Fed Balance Sheet Expansion, Unicorns, Unintended Consequences and Gold

The Bank for International Settlements (BIS) – the Central Bank of Central Banks – released two reports on “unconventional policy tools” – e.g. QE/money printing and interest rate suppression. It concluded that the extreme Central Bank interference since 2008 has had a negative impact on the way in which financial markets function.

While Jerome Powell and his “Gang That Couldn’t Shoot Straight” at the Fed prefer to use the term “balance sheet growth” in reference to money printing, the big-thinkers at the BIS call it UMPT (Unconventional Monetary Policy Tools).”

“Last month’s spike in short-term US borrowing costs was just the latest in a series of market shocks that have fueled investors’ suspicions that this radical monetary policy is having an impact on how financial markets function.” (Financial Times)

“Moral Hazard” is defined as the “lack of incentive to guard against risk where one is protected from its consequences.” In economics (real economics, not the Keynesian psycho-babble of the current era) this would refer to the egregious misallocation of investment capital caused by the unfettered creation of fiat currency injected into the global financial system.

Additionally, unprecedented permissiveness by the regulators, who are charged with enforcing laws originally established to prevent or at least contain the escalating financial fraud that accompanies asset bubbles, further enables and accelerates the formation and inflation of investment bubbles.

The BIS report of course neglected to discuss the extreme moral hazard engendered by the trillions in money printing. The “unicorn” IPOs are the direct evidence of this. The extreme  overvaluation of the equity in the ones that have sold stock into the public markets reflects the complete disregard of historically accepted tools and guidelines used for business model appraisal and financial valuation analysis. “But it’s different this time.”

The losses racked up by these companies, the ones with public equity plus the ones yet to be IPO’d, will aggregate well into the $100’s billions, possibly trillions before this era dies. A journalist from The Atlantic, in an article titled “WeWork and The Great Unicorn Delusion,” correctly asserted that “most [of these companies] have never announced, and may never achieve, a profit.” But he lost me when he asserts that these companies are “extraordinary businesses with billions of dollars in annual revenue and hundreds of thousands, even tens of millions, of satisfied global customers.”

Quite frankly, the business model of almost every Silicon Valley unicorn is predicated on building revenues and gaining market share by selling products and services for a significant discount to the all-in cost of production and fulfillment.

Every single unicorn IPO’d over the last several years that I have evaluated is not only highly unprofitable, but also burns legendary amounts of cash. Of course there are “millions of satisfied customers” globally – the unicorn business model functions in a way that is the equivalent of selling $1 bills for 75 cents.

The more relevant proposition is that, in all probability, many of these companies would have never  spawned if the Central Banks had not inflated the global money supply well in excess of real economic growth generated by the global economy.

I find it difficult, if not impossible, to refer to these appallingly unsustainable businesses models as “extraordinary” when in fact most if not all of them are nothing more than the product of the extreme moral hazard created by the Central Banks’ printing presses running overtime.

The economic losses incurred by the Silicon Valley unicorns are funded by the “private equity” funds which have managed to harness a significant share of the cash flowing from Central Bank money-spigots and transmitted through the primary dealer banks into the financial system. Little noticed is the fact that since 2014, roughly $1.3 trillion has drained out of the banks’ excess reserve account at the Fed and disappeared into the financial system’s “black hole.”

The 2008 Great Financial Crisis – which was a de facto financial system collapse until money printing bailed out banks and reckless investors – was fueled by the easy monetary and credit policies of Alan Greenspan and Ben Bernanke. Those policies stimulated huge mortgage, housing and general stock market bubbles. The unintended consequences bankrupted a large swathe of households and banks.

But that decade’s reckless Central Bank policies pale in comparison to the current era of unfettered money printing cranked up by Ben Bernanke (recall that he was affectionately called “Helicopter Ben”). The ensuing widespread asset bubbles have fomented into a financial Frankenstein that has broken free from its chains as evidenced by the sudden implementation of the Fed’s repo program, which has yet to be accompanied by a credible explanation.

Jerome Powell yesterday (October 8th) asserted in a speech that “balance sheet expansion is not Quantitative Easing.”  But make no mistake, the repo operations function as emergency room triage until the Fed and the Treasury Department formalize another round of money printing, or QE or whatever you want to call it. At this point it is nothing more than a game of Orwellian semantics.

If you’re curious as why the price of gold has risen 37% since the end of May, look to the events unfolding at the Fed and in the banking system. Just like in late October 2008, the price-action in gold is sending a loud alarm that is no longer containable with manipulative efforts in the paper derivative gold market. Eventually the Government’s Working Group on Financial Markets will be helpless in coaxing the hedge fund trading robots to help hold up the stock market.


The commentary above is an excerpt from the next issue of the Short Seller’s Journal (Sunday). I’ll be reviewing several unicorn short ideas over the next several issues. To learn more about this short-sell focused newsletter, click here:  Short Seller’s Journal info

11 thoughts on “Fed Balance Sheet Expansion, Unicorns, Unintended Consequences and Gold

  1. Just read an interview with Gerald Celente. He predicts not a recession
    but a global depression. His original price target on gold was 2k by early
    next year. He has revised that target to 3k to 5k by next year. The down
    side to the prediction is the global social unrest that will occur when all
    currencies begin and to lose value quickly. I guess your earlier prediction
    of a “The Road” scenario could become reality. I sure hope not but I’m
    mentally and physically prepared for the worst.

  2. Soon the money for stock buy backs will also dwindle (corporation have borrowed already excessively) and the market will sink. Then everybody will wake up. Too late.

  3. Probably just silliness, but doesn’t this remind you of an organized crime racket of counterfeiting and money laundering? And state condoned, too. Wow, what a business!

  4. I’m going to post a comment from another blog. I can’t stop reading it:

    “In fairness Steve, the madness must go on. Those in the know (the banking elites, senior government officials, corporate titans et al.) are fully aware of the fact that when the money printing runs its course all hell breaks loose. This isn’t going to be a run of the mill cyclical event that works its way out or even a repeat of the Great Depression. This time it’s for all the marbles. Society as we know it ends and what comes after is not even in the vernacular. There was a time when I detested TPTB and to some extent I still do because of the criminally insane system they created and perpetuated. Now, I just feel tremendous sadness and remorse for what lurks in the wings. You and a handful of other very smart analysts understand that what awaits us is an energy crisis of incalculable proportion. The public, aided and abetted by a media that caters to juveniles, has no concept of how our current society sustains itself. They think that the economy functions as a result of how much debt it can incur. Can we manage the payment? No idea that our monetary system is a construct of fuel spewing from the end of a gasoline hose at the nearest gas station. Once that stops or becomes unaffordable, we’re done and there is NO Plan B. We are now living in the Twilight Zone, crazy shit happening everyday and the world simply keeps on as if it’s a new level of normalcy. Lucky for you Steve (tongue in cheek) you will have much more insanity to report on. The problem of course is you are preaching to the choir. Your articles though are a welcome relief to those of us who need to know that we are not out of our minds. So keep up the great work but recognize that at this point there is NO alternative but to continue the financial and geopolitical madness. There is NO going back, there is no sustainable nirvana to work towards. There is NO balancing of anything. That ship sailed 50 years ago. The idea of endless growth and money for nothing and chicks for free, was to alluring. We ran it to the hilt and now we approach the banquet of consequences.It will be like no other time in history if for only it’s proportion. So, let’s continue to be honest with ourselves and note the absurdness and desperation of the control masters but realize that they are fully aware of what happens when we run out the clock. At this point, I’m hoping they have a few more rabbits in their hats. It’s not just about being right and wanting retribution. It’s about my wife, my children and grandchildren, my parents and the people I care deeply about. That’s what’s at stake. If it means more money printing for the time being, I’ll take it. THERE IS NO DESIRABLE ALTERNATIVE.”

  5. It is headlines like this that keep the banksters awake at night:

    “More than 7 million Americans are already 90 or more days behind on their car loans”

    As at the end of Sept. 131 million workers were in employment. These are the 63 per cent lucky ones. The rest is already homeless. Of the lucky ones at least five per cent are in deep trouble. If you assume that there are two people behind every car loan, it is ten per cent. Here is the full article:


  6. On October 14, 2019 (Monday), CME Group will launch two financially settled Shanghai Gold Futures, denominated in U.S. dollar or Chinese renminbi.

    No one has come out and said what this means for the price of Gold going forward.
    Probably because no one knows except Trump, Mnuchin, the CME, the cabal and the Chinese. And Trump does know.

    It sounds to me if you want physical gold for delivery, you now will buy the Shanghai Gold Futures contract because the Crimex and LBMA are tapped out. So the criminals found a way for others to go buy & deplete the Shanghai physical Gold. While the Crimex continues their paper fraud price suppression scheme. Were the Chinese threatened to do this, does a bear crap in the woods.

  7. Hello Dave, you may find a lot of fodder for your next copy of the Short Seller’ Journal in this video. It appears that the public has been totally mislead about the US housing market recovery. Apparently the banks stopped foreclosing in 2010 and millions of defaulters live in houses that belong technically to the banks without paying a nickel. There is another group of millions of defaulted mortgages that have been modified time and time again without success. Many banks may be already insolvent because the hidden losses exceed their equity. In that sense, the banking industry may have never recovered and may sit on negative equity of enormous proportions.

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