It has been six weeks since there has been “wisdom” from NOTES as the Jewish Holy Days gave pause to refresh and recharge the cerebral engine. Let’s hope the time away has borne the fruit that I was seeking to consume. We are posting a podcast I recorded with Professor Barry Eichengreen, one of the best economic historians in the land. His work on the GOLD Standard and the Great Depression is worth a read. It was an honor and privilege to be able to sit in conversation with the Financial Repression Authority’s Richard Bonugli as moderator.
The discussion did not devolve into wonky, theoretics but kept relevant to creating profitable trades and investments. Enjoy the PODCAST and as usual pour your favorite libation or give a listen on your favorite walking route. The PODCAST lays out much of what I have been thinking about as we are now in the last quarter of 2021 with the SPOOS up 15% in the face of so much uncertainty as the global economy unravels the financial outcomes of the ravages of COVID.
The Financial Times’s Gillian Tett wrote a piece last month warning about the burden of debt on the global economy. Tett cited the International Institute of Finance data that showed global private and public sector debt had reached $296 trillion at the end of the second quarter, a $26 trillion increase. This is a result of the FED‘s policies over the last 12 years in flooding the system with DOLLARS as the funding currency because of its RESERVE status. Of course not all debt is priced in DOLLARS but even if its just 50% that is an enormous amount.
If the DOLLAR were to rally — as some analysts wish — the results will be disastrous for the global financial system. My view remains that if the FED preempts other members of the developed world and begins TAPERING prior to the ECB, BOJ and others because of efforts keep the EURO and YEN lower for longer the world will suffer what Lacy Hunt and David Rosenberg have forecast, a global disinflation. This means global borrowers would be forced to repay dollar denominated debt with more expensive currency. This, coupled with a shrinkage in the liquidity pool, could very well result in a repeat of the second half of 2018.
As I discussed with Professor Eichengreen, the Swiss National Bank actions of January 15, 2015 provide a model of such an outcome. If you can recall, the SNB pulled the EURO/SWISS PEG and the Swiss franc soared and Europeans who borrowed low cost SWISS interest vehicles were crushed. The Swiss are not even a microcosm of the DOLLAR funding that has plagued the world for so many years. (I advise reading the BIS Working Paper: 483 — Global DollarCredit: Links to US Monetary Policy and Leverage.)
The FED wants to proclaim how noble its efforts have been but the DEBT created in its name have not had its day of reckoning. Maybe, that is why inflation is deemed to be the best cure to the massive problem providing a SPECTRE that haunts the world. This will be a theme for the fourth quarter here at NOTES FROM UNDERGROUND.
***In a speech to the International Monetary and Financial Committee on Oct. 14, ECB President Christine Lagarde reiterated what she revealed at the July press conference:
“Longer-term financial stability vulnerabilities have also been building up. The pandemic has left a legacy of significantly higher debt in non-financial sectors. Residential real estate prices have continued to rise sharply in many euro area countries, underpinned by strong lending dynamics, which raises concerns of potential overvaluation. Vulnerabilities in financial markets have also increased amid strong risk exposure and deteriorating liquidity at non-bank financial institutions.”
This is an important statement about the fragility created by the policies of the world’s key central banks. The question remains: Have the central banks risked their credibility in an effort to continue to keep the liquidity flowing even as its impact has shown minimal effects except on a multitude of assets (the primary recipient being equity markets)?
The issues confounding central bank credibility will continue. This is what makes GOLD a potential investment and not the concerns of the TRANSITORY nature of inflation. There is so much more to analyze as central banks mull a pivot in their policies. It is not going to be easy but NOTES, as always, intends to illuminate some of the key issues and seek out profitable opportunities.
Tags: BOJ, Christine Lagarde, ECB, Euro, Fed, global debt, Gold, Japanese yen, Podcast, U.S. Dollar
October 17, 2021 at 7:07 pm |
Gold has been doing The Rip Van Winkle ,but has come out of his slumber like everything -commodity.
Organically for those interested :On a drive trip from Chicago south past the panhandle ,infrastructure highway/road construction spending is on steroids .Heaviest truck and car traffic I have experienced with high pump prices ! Traffic in Atlanta on a Saturday night reminded me of San Bernadino Cali.Does the 1970’s come to mind?
P.S. This was one day ago . Yra keep up your good work !
October 17, 2021 at 8:27 pm |
Wake me up when gold spends more than a day above $2,000.
October 18, 2021 at 5:28 am |
Siegfried–when it crosses that LINE I am sure you will have already been WOKED to the changes elevating the metal and it won’t be due to inflation.I agree with your comment as GOLD has been a terrible investment for the last seven months but a good trade both long and short especially on some of the currency crosses—Gold/Yen,Gold/Eur,Gold /Swiss—will not have to wait until 2000 for that barrier was crossed fourteen months ago—many traders are looking for a monthly close above 1860—-so I am sure investors will be in the mix well before $2000—but as a trade it has been quite profitable.If disinflation replaces the fear fear of inflation will Gold go higher or lower?This is the critical question but if the central banks panic in the face of disinflation have they have proven to do–then your lines will certainly be crossed and it won’t be because of inflation
October 18, 2021 at 9:56 am
If we go into a Deflation, what financial products/money don’t have Counterparty risk?
October 18, 2021 at 10:48 am
Your point is well taken and really busts through the myth that the price of gold is just a measure of inflation. Rather it’s a measure of the fear of inflation and correspondingly also responds to the fear of deflation. We’ll need more fear to push up above $2000.
October 17, 2021 at 10:36 pm |
Yra- I listened to your very interesting podcast with Professor Eichengreen and agreed with it all except for one thing. That Tapering will not affect the markets.
I look at the markets as though it was a fireplace…or these days a bonfire. If you don’t keep adding logs, the fire goes out. That is why the Taper will be more cosmetic or optic but not real leading to its stoppage .
October 18, 2021 at 6:10 am |
Since the IMF, BIS, and World Bank are all on board with the Great Reset / Build Back Better / 4th Industrial Revolution, you must be aware of the CB’s role in this manufactured crisis – coronadoom and gloBull warming.
Surely the CB’s understand the impact of a rising dollar on sovereign debt. They also know that in order to Build Back a Marxist Utopia you must first destroy the economy in the tradition of Fabian Socialists. Is there a better to push the economy off the cliff than making sure the dollar rises (which will naturally happen, as the collapse always flows from the periphery to the core)?
By ramping up the pain and fear the globalist nutjobs (Schwab, Gates, Soros, etc.) must believe their sick vision becomes more palettable. The reality is it will cause peak tyranny that exposes the immorality of the establisment that drives revolts and their destruction.
October 18, 2021 at 9:51 am |
Good article……$296 Trillion at the end of the 2nd quarter says it all……lotta’ money. Would have taken the locals in the old Swiss pit almost 2 days to scalp out that much profit.
October 18, 2021 at 12:38 pm |
Shock–you are treading on hallow ground–but I certainlt get your point
October 18, 2021 at 4:56 pm |
Here comes the skunk at the garden party.
Bitcoin hit 61,856 to the USD today.
The supply limit of Bitcoin is 21,000,000
The skunk is now departing.,
October 20, 2021 at 6:00 am |
Mikegre–no Skunk just a perspective that has been shown to have an important place in the mosaic of global finance—it is volatile but so is everything of value in a zero interest rate world
October 19, 2021 at 10:22 am |
Amazing how we all toss around ‘a Trillion ‘ like it is actually a number the human mind can comprehend. I suggest it is not.
Question, if we looked at time, how long would one Trillion seconds be?
(Guess first before looking at the answer below)
31,546 years
See the real rocket scientists at:
https://www.grc.nasa.gov/www/k-12/Numbers/Math/Mathematical_Thinking/how_big_is_a_trillion.htm
October 19, 2021 at 1:18 pm |
GREAT
October 19, 2021 at 1:19 pm |
Oil prices scenarios???
October 20, 2021 at 6:06 am |
Arthur—this is best left to the technies for historical measurements and/or targets.There is a great deal involved as Russia/Saudi seek to revitalize their significance in a GREEN leaning world—-lack of investment has left exploration lower but wall street is itiching to get back in the game despite losses on fracking and the power of Larry Fink and ESG.It is Salingerian irony/hypocrisy that the Biden National Security team goes on knees to beg for more energy from those who they are so quick to Sanction—please reread NOTES blog titled sanctions are sanctimonious–Putin riding high as he exerts his presence on the world—maybe sanctions aren’t the cure all they teach in New Haven
October 21, 2021 at 11:38 am
Indeed.
Oct 21 Oil prices (now $85) could reach $100 in the coming months. Putin
https://geopoliticalcalendar.com/
October 20, 2021 at 12:28 pm |
Yra,
Good exchange with Professor Barry Eichengreen. Meaning no disrespect, my overall impression of his belief that Central Banks are able to rein in market forces, much less make policy that bring about “good” vs. “bad” societal changes smacks of hubris. Again, with no disrespect, academic economists deal with models where (in my opinion, UNIDENTIFIABLE exogenous variables) are not only IDENTIFIED, but they either assumed away, or worse yet, made to change in very controlled ways with NO INTERACTION with other input/output variables. The output of these models is a very sterile result, totally oblivious to the feedback loop that so often drives results in the marketplace of human interaction that is the essence of economics (a SOCIAL “science”) and the markets that operate in them. Left totally unaddressed in these models are the “unintended consequences” that makes up the “errors” that are assumed to average to zero in a normally distributed statistical framework. More times than not, those “errors” are not only fatal, but are the output the model should be focused on!
October 20, 2021 at 12:55 pm |
Are you taking into account they’ve made the model work continuously since 1913? #Lindy