Notes From Underground: Where Do We Go From Here?

In 2020, the entire world endeavored to smooth out a new wrinkle in the global macro landscape as the covid pandemic spurred fears of a global depression as economies shuttered to stem the virus’s spread. The FED stepped in to ensure that the global system had access to enough dollars as corporations and individuals rushed to sell assets in an effort to meet a potential economic contraction. The U.S. central bank did its best to reduce the fear of deflation by opening dollar swap lines to more foreign central banks, as well as pushing U.S. interest rates back to the lower zero bound. The huge amount of liquidity thrust upon the financial system stopped a global selloff in its tracks.

The Fed averted the threat of a DOLLAR SHORTAGE — and DEFLATIONARY SPIRAL — as emerging market economies were able to satisfy their borrowing needs without having to default, which would have only added to fears of an economic collapse throughout the global banking system. The BLOOMBERG COMMODITY INDEX made its low in late April, which allowed the emerging markets dependent on resource exports to stabilize. The BCOM closed 5% lower on the year but that was due to the heavy weighting of crude oil in the INDEX. The weakening U.S. DOLLAR did enable many commodity prices to close HIGHER in 2020. Soybeans were up more than 30%, alog with copper (30%), wheat (13%) and of course the PRECIOUS METALS (silver +50% and GOLD +25%).

Despite the Fed’s success, the financial markets are now wondering how the central bank and its global counterparts — ECB, BOE, BOJ, SNB, RBA, RBNZ, BOC — plan to EXIT this flood of liquidity without causing asset prices to collapse. (After all, these assets are now dependent on central bank largesse.) This has been an ongoing problem that central banks — and especially the FED — have to address. The Bernanke TAPER TANTRUM in 2013 scared the central bankers and kept them FEARFUL of disappointing markets. The Powell Pivot in January 2019 gave the global stock markets a sense of certainty that the central banks would keep the liquidity flowing so as not to create a BEAR MARKET in STOCKS. The markets have the central banks captured, ensuring the continuation of NEGATIVE REAL YIELDS, which is the KEY TO IT ALL.

So, WHERE DO WE GO FROM HERE? We’re going to deal with the increase in INFLATION to above the 2% targets of all the central banks. If U.S. HEADLINE INFLATION rises above 4% with unemployment above 5.5%, will the FED raise rates? It seems the answer depends on how Chairman Jerome Powell feels about the situation in the labor market affecting the minority populations. It was POWELL who painted the FED into a corner by acknowledging that the central bank would be very concerned about those workers that lost jobs by forced closed downs, THROUGH NO FAULT OF THEIR OWN. Will the FED raise rates if the labor market is not performing at pre-pandemic levels?

What makes this question more important will be the potential confirmation of Janet Yellen as Treasury Secretary. The Financial Times reported on December 27 that Yellen held a ZOOM call with Civil Rights Leaders. (“Black Leaders Urge Action to Match Janet Yellen’s Words on Race.”) The article emphasized that NO PROMISES were made about actions on jobs, though Felicia Wong of the Roosevelt Institute noted “as one of the advocates …. she was impressed by the secretary designate’s knowledge of the systemic nature of the economic challenges that communities of colour face. But she noted that no promises were made about what would happen after Ms. Yellen took office.” The story further stated “Ms. Yellen’s success in making the Treasury department work for communities of colour would be measured in part by whether she can secure funding for struggling state and local governments that disproportionately employ black people, and by breaking down more data in the department’s economic reports by race, said Ms. Wong.”

There is much ahead of us to digest in terms of global finance. The Treasury position will test Yellen’s strengths as a labor economist with a moral philosopher’s bent and a degree in FED Chairmanship, while working with Jerome Powell who has readily grabbed the scepter of Minister of Social Justice. So what is to be DONE?

In such a scenario how long will the FED allow economic growth to accelerate before RAISING RATES and will this prompt the necessity of YIELD CURVE CONTROL to prevent any market action to RAISE THE LONG END OF THE CURVE, thus subverting the intentions of a TREASURY/FED dedicated to social justice rather than traditional economic outcomes?

***Bitcoin has no reference value. This makes it unique. No matter how its price rises or falls, the pace of production follows a preset path, halving every four years until 2140 when the last of the 21 million Bitcoins will be mined — for all eternity. When the price of gold rises abruptly, production increases. The same holds true for oil, copper, condos, equities, bonds, everything in an infinite universe. If the Bitcoin price rises 10x or 100x, production will not increase. Period. And this creates one of the more fascinating inversions in today’s inverted world: An asset that has finite supply, but no intrinsic value, which could become priceless. But if only we imagine it so.

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28 Responses to “Notes From Underground: Where Do We Go From Here?”

  1. Matt Says:

    So with the central banks, the interest rates are low, as I read about Yellen that the dollar will continue it’s downtrend. The markets have the highest valuations as well as IPO’s and start ups. To me it seems comparable to the tech bubble. Equities are flying this year with the pandemic, what are we missing. People seem to be overlooking some variable.

  2. itissohardtochooseanuniqueusername Says:

    Yra, Happy New Year!
    Is it possible that the Fed is concerned about Bitcoin’s rise and creates a cryptocurrency that is backed by Fed/US gov?

    • Yra Says:

      yes it certainly appears to be a possibility but until then let it all hang out

      • ShockedToFindGambling Says:

        Yra- Have another question for you…..have called the FED and no one that I spoke to could give me an answer.

        When the FED buys Treasuries from the banks, they do not pay for them with currency………they credit the banks’ accts. at the FED.

        Can the banks then withdraw this credit as actual currency?

  3. Tamon Yamaguchi Says:

    Yra, there is an entire world beyond “The Fed”. Why do so few financial and economic commentators realize that? Is there no sense of history? Central banks are not necessary. They are a banking cartel. A method of separating people from their hard earned money.

    When Trump serves as President for the next four years the Federal Reserve is likely to be eliminated. In the oval office, he is surrounded by portraits and figurines of Andrew Jackson. Jackson is the last President who eliminated the central bank. Kennedy was going to try but the CIA got rid of him first.

    The next few years are going to be some of the most exiting in history. We are about to learn how we have been duped and controlled for thousands of years. I can’t wait.

  4. Alex Says:

    Hi Yra, thank you for another wonderful blog!

    Since August, the 2/10 spread has increased. It seems like this could be a warning sign for equities, as it portends a higher interest rate environment.

    However you’ve written in old Notes that a steepening of 2/10 should actually be interpreted as a positive sign for equities. Can you help me understand how you interpret this spread as an indicator? Thanks

  5. Asherz Says:

    In discussing the key role of the Fed in the world economy and interest rates, you put the spotlight on its views of social justice, and how that would be an important consideration in determining Fed policy.
    Bottom line the Fed has been a disaster. It caused the financial meltdown of 2008/9 and then bailed out the big banks and big corporations. All at the expense of savers, prudent homeowners, and pension funds. Artificial low rates and flooding the world with liquidity has given us record equity and debt markets, while the unfortunate middle class was melting away. The disparity between the top 1% and everyone else widened to unprecedented proportions.
    No one of the big bankers paid for the financial atrocities, as their lackeys at the Fed looked the other way instead of supervising and correcting the malfeasance going on in the real estate markets.
    The price for all of this has already been paid by the disappearing middle class. But the main blows are yet to come as they destroy our currency which will have the dollar replaced as the reserve currency. That is when the free ride will end.
    President Xi can’t wait.

  6. Yra Says:

    From Yra—the BITCOIN quote is from a wonderful piece by Eric Peters published this weekend—phenomenal overview of BITCOIN and its significance

  7. Fred Geschwill Says:

    Yra, I appreciate your ability to lay this out in terms of politics of finance. You do a superb job walking a line that is fraught with danger. Whenever, I let my political beliefs color my view of the market I end up proving my ignorance. You do great at helping me ‘try’ to view the markets in a way that leads to financial understanding. I never quite get there but I continue to try. Happy New Year to you and your’s.

  8. Kevin Says:

    Yra all the best for 21 and thanks for the many thought provoking posts.

    One observation, YCC as practised so far by Japan, Aussie etc may be a very misleading model for the Fed. It is one thing to implement YCC when there is no fear of inflation, but once that fear arrives, attempts to cap yields will only increase the perception that policy makers are totally inappropriately positioned and have backed themselves into a corner.

    I think the likely outlet would be the dollar. This could cause a dangerous inflationary feedback loop and if it gathers momentum would really drive the reflation trade.

    Russell Napier has some interesting pieces on what he calls “cap day”.

    • Yra Says:

      Kevin–yes I believe you are correct in the outcomes but if you listen to the FED it seems to be what they desire as they follow the Volcker assymetric model that it is easier to halt inflation then to kickstart an economy mired in deflation.Now the question is when have we been in deflation and the FED seems to panic each and every time the “giant battleship” appears to be running aground—the giant counterfactual in the sky—Powell,Yellen et al are focused on correcting the outcomes of inequality in the capitalist system especially as they perceive it to be caused by JOBS and EDUCATION—Brainard will be the voice to listen to if YCC becomes the prevalent policy—this has been done before in 1946-51 so there is precedent and it is only the rentier class who will be the major losers from this newest round of financial repression—King John stomps on the bond market while Robin Hood is galloping through the equity orchards

      • David Richards Says:

        I think the US and US policymakers don’t realize what a precarious position they’re in if they’re using the immediate post-WW2 years as a model for YYC, because today there exist far better opportunities for capital offshore than during post-WW2 when the US was the only game around as the ROW was in shambles in 1946-50.

        Indeed, an analysis of capital flows for 2020 shows the US as the big loser, not the rentier class, who can and already have moved substantial amounts of capital out of US holdings in 2020 as international capital flows analysis shows.

        YCC will exacerbate US capital outflows in today’s world, different than in 1946-50. US policymakers can halt that only by either 1) massively hiking interest rates in an economy that has shown it cannot tolerate even 1% real interest without crashing its markets, or 2) via harsh capital controls in which case US loses all notion of being a reserve currency along with the exorbitant privilege and national security implications of that.

        Thus, US policymakers are stuck between the proverbial rock and hard place. Unless the US magically reverses its large twin deficits, which ain’t gonna happen voluntarily. Meanwhile, the dollar (and thus average US workers’ purchasing power & standard of living) is the outlet that takes the beating, as Kevin suggested above.

      • Yra Says:

        Dave—was not implying that 1946-51 resembles anything at all in context just the policy and that is what the pundits will note–but the world completely different

      • David Richards Says:

        Yra, yes I know you weren’t comparing today to post-WW2 for YCC, I just noted that if the Fed is doing that in a “goldfish bowl”, then they may be surprised if they get a different outcome this time than last. Forced to choose among hard alternatives, they are. With each major policy step seemingly making their alternatives harder the next time.

  9. Financial Repression Authority Says:

    […] LINK HERE to the Blog Post […]

  10. Arthur Says:

    Must watch-read Charlie Munger:

  11. Richard H Papp Says:

    Thanks Arthur

  12. Pierre C Says:

    I’m so grateful that I’m able to sit in on these conversations. Thank you to everyone who shares on this blog.

    I did have a couple of thoughts… If the fed is successful at keeping prices elevated, especially home prices, the government will eventually have to step in with some kind of rent control, or give landlords tax breaks to house people.Especially if wages do not go up at the same time.

    God help anyone who borrows in Bitcoin. Try paying that debt back in a month or two. Even though I did buy some Bitcoin several years ago. What turned me off was talking to couple guys who owned a vape shop with a Bitcoin ATM. They told me that their electric bill tripled after installing it. I can’t see Bitcoin being good for the environment.My understanding, it’s an algorithm that’s being continuously bounced between computers in cyberspace. How much fuel and energy is that consuming? Seems to me a waste of resources. Correct me if I’m wrong. Of course I’m not saying that it could not go up in price, I think a good reference point would be the median price of a house in America $324,900. After all, one could trade a Tulip for a nice home in Holland in 1637.
    2+2= 5

    • David Richards Says:

      Pierre, speaking of tulips and bitcoin, one trader who I casually follow has long asserted bitcoin is a big ponzi scheme destined to get waaay bigger, even as I’ve witnessed him to be heavily long bitcoin and GBTC since spring (and also previously before he sold it all prior to its last bubble spike and pop). Essentially you hope to buy bitcoin before everyone else does, and then hope to sell it before everyone else does. With some arbitrage happenin. Here in case you’re interested:

      • Pierre Says:

        David, thanks for the article. It gives me a whole new perspective on what is happening. He touches a little on the tax implications, but that has got to be huge. The government is going to start relying more and more on this revenue.
        The Alchemy of Finance is one of my favorite books.

      • David Richards Says:

        Yeah, me too.
        Btw, I just thought Kuppy’s piece on BTC was a good counterpoint to Eric Peters. Full respect to both, and both have their money where their mouth/conviction is.

  13. Bosko Says:

    Excellent thoughtful conversations and usual on this blog. I’d like to humbly add that the birth of bitcoin was the result of a lack of trust in the financial system, soft rule of law and questionable accountability. Return these three things to the economy and I believe bitcoin will return to its fundamental intrinsic value….a simple digital ledger….value = $0.00. I’m with Yra on this all the way, bitcoin has no reference value. The big difference compared to gold is that gold is a physical asset and the integrity of the ledger is what keeps records on the price accountable, bitcoin has put the cart before the horse, it is an accountable ledger, but what is the asset backing it? I still have yet to figure out “what” people are coverting their currency to when they buy bitcoin? Is it just a secret digital ledger to hide money? Consider this…what’s worth more, the gold in a safe or the safe itself?
    What if the blockchain ever gets hacked? I wish that Bill Gates would finish what he started and return to software programming and make a virus-free software platform instead of talking about a biological virus on which he has no expertise.

  14. Bosko Says:

    …$50,000 bitcoin reflects an unhealthy economy, just like $50,000 gold, no one should want this, but it might happen. I’d like to see bitcoin at $1.00 and gold at $100, it would mean a high standard of living and a healthy promising economy.What’s the old saying, the market can remain irrational longer than you can stay solvent?

  15. Pierre Says:

    I thought some of you would be interested.

    • Yra Says:

      Pierre–I am going to correct you and hope Bosko will inform you further—Bosko upon reading my suggestions about a Gold backed bond almost seven years ago went out and with his Gold In Motion created a gold backed bond—-hopefully you two can connect about this

      • Bosko Kacarevic Says:

        Thanks for the support Yra.
        My contact information is here:

      • Pierre Says:

        After looking around Kindigo website, I am again truly humbled of the caliber of people I am privy to listen to on this blog.
        Both of the above mentioned sites do not apply to me at this time. I am not a Canadian resident and not an “institutional ” investor. I do have some gold and silver “leases” , but do not qualify for the bond offerings at MM.
        Just a thought, maybe Kindigo and Monetary Metals can connect.
        It’s people like you that are making a difference bringing sound money back

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