Tag Archives: inflation

Jerome Powell Fails The Gold Standard Test

“You’ve assigned us the job of two direct, real-economy objectives: maximum employment, stable prices. If you assigned us [to] stabilize the dollar price of gold, monetary policy could do that, but the other things would fluctuate and we wouldn’t care,” Powell said from Capitol Hill. “We wouldn’t care if unemployment went up or down. That wouldn’t be our job anymore.” – Jerome Powell in response to a question about returning to the gold standard

Everything about that answer is incorrect. To begin with, the Fed apparently now has three “assigned” jobs: employment maximization, price stability and “moderate long-term interest rates” (federalreserve.gov).  How can we take anything Powell says seriously if he’s not aware of the the duties of his job?

But let’s set that issue aside.  In fact, if the dollar was backed by gold, the Fed would be irrelevant – the gold standard would take away completely any need for a Central Bank. Powell and his cohorts would not have any job at the Fed.

The function of a gold standard is not to “stablize” the price of the currency which is backed by gold.  Interest rates can be used to “stabilize” the value of currency.  Free markets, if ever allowed, would set the price of money.  The function of the gold standard, fist and foremost, is to stabilize the supply of currency in relation to the wealth output of an economic system.

A Central Bank is not necessary to any economic system which has its currency backed by gold.  If the U.S. had its monetary system tied to the value of the gold it holds in reserve,  it would automatically serve the function of price stability. Remove gold from the equation and the macro variables fall apart rather quickly.

But let’s use reality to test this.  Prior to the closure of the “gold window,” the U.S. largely was a creditor nation and never incurred unmanageable Government spending deficits except during wars.  In fact, the amount of Treasury debt issued to fund the Viet Nam war ultimately led to the removal of the last remnants of the gold standard.  This is because the U.S. Treasury did not have enough gold left to redeem debt issued to foreigners with that gold per the Bretton Woods Agreement.  In short, the U.S. ran out gold so Nixon closed the gold window.

Take a look at the economic and fiscal condition of the United States from inception to 1971 and post-1971.  Any “economist” or Central Banker (Powell is not an economist and probably never thought about gold until he was prepped to answer the possibility of a gold standard question) who opposes the gold standard is ignorant of historical facts or has ulterior motives.

Aside from his inability to respond intelligently to the gold standard question (he should have taken notes from Greenspan), Powell knows that  a zero interest rate policy and money printing are the only ways that he and his elitist cronies can keep the system from collapsing until they finish extracting the last remnants of wealth from the public.  A gold standard would stand in the way of this effort.

Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government’s promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. – Alan Greenspan, “Gold And Economic Freedom,” 1966

Modern Monetary Insanity And The Three Stooges

James Kunstler summarized it perfectly. So rather than reinventing the wheel, here’s an excerpt from his Monday commentary:

Jerome Powell [was] wheeled out on CBS’s 60 Minutes Sunday night, like a cigar store Indian at an antique fair, so vividly sculpted and colorfully adorned you could almost imagine him saying something. Maybe it was an hallucination, but I heard him say that “the economy is in a good place,” and that “the outlook is a favorable one.” Point taken. Pull the truck up to the loading dock and fill it with Tesla shares! I also thought I heard “Inflation is muted.” That must have been the laugh line, since there is almost no single item in the supermarket that goes for under five bucks these days. But really, when was the last time you saw a cigar store Indian at Trader Joes? It took seventeen Federal Reserve math PhD’s to come up with that line, inflation is muted.

What you really had to love was Mr. Powell’s explanation for the record number of car owners in default on their monthly payments: “…not everybody is sharing in this widespread prosperity we have.”

And so it went on 60 Minutes on Sunday evening. I strongly recommend reading Kunstler’s entire essay:  Ides and Tides…The Fed and the FOMC are not mandated to set monetary policy to stabilize employment and inflation. The Fed’s role is to help the banks maximize profits. That’s it in a nutshell.

The best way to fight and protect yourself from the Fed’s mandate is to own physical gold. Phil Kennedy of Kennedy Financial invited Bill “Midas” Murphy and I to discuss the gold market and where it’s going from here:

The Fed: Lies, Propaganda And Motive

The agenda of the Fed is to hold up the system for as long as possible. The biggest stock bubble in U.S. history has been fueled by 10 years of negative real interest rates. The only way to justify that policy is to create phony inflation statistics. Based on historical interest rates and based on the alleged unemployment rate, a “normalized” Fed funds rate should be set at 9%, which reflects a more accurate inflation rate plus a 3% premium. The last time the unemployment rate was measured at 3.7% was October 1969. Guess what? The Fed funds rate was 9%. I guess if you live an a cave and only buy TV’s and laptops, then the inflation rate is probably 2%…

Silver Doctor’s Elijah Johnson invited me to discuss the FOMC policy decision released on Wednesday afternoon:

****************************

If you are interested in ideas for taking advantage of the inevitable systemic reset that  will hit the U.S. financial and economic system, check out either of these newsletters:  Short Seller’s Journal information and more about the Mining Stock Journal here:  Mining Stock Journal information.

WTF Just Happened? Stock Market Ignores Escalating Trade War & Spent US Consumer

Every month Government, corporate and household debt hits a new all-time high. The entire financial system is heading down an unsustainable path of debt issuance. The delinquency rate for auto and credit card debt is already at levels last seen in late 2008. The only reason the banks are not on the ropes – yet – is because they are still sitting on most of the liquidity the Fed injected into the banking system from 2009 to 2015.

This “slush fund for a rainy day” has been declining. As this money flows into the economic system, it’s starting to ignite inflation. Even the monthly Government-generated CPI and PPI reports, which are highly manipulated to minimize the true inflation rate, are starting to show rising inflation. Of course, with wage growth stagnant, the average household disposable income level is dwindling rapidly, which is why the personal savings rate is at a historically low level and revolving credit use is at an all-time.

Consumer sentiment has been trending lower off a recent peak. While the media puppets explain that trade war headlines are weighting consumers expectation, in truth consumer sentiment is falling because the average household is suffocating from the crushing weight of debt and a diminished ability to service that debt because real disposable income is declining. In most areas, home prices are falling. In fact, the home buying sentiment component of the U of Michigan sentiment survey is at its lowest level since 2008.

In this episode of WTF Just Happened?, we discuss these issues plus whether or not gold is forming a tradable bottom here (WTF Just Happened is a produced in association with Wall St. For Main Street – Eric Dubin may be reached at  Facebook.com/EricDubin):

****************************

I recommended Arizona Mining in May 2016 at  $1.26 to my Mining Stock Journal subscribers.  It was acquired for $1.3 billion, or $4.65/share.  My subscribers and I are making a small fortune shorting homebuilders plus this week’s issue features an idea that is the ultimate contrarian play.

Visit these links to learn more about the Investment Research Dynamic’s  Mining Stock Journal and Short Seller’s Journal.   

Retail Sales: Inflation Plus Extrapolation

The footnotes are the most interesting section of every financial and economic reports.  They also happens to be least studied section of these reports.  Those who prepare these reports rely on this fact.

The monthly headline retail sales is based to a large extent on estimates, guesswork, invalid assumptions and statistical magic.  Examine the line-item details in this retail sales report link. Note the numerous lines for the May “estimate” that contain “(*).” Then scroll down to the footnotes.

“(*)” indicates, per the footnotes, that “advance estimates are not available for this kind of business.” Footnote 3 further explains that “Advance estimates are based on early reports obtained from a small number of firms…”.   In other words, a significant percentage of the retail sales are based on guesswork and inference.

Scroll further down the retail sales report and Table 2 shows the summary table (Table 2) which presents the month to month percentage change comparison for the latest month’s report.  The data in first four lines in this table is the data used for the headline reports.

Everyone uses these numbers, most without any knowledge whatsoever about the degree to which the data “behind” the numbers is comprised of highly questionable guesswork and unsubstantiated, if not entirely problematic, statistical inference and  adjustment calculus.

Additionally,  there’s a section in the report that explains methodology for the guesswork.  “Advance estimates are computed using a link relative estimator.”  A “link relative estimator” is a polite descriptor that basically means, “we assume that the historical growth rates implied by our historical reports can be applied to growth rate we assume in  this month from the previous month.”  On top of all of that, the Census Bureau then applies its nefarious “seasonal adjustment” factors to the data.  Keep in mind that a significant portion of the data is pulled out their ass.

All of this methodology is explained in further detail in the tabs on the main Monthly Retail Trade page of the Census Bureau. The information spread out in this section substantiates every assertion I have put forth above. It requires sifting through the “how data are collected,” “definitions” and “FAQs.”  I’m probably one of the few analysts curious enough to subject myself to this brain damage.

By the Census Bureau’s own trumped up numbers, most of the “gain” in retail sales from April to May, if indeed a bona fide gain occurred, was from gasoline and clothing inflation.   The numbers in the report are expressed in nominal terms.  They are not adjusted for the effects of price inflation.  Removing the effect of price inflation would yield the change in “unit” volume of retail sales.  This would be the number of true interest.

Finally, the estimated change in retail sales is not consistent with the patterns in consumer credit.  Based on the Fed’s consumer credit report, the use of revolving credit (credit cards, checking overdraft accounts, etc) has been contracting.  With the savings rate at an all-time low, the only way that retail sales unit volume could possibly increase is through the use of credit.  Thus, while guesswork and inflation is driving today’s headline report, in all likelihood unit volume of sales declined.  This latter assertion is indeed supported by recent manufacturing, factor order, durable goods and wage growth data.

Navin R. Johnson Goes To The White House

(Note: with apologies to Carl Reiner and Steve Martin, who directed and co-wrote “The Jerk,” respectively)

Just when you thought Trump’s “leadership” could not get any more insane, he adds a third ring to the circus going on at 1600 Pennsylvania by hiring “economist,” Larry Kudlow to be the head of his economic advisors.

For those of you not familiar with financial market history beyond the last 10 years, which includes the majority of money managers and other sundry financial “professionals,” Kudlow was the chief economist at Bear Stearns from 1987 to 1994.  His tenure at Bear ended infamously when it was revealed that he had developed a nasty cocaine and alcohol addiction at some point in his career.

Prior to Bear, Kudlow began his post-college career as a Democratic political operative.  He parlayed his political connections to get a job as a junior staff “economist” at the Fed.  I use quotations marks around the term “economist” in reference to Kudlow because he does not have a degree beyond undergrad  from the University of Rochester, where he majored in history.

At some point Kudlow, likely for political expedience given the political “winds” of the country in the early 1980’s, became a Republican. He wheeled his political connections into a job in Reagan’s OMB (David Stockman was the Director).  From there, he moved on to Bear Stearns.  The rest is history.

I thought  it would be interesting to peer into the mind of an untrained economist to examine the thought process.  Clearly Kudlow excelled at wheeling and dealing his political connections.  But is he qualified to be the president’s chief economic advisor, especially at a time when the U.S. is systemically collapsing?

In November 2007, Trump’s new Chief Economic Advisor, Larry “Señor Snort” Kudlow wrote an article about the economy titled, “Three More Years of Goldilocks” for which he should receive the Darwin Award (credit goes to @RudyHavenstein for posting the article).  Let’s examine some excerpts – keep in mind Kudlow wrote this about 5 months before Bear Stearns collapsed, triggering a financial crisis that anyone with more than two brain cells could see coming:

“I think the election-year economy will be stronger than the Fed’s estimate — closer to 3 percent. Too much is being made of both the sub-prime credit problem and the housing downturn.” IRD note: Many of us predicted and made big bets on the outcome of “too much being made of the sub-prime credit problem;” a caveman could see what was coming.

“What’s more, the entire market in sub-prime debt is just 1.4 percent of the global equity market.” – IRD note: Maybe 1.4% of a global stock bubble – but that’s like saying a small nuclear bomb in the hands of a madman is just 1.4% of the total stockpile of nuclear weapons. Notice that Kudlow overlooks the $10’s of trillions of OTC derivatives connected to the sub-prime debt, something that was obvious to many.

In issuing a forecast for 2008, Kudlow goes on to say:  “Both consumer spending and business capital investment are advancing…Right now, stocks are in a classic declining-profits correction. This downward trend has so far reduced the Dow by roughly 8 percent. As a rough guess, a 10 percent correction ought to spell the end to the Dow’s slump. And Fed rate cuts should be a big booster for stocks.” IRD note – Where on earth was he getting his data on consumer spending? By November 2007, households that weren’t living in fear of foreclosure were living in fear of losing their job. Between October 2007 and March 2009, the S&P 500 collapsed 58%.

Kudlow’s assertions back in 2007 were a joke.  What happened to Kudlow’s “Goldilocks economy?”  This is the person who is now Trump’s lead economic advisor.   Now Kudlow once again is asserting that, “the profit picture is good. It’s looking real good, and growth is not inflationary just let it rip for heaven’s sakes. The market is going to take care of itself.”

Based on his track record of issuing bullish forecasts right before a collapse,  I’d suggest that the economy and financial system is closer to taking care of itself by  “ripping” off a cliff without a parachute than it is to producing real growth. Retail sales have tanked three months in a row, the housing market appears to be headed south, auto sales plummeting, restaurant sales have dropped 19 out of the last 20 months. Where is this growth you seeing, Larry? Please do tell…

More Evidence That The Fed And Big Banks Collude?

Should this surprise anyone?

An interesting study by a Phd candidate at the University of Chicago is being released which shows a statistically high incidence in taxi trips between the NY Fed and big NY banks clustered around FOMC meetings:

Mr. Finer writes that “highly statistically significant patterns in New York City yellow taxi rides suggest that opportunities for information flow between individuals present at the New York Fed and individuals present at major commercial banks increase around” meetings of the interest-rate setting FOMC.

“Their geography, timing and passenger counts are consistent with an increase in planned meetings causally linked to the incidence of monetary-policy activities,” he wrote. “I find highly statistically significant evidence of increases in meetings at the New York Fed late at night and in off-site meetings during typical lunch hours,” which is suggestive of “informal or discreet communication.”

“As reported by the Wall St. Journal, but curiously absent from Fox Business reporting – both organizations are owned by Rupert Murdoch – Mr. Finer used government-provided GPS coordinates, vehicle information and other travel data to track taxi traffic between the addresses of the New York Fed and major banks. His research pointed to increased traffic between the destinations around lunch and late evening hours, which suggested informal meetings were taking place, Mr. Finer wrote in his paper. He found elevated numbers of rides around Federal Open Market Committee meetings, with most of them coming after the gathering.” (WSJ)

This should not surprise anyone. It actually makes sense. The Fed is owned by the Too Big Too Fail banks and, without question, have an inordinate amount of influence on Fed policy.

You can read the entire article here: Increase in Fed/NY Bank Meetings Around FOMC Meetings.

 

The Fed’s “Catch 22”

Before diving into the topic, let’s be clear about one thing:  The economic definition of “inflation”  is the increase in money supply relative to the marginal increase of wealth output (GDP) in the economic system for which money supply is created. This is differentiated from “price inflation,” which is “a general rise in prices.”

Money and credit creation in excess of wealth output causes currency devaluation.  It is this currency devaluation that arises from money and credit printing that causes “price inflation.”  More money (and credit) chasing a relatively less amount of “goods.”

Furthermore, the commonly used price inflation reference is the Government’s CPI.  The CPI measurement of inflation has been discredited ad nauseum.  And yet, 99% of analysts, commentators, bloggers, financial media meat-with-mouths, etc uses the CPI as their inflation trophy.   But the CPI has been statistically manipulated to mute price inflation since the early 1970’s, when then-Fed Chairman, Arthur Burns, correctly understood that the currency devaluation that was going to occur after Nixon closed the gold window would have adverse political consequences.  Today, the CPI measurement of price inflation is not even remotely close to the true rise in prices that has occurred over the last 8 years. Over the last 47 years, for that matter.

This notion of rising inflation seems to be the en vogue “economic” discussion now.  But the event that causes the evidence of currency devalution – aka “inflation” – has largely occurred over the past 8 years of global money printing.  If your general basket of expenditures for necessities – like housing, healthcare, food, energy,  and transportation – has risen by a considerable amount more over the last 5-7 years than is reflected in the CPI, ask either the Bureau of Labor Statistics, which publishes the  CPI report – or the moronic analysts who insist erroneously on using the CPI as the cornerstone of their suppositions – why that is the case.

The Fed’s Catch 22 – It’s been estimated that the Treasury will need to sell $1.4 trillion new bonds this year to cover the spending deficit that will result from the tax cuts combined with the record level of Government spending just approved by Congress and Trump. With the dollar declining, foreign Treasury buyers are sitting on significant losses on their Treasury holdings. As an example, since March the dollar has dropped 16% vs. the euro. Add this to falling Treasury bond prices (rising yields), and European holders of Treasuries, especially those who have to sell now for whatever reason, have incurred a large drop in the euro-value of their Treasury bonds. The same math applies to Japanese Treasury bond investors, as the dollar has fallen nearly 9% vs. the yen since March.

One of the primary fundamental factors causing the dollar decline is the continuously deteriorating fiscal condition of the U.S. Government. If the Fed continues hiking interest rates at the same pace – 1.25% in Fed Funds rate hikes over two years – the dollar will continue declining. The pace of the rate hikes is falling drastically behind just the official measurement of inflation (CPI). Imagine the spread between the real rate of inflation (John Williams estimates actual inflation to be at least 6%) and the Fed funds rate, also known as “real interest rates.” Real interest rates using a real measure of inflation are thus quite negative (6% inflation rate minus 1.25% Fed funds = negative 4.75% real rate of interest). As negative real rates widen, it exerts further downward pressure on the value of the dollar.

The Fed could act to halt the falling dollar by hiking rates at a faster pace and actually sticking to its stated balance sheet reduction schedule. But in doing so, the Fed risks sending the economy into a rapid tail-spin. Higher rates and less banking system liquidity will choke-off the demand for the low-cost credit – auto, credit card and mortgage loans – that has been stimulating consumer spending. In fact, I have made the case in recent SSJ issues that the average household is now near its limitations on taking on more debt. Consumer borrowing, and thus consumer spending, will decelerate/decline regardless of the cost of borrowing. We are seeing this show up in retail sales (more on retail sales below) and in stagnating home sales.

As it stands now, based on its reluctance to reduce its balance sheet at the $10 billion per month rate initially set forth by Janet Yellen, it appears that the Fed is fully aware of its Catch 22 predicament. Last week, in response to the nearly 10% plunge in the Dow/SPX, the Fed actually increased its QE holdings by $11 billion. It did this by adding $11 billion in mortgages to its SOMA account (the Fed’s QE balance sheet account). This is an injection of $11 billion in liquidity directly into the banking system. This $11 billion can, theoretically, be leveraged into $99 billion by the banks (based on a 10% reserve ratio). The dollar “saw” this move and dropped over 2.2% in the first four trading days this past week before experiencing a small technical bounce on Friday. The 10-yr Treasury hit 2.93% last week before settling Friday at 2.87%. 2.87% is a four-year high on the 10-yr.

The Big Money Grab Is “On” As Middle America Collapses

The stock market rejoices the House passage of the tax “reform” Bill as the Dow shot up 187 points and the S&P 500 spiked up 21. The Nasdaq soared 1.3%, retracing its 3-day decline in one day. The tax bill is nothing more than a massive redirect of money flow from the Treasury Department to Corporate America and billionaires. The middle class will not receive any tax relief from the Bill but it will shoulder the burden of the several trillion dollars extra in Treasury debt that will be required to finance the tax cuts for the wealthy. The tax “reform” will have, at best, no effect on GDP.   It will likely be detrimental to real economic output.

The Big Money Grab is “on” at the highest levels of of Wall St., DC, Corporate America, the Judiciary and State/local Govt. These people are grabbing from a dying carcass as fast and greedily as possible.  The elitists are operating free from any fear of the Rule of Law.  That particular nuisance does not apply to “them” – only to “us.” They don’t even try to hide their grand scale theft anymore because the protocol in place to prevent them from doing this is now on their side. This is the section in Atlas Shrugged leading up to the big implosion.

“When you see that money is flowing to those who deal, not in goods, but in favors–when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you–when you see corruption being rewarded and honesty becoming a self-sacrifice–you may know that your society is doomed.” – Atlas Shrugged

Speaking of the economy, as with inflation the GDP report does not reflect the true level of real economic activity in the U.S. because the Government report is not designed to measure real economic output. Instead, the GDP is yet another Government economic report constructed with blatant statistical manipulation and outright fraudulent data sampling. How am I so certain of this? The “tell” on the true condition of the economy lies with the fact that Fed is “normalizing” neither interest rates nor its balance sheet. In fact, if the Fed were to “normalize” monetary policy, it would quickly hike the Fed funds rate up closer to 6% and it would be reducing its balance sheet and removing at least the $2.1 trillion in printed cash sitting in the banks’ excess reserve account.  The problem is that this “normalization” would pop the enormous asset bubble created from money printing.  It would also interrupt the ongoing wealth confiscation.

Elijah Johnson at Silver Doctors invited to discuss the above issues as well as the stock, bond and housing bubbles. And of course gold and mining stocks:

I’ll be releasing the latest issue of my Mining Stock Journal this evening. It will have an emerging junior gold exploration company that has been described at “Gold Standard Ventures 2.0.” You can find out more information here:   Mining Stock Journal info.

Gresham’s Law meets its Minsky Moment

There’s a reason that the Fed pursues these actions and it’s not a conspiracy theory. When unlimited cash hits a limited supply of assets, whether paper or hard, this inflationary deluge boosts taxable asset values by 100-1000%, fattening the coffers of the tax collectors. 

While it’s no secret that the Fed, along all global Central Banks, are supporting their respective financial systems by capping interest rates with “QE” (also known as “money printing”), the yield on the 10-yr Treasury has risen 36 basis points in two months from 2.04% in September to 2.40% currently. There have not been any Fed rate hikes during that time period. The yield on the 2-yr Treasury has jumped from 1.26% in early September to 1.66% currently. A 40 basis point jump, 32% increase, in rates in two months.

This is not due to a “reversal” in QE. Why? Because through this past Thursday, the Fed’s balance sheet has increased in size by over $7 billion since the Fed “threatened” to unwind QE starting in October. The bond market is sniffing hints of an acceleration in the general price level of goods and services, aka “inflation.”

I wanted to post this comment from my blog post the other day because this person uses an expressive writing style to convey incisively the uneasy truth about the financial and economic system in the U.S.:

Bankers are moral lepers, the financial equivalent of hookers and blow. You can never get enough of the moral debauchery in that world.

When a shit box tiny house, half the size of my man cave, goes for $50,000 less than my entire home in Reno, the end is nigh. $2,000 a square foot for a studio? What effing moron would pay that. Don’t answer. We know someone did. I pity the fool.

Bitcoin 7000, DOW 23,500, studios for $550,000 are all a result of the Greenspan /Bernanke/Yellen  QEpocalypse.

The flood of faux FIAT creates the same Cantillion effect as the flood of gold and silver from the new world that inflated the values of assets in the old world and decimated those outside the ring of prosperity created by that effect.

And that was when gold and silver were real money. But do you think gold and silver can catch a break today? Nope, not a chance.

There’s a reason that the Fed pursues these actions and it’s not a conspiracy theory. When unlimited cash hits a limited supply of assets, whether paper or hard, this inflationary deluge boosts taxable asset values by 100-1000%, fattening the coffers of the tax collectors. No accident there.

You would think this might solve some fiscal woes at the local and state level by boosting tax receipts by a few hundred percent. Nope, not happening there either.

The states and cities created their own PONZI schemes with underfunded overly generous pension plans. Even a moron could get a better return in those funds but now they are out there with their begging bowls.

The County of Maui just raised it’s property taxes 42% to pay for pension plan deficits. A senator from Ohio wants to use funds from treasury bonds to bail out their public pension deficits.

As we see asset prices sky rocket, the demands from the public sector grow even faster than tax revenues and asset inflation will handle. Gresham’s Law meets its Minsky Moment and none too soon.

And don’t even get me started about Social Security. Just let me get mine before the whole shit show collapses.