Capital Market Notes

The Fed can say what they want, the pundits on television can do the same, but the bottom line is a debt-based global economy can not function without constant liquidity.  The Fed talks about quantitative tightening, but when push comes to shove they will have to do what they have to do: provide liquidity.  If not, game over.

Last part of this article from the Market Insider, says the following (with the part in the parenthesis being my edit)…

But while this is true (Fed performing quantitative tightening) for short-term assets such as T-bills, the Fed has actually been picking up long-duration bonds since QT started in June of last year.
 
Market veteran Ed Yardeni pointed out in a note last month that the Fed seeks to moderate the impact of its QT program with continued purchases of Treasuries with maturities of 10 year of more.
 
Though QT has reduced the Fed’s balance sheet by $1 trillion overall since beginning last year, the central bank has added around $77.5 billion in bonds with maturities of 10 years or more, according to St. Louis Fed data.

I think understanding this concept is crucial.

Regulations have not been set for crypto, but that isn’t stopping Blackrock from getting things in place. They signed a deal with Coinbase last week to begin to offer their clients access to crypto trading. Given that the entire crypto market is about $2 trillion, as this is being typed, and Blackrock manages about $10 trillion, this could have a big impact on the crypto markets.

After a 5.4% reading last month, today’s release saw the Consumer Price Index post a 6.3% gain. Nice to see the number officially put out by the government, but we’ve all seen this inflation when we fill our cars up, go to the grocery store, or grab a dinner out with friends and family.

For a quick write up on the data release, here is an article posted on CNBC.com

https://www.cnbc.com/2021/11/10/consumer-price-index-october.html

We mentioned a “game changer” in our latest research report. This article, which just came out, provides us some insight as to where they are in the process.

https://www.cnbc.com/2021/09/22/the-fed-is-evaluating-whether-to-launch-a-digital-currency-and-in-what-form-powell-says.html

As readers of our research know, we track four main inputs in our macro model. One of those inputs is “current earnings versus potential earnings.” When COVID shut the economy down, earnings versus potential fell off a cliff and bottomed out about 40% below potential. However with the earnings numbers released this quarter, our model shows that earnings are now 17% above potential.

This fact is a very important piece of information and we will be monitoring it very closely.

One of the most interesting things I’ve ever seen is occurring right now.

The European Investment Bank (EIB), according to Bloomberg, is selling “Digital Bonds” on the Ethereum blockchain. The EIB is the lending arm of the European Union. They are the biggest multilateral financial institution in the world and one of the largest providers of climate finance. Ethereum is the second largest cryptocurrency blockchain protocol, with only Bitcoin having a larger market capitalization.

This digital bond offering is the first of its kind. Goldman Sachs, Banco Santander, and Societe Generale are underwriting the offering, which consists of €100 million (roughly $121 million) issuance of two-year notes that are set to be priced next Tuesday.

The Ethereum protocol’s unique value-added proposition in the cryptocurrency/decentralized finance space focuses on their “smart contracts” which are embedded in the transactions on their blockchain. The long-term usefulness of these smart contracts are being tagged as revolutionary to the business world as they could save time and expense on any transaction that involves any type of contract between buyers and sellers. For instance, these digitized contracts could streamline the home buying process.

I find it beyond fascinating that the world’s largest multilateral financial institution, with a very large focus on combating climate change, has teamed up with some of the most powerful global investment banks for the first ever digital bond offering through a cryptocurrency protocol.

This is a clear sign that the dawn of a new era in finance is upon us.

This is a piece from CNBC regarding the famous investor Bill Miller’s take on Bitcoin. Frankly, we agree with him.

https://cnb.cx/2RKXlPb

Yesterday, Fed Chair Powell gave a press conference to update the world on the Fed’s thoughts regarding monetary policy.  I have been a critic of Chairman Powell’s ability to communicate and, more specifically, his phrasing of things as it relates to the market.  I will never forget his careless comments in late 2018, which led to one of the worst 4^th quarters in market history and the worst Christmas Eve trading day ever!

Nevertheless, I think he did a good job yesterday.  He calmed the market’s anxiety regarding the potential for interest rate hikes by reassuring investors that the Fed would not flip from an easy policy stance to a tight one.

However, I cannot for the life of me understand why any market participant feels that the Fed would move towards instituting any policy that would choke off the liquidity from the markets.  It seems completely clear to me that our debt-based global economy needs stable, if not rising, asset prices in order to function.  If the Fed were to begin a process of raising interest rates, then asset prices would be sure to fall, hard.  This, of course, is exactly what the Fed will do anything to avoid.

With this as a backdrop, I expect to see easy monetary policies for the foreseeable future, even if that means some inflation will be brought into the system.  The Fed would welcome some inflation showing up in our CPI numbers, as opposed to seeing asset prices fall significantly.  This bias towards easy money is something that I think will continue to provide fuel for the markets.

In late 2017, I wrote a research report entitled “Central Bank Hubris.”  In it, I quoted a line from C.S. Lewis and that quote was; ‘It is not the assumptions that are discussed in society that are dangerous, but the one’s that are implied.’

At that time, I felt the implied assumption in the market that the Fed (and other Central Banks around the world) was infallible and could do no wrong was a massive issue then. And to be completely frank, I think this situation has only gotten worse.

Because of this implication that the Fed was infallible, I wondered aloud in that report what a mistake by the Fed could look like. In fact, here is a quote from that piece…

“What happens if the Central Bankers make a mistake?” Looking beyond the accepted ideas of what a Central Bank mistake looks like, I can see that they already have made a mistake! And that mistake is that they have meddled so deeply into the functioning of the markets that there is no way they can stop without completely disrupting the same markets they’ve been trying to “save.”  

This mistake of over-meddling is leading us down a path of massive money printing and currency debasement and a pile of debt that, in my opinion, can never be paid back. And with this, the door is open to things like Bitcoin, Modern Monetary Theory, and a strong basis for more and more Central Bank control of the economy.

In this type of environment, some asset classes and specific investments are truly attractive while others, even though traditionally thought of as essential parts of a portfolio, become truly unattractive to many investors over the long term.

Regardless, this market environment isn’t boring as we appear to be on the precipice of major social and geo-political change.