds like mine are required to demonstrate negative correlation with risk assets (when they go up like this I go down…), avoid large drawdowns and post consistent high risk adjusted returns.

Oh, and I forgot, macro fund clients don’t like us investing in the stock market for the understandable fear that we concentrate their already considerable risk undertaking. That proved to be an almighty puzzle for a fund like mine that has been proclaiming the stock market as a “safe-ish” bet ever since 2013.

Let me explain the “markets are wrong and we boom now” argument. To begin with, and for the sake of clarity, I think we have to carefully go back and deconstruct the volatile engagement between capital markets and central banks for the last ten years for an understanding of where we stand today.

The first die was cast by the central bankers in early 2009: having stared into the abyss of a deflationary spiral in 2008 the Fed and the BoE announced a radical new policy of bond purchases named Quantitative Easing. The bond market hated the idea as it was expected to cause a severe inflation problem.

Thankfully Bernanke, a student of the great depression knew better.

Markets primed themselves for inflation yet even with a ripping stock market in 2009/10 they were disappointed. QE rescued the financial system but the liquidity created was distributed to the very rich who have a very low monetary velocity and so the expected inflation fillip never materialised as the liquidity injection came to be stored rather than multiplied by the banking system.

Several years later, in 2013, the Fed suggested a reduction in the pace of its QE program. They wanted to tighten credit conditions gradually. However, capital markets beat them to it and the ensuing “taper tantrum” tightened monetary policy on their behalf. Within four months the market had taken 10 year treasuries from a yield of 1.6{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} to 2.9{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528}, a move of far greater impact, and much more rapid, than anything the Fed had contemplated doing.

Markets initially thought the US could cope with this higher level of rates, but with a slowing economy, an unfortunately-timed oil price crash, and persistent ghosts in the machine (like the substantial Yuan devaluation fear which never materialised) they were proven wrong. Back then, with a 7.6{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} national unemployment rate and tepid wage inflation, this tightening always looked a little premature to us and so it proved with the rate of price inflation inevitably sliding lower to present levels.

And so last year, following many years of berating the Fed for its easy monetary policy regime, investors collectively threw in the towel. This rejection of the basic tenets of the business cycle by those who direct the huge pools of real money is proving particularly onerous to attack as it seems that the basic macro fund model is broken: there are just not enough “coins in them pirates’ chests” to challenge the navy of this flawed real money doctrine. Managers, and I must count myself in this camp, feel compromised by our poor absolute returns since 2012 and we find ourselves unable to put up much resistance to this FAKE NEWS.

Why should you fight it? Well let’s look at the last few times American unemployment dipped below 4.5{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} like today. I would largely ignore 2000 and 2006 when monetary policy was tightened and the economy buckled under the duress of the dramatic reversal in what had been credit fuelled misallocations of capital in the TMT and property sectors. No, for me 1965 is far more illuminating. Then, like today, there was no epic bubble or set of circumstances whose reversal could cause a slump; people forget but recessions don’t come out of thin air. No, in 1965, economic growth got choked by a tight labour market; a market as ominously tight as today’s.

In the middle of 1964, CPI core inflation was running at 1.7{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} and indeed dropped to just 1.2{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} in 1965; unemployment was 4.5{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528}, the same as today. And yet by the end of 1966 inflation had essentially got out of control and didn’t dip below 2{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} again until 1995, almost 30 years later.

Read More @ ZeroHedge.com