Notes From Underground: Euthanize the Rentiers

As we head into the global macro uncertainty of 2020, equity markets continue to elevate due to central bank liquidity additions. One year ago, U.S. equities suffered large losses, which some attributed to the FED firing its DOUBLE SHOTGUN of interest rate increases with QUANTITATIVE TIGHTENING (Druckenmiller/Boockvar).

The almost 20% drop in the S&Ps in fourth-quarter 2018, coupled with a rise in yields forced Federal Reserve Chairman Jerome Powell to pivot away from the FED‘s balance sheet-shrinking mission, which policy makers had said was on auto-pilot. The central bank’s own forecast for 2019 was for FOUR rate increases (and a fed funds rate at 3.5%).

The PIVOT came in early spring as the FED moved away from balance sheet contraction by tapering the runoff of maturing Treasuries, eventually stopping it altogether in July. It followed with reinvestment purchases to replace the maturing agency MBS holdings. That has evolved into balance sheet expansion as the Fed plans on buying Treasury bills into the second quarter of 2020 to add reserves back into the system and keep short-term funding rates under control.

And so we end 2019 with the FOMC announcing three interest rates cuts in an effort to BUY INSURANCE against the “BOGEY MAN” of a global recession. U.S. fed funds are closing the year out around the 1.55% level, sending yet another amalgam of FOMC forecasts to the recycle bin of the almighty COUNTERFACTUAL Claims Department. You know, the place beloved by the sycophantic apologists of all Fed actions since the introduction of the GREENSPAN PUT.

I can’t see the future, but I have a visual of DOW 30,000 hats as central banks continue to elevate shareholders by any means. Earnings appear to be lagging even as equities reflect the destruction of the rentier capitalist. [Keynes maintained that people living off income generated from property and financial assets were figuratively euthanized via lower interest rates.] Unfortunately, former Fed Chairman Ben Bernanke pushed for the money to flow to stocks in his call for the portfolio balance channel, which pushed elevated returns to equity investors while financially repressing bond owners and bank depositors.

When Keynes opined on the need to “euthanize the rentiers” the global financial system was on a gold standard and not a fiat currency dominated by the printing press. The FED has set the standard for liquidity additions in an effort to sustain stock prices. Japan was the first to embark on QE but the Japanese were in actual DEFLATION, which meant that Japanese bond owners were actually experiencing REAL YIELDS even with interest rates near zero. The U.S. and Europe have not had real deflation so real yields have been NEGATIVE since the advent of QE programs. This has pushed investors to buy assets like art, gold, land, REITs, wine and especially stocks to keep from being EUTHANIZED as bondholders (those negative real returns). This is the global financial environment that confronts all investors as the calendar flips to 2020.

This past week the Bank of Japan and the Bank of England held interest rates steady with guidance that the central banks are ready to act if the global slowdown creates downward domestic pressures. The odd bank out was the Riksban. It as the DOG THAT BARKED as it raised rates to zero even as it acknowledged that it had not met its INFLATION targets and voiced concerns about a possible renewed slowdown in the global economy.

The small central bank made it easier for the ECB to move from NEGATIVE to zero in a similar fashion to the RBNZ setting the level of a 2% inflation target that all the major central banks have tried to achieve. The Swiss National Bank let it be known that it will continue its policy of NEGATIVE RATES. President Thomas Jordan said, “Negative rates remain essential to keep the safe-haven Swiss franc from going through the roof and damaging the export-led Swiss economy.”

So much for the G-20 agreement on currency level manipulation.The coming year will be a challenge to bondholders in the face of fiscal stimulus programs and rising government deficits. How long will the rentiers absorb the pressure of financial repression?

As Joseph Schumpeter wrote in 1931– and can be found on Page 98 in his essays Clemence edition, “It is easier to dampen prosperity by a high rate of interest than to alleviate depression by a low one.” Empower the holders of equity, euthanize the world’s bondholders is the outcome of the last ten years of monetary policy being the ONLY GAME IN TOWN.
Wishing all a meaningful, happy Hanukkahand for those celebrating Christmas a meaningful, joyous celebration in which we all strive to bring light into the world through our actions. All the lights of Christmas and Hanukkah should drive away the darkness of our times.

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23 Responses to “Notes From Underground: Euthanize the Rentiers”

  1. asherz Says:

    Yra- Schumpeter’s words were brought into action when inflation was raging 40 years ago, by the late, great Fed chairman Paul Volcker. The rentiers were then given an abundance of turkey and stuffing in their holiday celebrations.
    But one thing the big man is not known for but had an enormous influence, in causing a momentous event. His obituaries hardly mention it. A decade before his strangling inflation, the Bretton Woods gold connection to the greenback was still in effect. He fought a duel with Arthur Burns regarding the open gold window, and in 1971 President Nixon closed that aperture. Burns subsequently went along with that decision and with Keynes theory in hand caused a raging inflation.
    Volcker put out that fire with 15% T-Bill rates, as the Austrian economist pointed out in your 1931 quote. But Volcker’s antipathy to the barbaric metal has now led us to a $23 trillion national debt with Powell and all others apparently helpless to stop, after one brief foray on the battlefield.
    The smoke from Pompeii is rising, but all are feasting and drinking as equities and real estate investors are dancing to the music. A visit to Naples today by our financial gurus would be instructive as an excursion to the now quiescent volcano would be instructive.

    • yraharris Says:

      Asherz–going back to the Thomas Enders piece you have posted many times I think Volcker understood his support of we are all Keynesians Nixon move of 1971 but I know that P.V. viewed Gold and its signals as his nemesis as a central banker–which made him a formidable anti-inflation combatant

      • AsherZ Says:

        Correct Yra and it makes me wonder about the role of the Central Bankers and question the wisdom of the creation of the Federal Reserve Banks in 1913, controlled by the institutions they are supposed to supervise. This came in response to the Panic of 1907 and John Pierpoint Morgan’s displeasure. Interesting that the current Repo situation has JPM rumored to be involved.
        The Austrians were right. Let the markets solve imbalances rather than some bureaucrat who taught at Princeton. Short term pain but long term stability.
        See the January issue of Commentary now in the mail in Letters to the Editor and the response.

  2. Bosko Kacarevic Says:

    The big question…Is it different this time?
    Let’s look back…
    –1913 the FED is created, then we had the roaring 20’s during a gold standard.
    –Than came the 1929 crash. The solution…FDR defaulted on America’s debt by taking the country off the gold standard in 1933, effectively annulling all debt contracts, and gold becomes illegal to own privately.
    –Then FDR introduced the Glass-Steagall Act. Things were okay for a short while until WWII and then the Bretton Woods gold agreement.
    –1945 Europe re-builds while America holds Europe’s gold for “safe keeping?”
    –America does well for many years, then comes the Nixon shock in 1971. The gold window closes. Soon after, “paper” gold trading on the futures market is introduced. Gold rallies to $850 in 1980 (as you were there), and we all know what the late Mr. Volker did to cure this.
    –Mean while the Glass-Steagall Act is still in place, until 1999 when it was repealed under Clinton.
    –Paper derivatives on everything is now possible and banks love it. –BOOM…2000 the internet bubble POPS.
    –Banks go wild with mortgage derivatives until 2008
    –Computer algos take over the trading floor in Chicago and New York.
    –BOOM… 2008 mortgage collapse and the FED prints money in over-drive, debt goes through the roof.
    –2019 the central banks keep printing and we have an all-time-high in the DOW, the longest bull market in history.

    2020… now we have no gold standard, no Glass-Steagall and roughly zero interest rates, hmmmmm, sounds like a financial free for all?
    So, is it different this time?
    I think it’s very different, the financial rules and discipline of the past no longer apply, value investing seems irrelevant when central banks can de-value money by printing it and “do what ever it takes.” I think this is a massive experiment never attempted before, and maybe it will work? But if it doesn’t…OOOUUUCH!

    Happy Holidays,

    • yraharris Says:

      Bosko–a very comprehensive time line,This may be Bosko but there is nothing saccharine about it.The world is a far different place for financial concerns—–debauch,debase it is just another form of Draghi’s Whatever It Takes—have a Merry Christmas and enjoy the season –the world will always be with us

  3. kevinwaspi Says:

    Thank you for another year of thought provoking discussion here on Notes. To you and all of the regular participants to these discussions, I bid you a Blessed Hanukkah, Merry Christmas, and happy and healthy 2020.

    • yraharris Says:

      Professor—Merry Christmas to you and thanks for your regular dose of wisdom and the friendship that has evolved over these years—-Yra

  4. Michael Temlle Says:

    Merry. Mas and Happy Hanukkah to one and all.

    I offer up two predictions for 2020, based largely on what I see taking place with silver miners.

    The only “thing” more despised than gold is silver

    Yet, yesterday, 4 of the leading “pure play” silver miners all surged to new 52 week highs as the PMs both busted out on the charts.

    Inflation is baked into the cake and after the twin tower events of Repoggedon and the Riksbank hike to zero, I think it is a lay up that the following will occur in 2020

    1. Global duration bonds will collapse as the end of NIRP will become “self evident” after LaGarde moves to follow Sweden.
    The havoc in bond markets will trigger ever more QE as the still $11 Trillion of neg yielding bonds will not find a bid. Ergo, more QE to try to staunch the tsunami. Never have duration bonds looked so primed for a crash

    2. Gold and silver will simply soar in 2020. Reasons for it are numerous and have been discussed ad nauseum.

    Gold to $1700-1800 by Mar 31. $2000 by Xmas 2020, one year from now

    Silver..Still way undervalued relative to gold at 85 to 1.

    Silver to $22-24 by Mar 31.

    $30+ by Xmas 2020.

    Strangely, i think stocks do OK in 2020, but with some epic volatility along the way.

    Hope all find peace and joy with family and friends today



    PS I feel stronger about these 2 views than I did 12-15 months when I loved buying RED EDs

  5. yraharris Says:

    Mike–is this mike TEMPLE?For it is the voice of Mike Temple but the hands of Keynes and Schumpeter—and the name says TEMlle

  6. Mike Temple Says:

    Alas, a rose by any other name.

    Yes, ‘‘tis I, Michael Temple

    Slip of my keypad earlier today.

    Like my alter ego, I say it TWICE AS LOUD

    Never have gold and silver (and their miners) been so cheap and poised for greatness.

    You don’t want to hear my ultimate thoughts on where gold is headed this coming decade.

    But, I promise you this, the fever will outshine bitcoin and could be FANG-like before it ends.

    To infinity and beyond…..

    Mike Temple
    (Not Temile)

  7. ShockedToFindGambling Says:

    Yra…….good post and comments.

    IMO, the Gold/Silver breakouts are signalling the Stock Market rally is close to over.

    Look at the weekly ECC chart (CLOs)……has topped, I think ……should be a leading indicator.

    Look at HYG and JNK monthly charts…….potential massive tops.

    Euro has turned up short term……..Europeans starting to get assets out of the USA.

    Yield curve always steepens, just prior to a recession.

    Despite all the reflation talk, it looks to me like the next phase is deflation.

    I could be wrong……..95% on CNBC are bullish.

  8. Mike Temple Says:

    1. While I agree with you that stocks are likely to hit an air pocket some time in Jan/Feb, it will not be fatal. Scary, but not the end of the bull market. Why? Powell has shown he will always react to market chaos with more easing, and now QE.

    And, Trump will be berating him for action, calling him a political partisan for the Dems if he doesn’t rescue markets.

    2. I do agree that junk bonds look ridiculously overvalued/stretched.

    Perhaps simply buy puts in HYG or JNK as VOL is quite low

    3. Finally, I disagree with you about deflation, at least here in US.
    The coming Fed QE/monetization of debt will knock the stuffing out of USD. The steepening yield curve, which you noted, is an inflationary indicator, not deflationary.

    Simply put, the “system” can not tolerate deflation. And while I don’t necessarily believe in “signs”, the passing of Volcker, the ultimate anti inflation warrior, could be such a “sign”

    Mind you, I am not predicting that long bond yields soar to 6/7/8% or more. The authorities will never allow such carnage. Instead, Fed will become like BOJ and own the curve, suppressing rates monstrously. Doesn’t mean inflation won’t happen.

    Just means we need to look elsewhere for the transmission signal.
    Namely, a plummeting USD and soaring gold/silver.



  9. ShockedToFindGambling Says:


    Good points, but I do not believe that Central Banks/FED can always control things…….look at 2001-08, where they stayed too easy, too long, and finally market forces took over.

    It was mainly CDOs that were way over-valued then……now it’s a lot of things.

    Concerning your yield curve comments. open the chart below and hit the MAX time frame…….the yield curve always STEEPENS just prior to a recession……no one seems to believe me on this, but the chart clearly shows it…..

    This is only my best guess………

  10. Mike Temple Says:

    We appear to disagree.
    You foresee the financial markets ending in icy deflation, while I think the US fiscal and monetary situation are pointing towards heated inflation as the Fed’s ultimate monetization of trillions of future debt issuance seems a “lock”, to me.

    Furthermore, this President and Congress will continue to spend spend and then spend much more during the upcoming recession, which I have no doubt is arriving within the next 12ish months.

    As Yra has highlighted, Roosa bonds could very well be part of our financial dystopian future by 2025.

    Here is another frightening fiscal development that was quietly contained in the most recent budget.

    For the first time EVER, the federal government has bailed out a bankrupt multi employer pension fund for the United Coal Miners Union.

    PBGC, the guarantor of over 1000 such multi employer industrial pension funds, will be entirely wiped out when just one of these big funds goes insolvent.

    NY Times ran a fascinatingly depressing article about the financial woes. 75% of those 1000 such pension funds are 50%!! Underfunded.

    The largest plan, the Teamsters (with a $40 BN plan) faces actuarial insolvency by 2025.

    Having crossed the Rubicon with the bankrupt Coal Miners Fund this past month, how will the government say “No” to the wave of other bankruptcies, especially if the Dems capture the WH next November.

    This country will NOT put up with the politics of austerity. We have watched huge social protests spill onto the streets of several countries this year as citizenry after citizenry will not accept continued austerity measures such as pension reform in France and the lowering of subsidies and raising of user taxes on everyday items.

    Recall, I have never once offered a prediction that US Long rates necessarily catapult sky high. The system can not withstand it.
    Instead, the Fed will monetize Treasury issuance and take its balance sheet towards 6/8/10 trillion dollars. Why not?

    Who is to stop them? Nobody.

    But, because none of this will take place in a vacuum, watch for the release valve in terms of a crashing USD and a skyrocketing of gold in the 2020s.

    If Treasury runs out of buyers, would not surprise me to see legislation passed mandating that ALL 401Ks and pension funds invest a significant portion of their funds in special issued treasury bonds. Like Willie Sutton, go to where the money is.

    Highly dystopian thought. But, I think that is where we are ultimately headed by 2024/25.

    So, yes, I see a recession coming. But, no, I don’t see a deflationary 1930s.



    • yraharris Says:

      From Yra—the high level of this discourse is greatly respected and appreciated.You have covered the concerns of 2020 or as Ben Hunt of Epsilon has recently written the LONG NOW—-this is not idle conversation for readers of NOTES but an effort to monetize fundamental analysis into actionable profitable trades.As Billy Joel sings —We Didn’t Start This Fire but we are cognizant of its existence.If a printing press operates in a basement out of sight does it still leave a trail of destruction?

      • Michael Temple Says:

        I truly believe the Ben Hunt piece is as dark and foreboding a vision of both our political and social future as anything out there. The financial implications will be similarly apocalyptic.

        If we, as a country and society, cannot come together to agree that truth and honesty DO matter, then the decade ahead could become far more Orwellian than we could ever imagine.

        Gary Kasparov, the famous Soviet dissident, has similarly been ringing the very same alarm as Ben Hunt.

        The Nov 2020 election will be as consequential as any election since 1860. I don’t say that lightly. We are two Americas right now.
        Frightening front page NYT story yesterday highlighting the crassness of those “true believers” who fervently and blindly pledge allegiance to Trump. Not only do they ignore his lies and unconscionable mean spirited actions, they embrace them.
        They have suspended critical thinking about their Dear Leader when they state, as many did for this article, that they would act illegally and with violence and malice towards the “enemies” of this President.

        Not a good backdrop for a decade of prosperity, if you ask me.

        Google the Garry Kasparov quote/prediction from the Sunday NYT Review article. According to him, we are already living in a system similar to the Soviet Union where the State tells us daily what the truth is.

        Record setting inauguration crowds
        Hurricanes threatening Alabama
        Humans don’t contribute to global warming, if that even exists.
        The Kurds were no friends of the US during WW2
        The Ukrainian phone call was “Perfect” ( but I won’t allow key
        Eyewitnesses to provide exculpatory testimony)

        Etc Etc Etc

        Winston would be proud.


      • yraharris Says:

        Mike—there is way too much politics in this BLOG post which takes us away from our “Mission “—as always I advise no political outlook that will ramp up any form of partisan discussion—-you are a very respected member of this community with great posts so please,please —let the tweets wind up in the dead air and keep on our path of high level exegesis of markets—-Fondly and Respectfully,Yra

      • Michael Winston Temple Says:

        Ordinarily, I would cease and desist.
        However, my comments are not so much politically biased as they are a recap of the “Alice in Wonderland” conditions that now define the mindset of this President.

        Why does that matter financially? Because alternative facts are now embraced everywhere.

        Powell is conducting QE before our eyes with the massive $700/800 BN Repos to pump enough liquidity’s/reserves into the system.

        As long as there is a benign “alternative” explanation, all is well and the algos kite stocks higher due to the liquidity splurge.

        Yet, something did break in repo land.

        Gold, imo, is beginning to call “BS” on this alternate reality.

        Not once have I opined on the political policies of Trump. But, I have called out the erosion of CIVIL NORMS that this President stokes and the way he configures “facts” to support his worldview.

        Now we watch the Fed do similarish things by calling itsactions, “Not QE”.

        I stand by my comment that Nov 2020 election will be epochal. Note, I did not say all is lost if Trump is re-elected. Financially speaking, matters could turn out far worse if the Dems put Warren or Sanders in a he WH

        In that respect, politics will have great consequences on markets.

        The Ben Hunt piece speaks similarly to the breakdown in economic and financial logic that dovetails with the political machinations in DC.

        Forthwith, I will not discuss POTUS. But, there is no mistaking that alternate facts are now part of this Fed’s arsenal as evidenced by the “Not QE” response to a 5-alarm fire in Repoland that has been burning for over3 months

  11. ShockedToFindGambling Says:

    Mike…..Agree with a lot of what you said.

    I just think we will see deflation first, leading to ridiculous QE/ZIRP/NIRP/CashForClunkers……leading to destruction of most currencies……that leading to inflation.

    The debt bubble is bound to collapse, and deflation should follow pretty quickly.

    The Central Bankers should be tightening now, to pop the “bubble” wave, before it become a tidal wave…….it may be too late…..but that would get Powell ridiculed on CNBC and in Washington, and his wife would probably change the locks (or if she’s Jewish, withhold the Lox).

    Just an opinion……..I don’t claim to know anything.

    • Michael Temple Says:

      The CBs are on the cusp of tightening.

      The Riksbank (older than the ECB) has “stunningly” said no to ZIRP and has raised its short rates to zero. LaGarde is making similar noises.

      So, you are right that the bond bubble of a still-$11 trillion of Neg Yielding Bonds, with loads of them in Europe, is very likely to go splat this year.

      But, this is not deflation. The crisis, when it comes, will be meet with gigantic QE buying to stem the tsunami of selling. The PIMCOs and Gundlach of the bond world want nothing to do with long duration, and rightly so.

      So, I expect even bigger QE than what has been undertaken here in 2019 when there was no real crisis.

      Therefore, I believe the coming QE, combined with so much else that I/we have discussed, is going to lead to even more reckless financial shenanigans and trenendous fiscal pumping…. Also, note that Trade Wars are the opposite of the disinflationary era of expansive global trade flows that lowered prices globally for so so many items Tariffs have always been and will forever be inflationary.

      With unfathomable trillions of debt now and trillions more to come, holders will realize that the coin of the realm is not worth the paper it is printed on, not when the CBa have been “running those presses” on Max Throttle in 2019…

      The voracious CB buying of gold, at levels not seen since 1968, tells me that something is rotten in Denmark. We raced to the preciouce of deflation in 2008 09 when Lehman went under.

      The authorities here and abroad did everything and new things to stave off deflationary spiral.

      Expect the exact same to play out in 2020 and beyond.
      Don’t forget, the 1979s experienced the conundrum and double edged pain of stagflation.

      I think it is quite possibly probable we see the same again.

      • TraderB Says:

        The annual budget deficit in the US continues to be in the $1T – $1.5T range, then the FED is going to need to start increasing its balance sheet by $1.5T+ per year. It appears that this is a certainty at this point to anyone that follows this blog.

        The fact is that every $1 the FED buys at the point is no longer a “loan”, it is clearly (permanent) debt Monetization.
        This is going to send gold screaming higher as the entire financial system loses credibility. Right now they are just “providing liquidity” in the repo market, which smells a lot better than if they were to buy $500T of bonds (with stocks at all time highs and unemployment at all time lows).

        It appears to me that the FED is ironically now in need of a “catalyst”. Some sort of deflationary economic or market development that gives them the cover to justify the unprecedented buying of trillions of dollars of treasuries.

        The better this perceived reason/excuse is, the higher the probability they can maintain price stability (credibility of USD) while inflating their balance sheet to epic proportions.

  12. Chicken Says:

    Yra, thank you for yet another splended year of sharing your thoughts and infinite patience! 🙂

  13. A.S. Says:

    No?they don’t ..liquidity here (was thx to QE/nonexistant now/(now) was QT) has got nothing to do w/ well, Trump; all thx to him ..

    Yeah, I’m not sure what I’m reading but , if anything -19 has been QT – the exact opposite of QE (“fed buyback”) moreover, not hearing anything re MBS..there is smth QM (no not :p mini-oil) “non-qualified mortgage”, but, well, if someone wants me to open this up, let me know ..

    Ok, didn’t know that abt bills ..

    Well, 😉 we can see the future if we just listen to ourselves ..but, again, I beg your pardon, as I mentioned previously, this has got nothing to do w/ financial engineering ..

    Yeah, exactly (Ben) (and, also like I said) QE (was thinking of ’08 then; true, let me elaborate further) QE began in..’13? ..heli money whatnot ..

    lol 😀 exactly; wonderful, I’d say Europe hasn’t had deflation since a gold coin n’ Austria-Hungary..ahh the golden age , Vienna ..

    Those investments aren’t bad .. art, wine .. I traded through the BoE meeting; heck, the volatility has just just left the euro. Simply.

    What we really should have is the eq market doing its thing, economy in a place it’s never been before, new products, etc. bonds for those seeking more safety short; much like getting the govt out of social policy get the CB/Fed out of your wallet ..

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