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Musings Report 2020-30 7-25-20 I've Got a Bad Feeling About This
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I've Got a Bad Feeling About This
Fans of the original Star Wars trilogy will recall the characters saying, I've Got a Bad Feeling About This, at pivotal moments before bad things start happening.
I've Got a Bad Feeling About The Economy and Financial Markets. I've already laid out the reasons in this week's blog posts (links below).
Several things may be behind my "I've got a bad feeling about this." One is the Federal Reserve balance sheet, a reflection of how much currency (US dollars, USD) the Fed is creating out of thin air and injecting into the financial system.
The general belief in the stock market is that "The Fed has our backs," meaning that the Fed printing money is essentially a guarantee that stocks will continue lofting higher.
But is this belief actually supported by evidence? Let's look at the Fed balance sheet this year and break it into trends:
https://fred.stlouisfed.org/series/WALCL
12/25/19 $4.165 Trillion
1/1/20 $4.173 T
1/8/20 $4.149 T
1/15/20 $4.175 T
1/22/20 $4.145 T
1/29/20 $4.151 T
2/5/20 $4.166 T
2/12/20 $4.182 T
2/19/20 $4.171 T
2/26/20 $4.175 T
For 10 weeks, while stocks continued lofting higher, the Fed balance sheet did not change enough to affect the $20+ trillion US stock market.
As the stock market started crumbling on February 24, the Fed started printing modest sums.
3/4/20 $4.241 T
3/11/20 $4.312 T
As stocks melted down, the Fed started printing $300 billion a week--an extraordinary sum, reflecting their obvious panic. (Recall that prior to the 2008-09 stock market meltdown, the Fed balance sheet was around $800 billion-- less than 20% of the 2019 total.)
3/18/20 $4.668 T
3/25/20 $5.254 T
4/1/20 $5.811 T
4/8/20 $6.083 T
4/15/20 $6.367 T
4/22/20 $6.573 T
4/29/20 $6.655 T
5/6/20 $6.721 T
5/13/20 $6.934 T
By mid-May, the Fed had printed and injected into the financial system almost $3 trillion, boosting its balance sheet from $4 trillion to $7 trillion.
Over the next month, as the stock market moved steadily higher, the Fed started reducing its balance sheet.
5/20/20 $7.037 T
5/27/20 $7.097 T
6/3/20 $7.165 T
6/10/20 $7.168 T
6/17/20 $7.094 T
6/24/20 $7.082 T
7/1/20 $7.009 T
7/8/20 $6.920 T
7/15/20 $6.958 T
7/22/20 $6.964 T
For the 11 weeks from mid-May to late July, the balance sheet has barely budged: $6.93 trillion to $6.96 trillion. A few billion dollars is just background static in the $20+ trillion stock market. To move markets, the Fed had to print $200 to $300 billion a week.
While punters believed "the Fed had their back" in January and February, the Fed was just holding steady. (Yes, there were repo operations, but these were more credit related than stock market related; and recently, even repo operations have diminished.)
Now once again, punters are confident "the Fed has our back" while the Fed's balance sheet has gone nowhere for 11 weeks.
A theory I've proposed in the blog is that anti-Trump camps in the unelected Deep State would be foolish to let the Fed boost the stock market before the election, as a rising stock market would give President Trump a major tailwind. For this reason, I posited that Deep State players may have told Fed Chair Powell "we know where you live," i.e. stop saving the stock market or there will be consequences that will not be mere abstractions.
Fed Chair Powell has already given himself cover for this 11 weeks of stasis: the Fed did everything up front, and now that the economy is recovering, we've done our job.
The pattern of the Fed doing nothing for 10-11 weeks and then the market crashing is interesting.
So is the relentless decline of the US dollar (USD). The widespread belief is that the Fed printing $3 trillion is inflationary, and so gold is rising as everyone seeks a hedge to the USD losing value--a trend that will only accelerate as the Fed keeps printing trillions.
I too see money-printing as inflationary, but I am also aware that there could be turbulence that upsets various apple carts of certainty.
Look at what the USD did as stock markets sank from late February into mid-March: first it plummeted along with stocks and then soared in a crazy rally, which ended when the Fed started their "print $300 billion a week" program.
Analyst Sven Henrich sees the potential for a USD reversal, and while he doesn't address the reasons why, here's one potential reason: a great many enterprises outside the US have borrowed money denominated in USD over the past decade, and so they need USD to service their debts. This demand for USD is measured in trillions, and can create a dollar shortage as borrowers buy USD to build a reserve against future shortages.
All of this probably sounds pretty arcane and abstract, and my point is simple: it's difficult to predict big moves with any confidence in such volatile times.
There's the issue of scale: the Fed's balance sheet sheet expansion of $3 trillion is unprecedented, but it's really not that big compared to the $20+ trillion US stock market, the $40+ trillion bond market, the $100+ trillion in financial assets held by US households, or the $340 trillion in global financial assets.
The stock market is large, but the bond market is much larger, and the currency market is larger still. These markets can disconnect for a time and then violently re-connect, or they can be tightly correlated, going up or down in tandem, and then lose their correlation very suddenly.
"I've got a bad feeling about this" is of course an intuition, not a prediction. Maybe the confidence in the current trends continuing will be rewarded. On the other hand, some surprises that few expect wouldn't surprise me.
Highlights of the Blog
New Podcasts:
AxisOfEasy Salon #14: Jobageddon and the Coming Education Revolts
Posts:
Why the Unraveling Will Accelerate 7/24/20
Introducing the "Everything Bubble" Sentiment-o-Meter 7/23/20
Inflation/Deflation: The Economy Is an Elephant 7/22/20
Inequality Is America's Monster Id 7/21/20
The Real Unemployment Rate is 21%--and Heading Higher 7/20/20
Best Thing That Happened To Me This Week
Delivered lychee to friends and family. This is 70 pounds (32 kg), about half the harvest from one tree.
From Left Field
My patient caught Covid-19 twice. So long to herd immunity hopes. Emerging cases of Covid-19 reinfection suggest herd immunity is wishful thinking.
Business-as-usual porn – or, We need to talk about collapse
Rethinking Humanity: Five Foundational Sector Disruptions, the Lifecycle of Civilizations, and the Coming Age of Freedom (via Adam T.) -- good example of techno-fantasy....
How a Great Power Falls Apart: Decline Is Invisible From the Inside -- this is much more realistic and grounded than assuming 3-D molecular fabs will make everything for free...
'I Can't Keep Doing This:' Small-Business Owners Are Giving Up-- this is simply being ignored as a key dynamic of what happens going forward....
A Second Coronavirus Death Surge Is Coming
THE GREEN ELECTRIC CAR MYTH: 772 Pounds Of Petro-Chemical Plastics In Each Vehicle (via James D.) --what few want to hear....
What Communists Did To My Family In The Soviet Gulags
This model forecast the US's current unrest a decade ago. It now says 'civil war'
"Normally, prior to this worsening process, a country would be able to adapt to, to deal with that. But because of this long-term buildup of vulnerabilities, it cannot."
Why a Great Reset Based on Green Energy Isn't Possible
"On a stand-alone basis, intermittent renewables have very limited usefulness.Their true value is close to zero.".--important to understand Gail's research and conclusions....
I’m a Parent. And a Bad Teacher. All I Do Is Panic About School. "September is coming--and too many children and educators don’t have a plan. Meanwhile, privileged families are creating their own little education yurts with tutors and tennis coaches and pastry chefs and widening the chasm between families who can and cannot bathe problems in money." -- rare example of class conflict making it into the corporate media....
That Time Charlie Chaplin Almost Got Assassinated In Japan (via GFB) -- Charlie's acting skills paid off...
"To be able to practice five things everywhere under heaven constitutes perfect virtue: gravity, magnanimity, sincerity, earnestness and kindness." Confucius, via Mark J.
Thanks for reading--
charles |
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