Postcards from the Florida Republic - October 16, 2022 (Triumphant Return Edition)
From the Desk of Garrett Baldwin ?
October 16, 2022
Current Outlook: Incredibly optimistic about raw materials and basic commodities moving forward. The “Great Transition” may not be about green energy or inflation. It may be about shifting from traditional market economics to a world with politicians at the center of money flow and not the Federal Reserve. This matters because the world is still built around oil (not the other way around), and every solar panel sourced in China won’t change this. The Fed can’t fix inflation on its own without cooperation from supply-side policies in Congress and more-responsible fiscal managers. Even without a pivot, my long-term portfolio moves overweight energy/food/materials for the decade.?
Bearish: I’m avoiding haunted hayrides with other peoples’ children. ??
Serious Question: Is there one sane, responsibly managed, majority-speaking English language nation left in the world?
Going Long: Based on the move back down into oversold conditions on Friday, I’m expecting another similar pop to what we saw on October 3-4 and October 12. Funds just keep pounding the S&P 500 futures into the ground, so any small amount of buying or surprise bad news can trigger profit taking. Energy is the only positive sector right now, although it feels like regional banks may get some attention. Cash is still an optimal position right now. I’m selling puts on oil stocks.
Dear Future Florida Republic Residents,
It is nice to be home.
Things feel calmer… I can just sit back and relax.
I can watch the Buffalo Bills battle the Kansas City Chiefs.
I can do your best to avoid Twitter or social media on Sunday.
To get into crunch time into the last two minutes of the game.
But then my phone goes off… and I get this…
These two statements are one day apart. What is Yellen doing??
This is a problem. Whether it’s public relations, mismanagement, or flat-out senility – officials must track public comments.
Today, I want to start with a clear understanding of why we’re seeing these conflicting statements. We have competency issues.
? Oh: So, THIS is Why I Now Have Anxiety Issues
There are five people I follow for sober commentary on the market. I don’t feel like I’m being sold anything. I just like to listen to what they are discussing, and then I do additional homework from there. Naturally, I listen to a lot of other people – especially in the momentum world of trading.
But from a macroeconomic perspective, I always start here:?
Let eye a recent statement from Minerd at Guggenheim Partners.
Two weeks ago, he wrote a blog post about the dangers ahead in October. He noted cracks in the United Kingdom, Switzerland, and the European Union. The emerging markets are breaking down, and our bond markets continue to go haywire.
Most people wonder when the liquidity problems of Europe spill over to our shores.
I think that will be in November - as it will take some additional time to reveal additional cracks - especially with many banks and other funds still trying to get certain assets off their books.?
But Minerd got my attention when talking about competency.
Yes, rates are moving higher at the fastest pace in modern history - and yes - every time that the Fed engages in a fast-tightening cycle - something around the world breaks.?
But there’s more to this. Minerd writes:
“Now in the middle of a sea change in financial markets, most of the professional talent that manages this complex global network—asset managers, market makers, financial advisors, bond issuers, macroprudential regulators, central bankers—have little to no experience with the market volatility associated with a sea change in global policy, whether it be monetary, fiscal, or geopolitical. The good news is that as challenging as 2022 has been, investors with dry powder have the opportunity to take advantage of dislocations that have offered yields at levels we haven’t seen in decades.”
And therein lies the problem.?
No one seems to know what they are doing, do they? Which is why so many people are panicking and flailing around in the wind. ?
This is only the third time I’ve known interest rates over 3%.?
Most younger people trading and investing have never known interest rates over 5%.
Anyone who has started in the markets since 2010 has virtually no reason to teach themselves of the fundamentals of a balance sheet.
They didn’t need to.
Instead, they’ve rooted for zombie stocks, swallowed up non-interest-bearing assets like cryptocurrencies on speculation, bought unprofitable companies, and praised cheap capital ways.
The Fed made everything go up… as the Fed made it all up.
Ben Bernanke won a Nobel Prize for breaking the economy, and allegedly fixing it. This was all theoretical economics…
And now all of this is coming to an end.
Meanwhile, we have no one but Yale lawyers running around in charge of everything.
These political operatives believe they know better on oil production than the executives at Exxon or Chevron.
They believe they know better about how things work… when in reality they don’t.?
No matter if it’s at the Fed, in banking, at the energy level, or any other part of policy, we continue to put all our hopes and prayers in models instead of experience.?
That’s why I love this Twitter thread this week.
People with significant industry experience need apply.?
This issue will likely get much worse.
I’ll explain how and what that means in a moment.?
But first…
? Instant Reaction to the Headlines of the Week
I’ve broken my drum beating it for the last six months in this…?
But listen, it’s just a transition… right? A transition to WHAT?
I’ve lost confidence in government’s ability to address rising food prices. I expect even dumber responses to this crisis.?
To solve the ongoing food crisis and surge in grocery prices… I’m half expecting the White House to form a Congressional committee that will spend $10 million to explore pouring knockoff Gatorade onto the crops to make them “stronger.”
Let’s break this final one down.?
The Fed has trillions in assets on its balance sheet.
The government is sitting on $31 trillion in debt. Consider this number from Adventures in Capitalism, a brilliant four-part series over the last few months.?
“During 2021, the Federal government paid $392 billion in interest on $21.7 trillion of average debt outstanding—or an average interest rate of 1.8%. Now imagine if Fed Funds actually got to the terminal rate and stayed there for any period of time. What would paying an average rate of 4.6% on year-end 2021 debt do to the interest expense? Well, it rises by $636 billion to $1.028 trillion or the more than the cost of our entire military spending of $801 billion in 2021.”
?But what will we do here to address surging interest payment?
Cut the federal budget? Engage in austerity??Increase supplies?
(Editor’s Note: Before you answer those questions… picture me sitting in Delray, Florida last week, writing this on a beach… (More on this in a moment.)?
We have a government that doesn’t want to increase oil supplies, cut red tape to allow more home construction, create conditions for us to produce more fertilizer, or make it easier in any way to bring more products and services to the market.?
No.
So, that’s right out.
Meanwhile, we have a Fed that doesn’t understand the impact of negative real interest rate. The real interest rate in this economy is NEGATIVE 5.1%.
The Fed funds rate is 3%. The CPI is 8.1%.
Take the difference.
We’ve never brought inflation down without getting the Funds rate above CPI. Negative real rates drive more consumer consumption - as they know their money will later buy less.
But as the author above notes: If the Fed funds rate moves higher, the cost of U.S. debt explodes to levels that swallow the Federal budget.
Should we think a bunch of people with no economic background will engage in austerity and bite the bullet for all their reckless spending?
Absolutely… not.
Nope - we’ll likely raise interest rates while we pivot to some level of balance sheet increases or a new form of monetization.
Or we’ll see a continued transition where the Fed doesn’t matter to national policy – and politicians fulfill campaign promises with newly signed cash printed by the Treasury Department while the Fed tries to readjust capital costs.
That’s just code for 4% inflation over a decade or more.
In the process, the dollar would likely weaken against global currencies (unless we’re just going to swallow other economies whole), and boost real assets like gold, silver, food, oil, natural gas, and other commodities higher.?
That is the most likely outcome in the end - because the cost of austerity is chaos in social spending. There will be more people who need housing, food, and other necessities in an increasingly politicized society – so we’ll print more money.?
? Is This How the Next 20 Years Plays Out?
?(Editor’s Note: Everything you read above – I considered last Monday. Let’s start this by showing you a transition… Stop thinking of me sitting on a beach, and now picture me on a couch. Perhaps I am now wearing glasses and have a bit of a beard… to exhibit that time has passed.)
On Friday, I read an exceptional interview with Market strategist and historian Russell Napier. It found its way to Zero Hedge because it’s just that good of a conversation?
I knew I would enjoy it when the interviewee used the term “Dirigisme” to explain the future of Western financial systems.
Dirigisme is state-driven control of an economy. It is not socialism or communism or Marxism or even a command economy.
But it’s vastly different than market-driven economics. (Naturally, some economic schools equate it to fascism.)
It is something that I have discussed since the 2008 financial crisis – only to witness its acceleration of this practice with dramatic “public investments” in green energy, union work, infrastructure, and whatever else they spent it on.?
This article cuts to the core of why the Fed will not get inflation under control to its 2% target. As I noted above, the government (Congress and the White House) will keep spending.
?Largely because of political obligations…
I deduced from the argument that we are witnessing…
1) The increased politicization of finance in America and Europe
2) A process where central banks ceded power on money creation
What Napier notes is that governments now just decide to create money. Emergencies have allowed them to do so…
At first it was COVID. But then it became the war, now electricity shortages and inflation) give them new power to simply pump money into the system – where they want to pump that money into the system. Student loan bailouts and financial crisis? Sure… why not?
Consider this: We’re about to give 70 million Americans an 8.7% increase in their cost-of-living-adjustments (COLA) around Social Security.
Nothing against paying these obligations – but this is clearly inflationary in its very nature… as it is very political.
In Europe – governments are guaranteeing loans offered by banks.
And that process of politicizing capital will effectively paralyze banks and wait for politicians to say “Jump” before they start lending to certain industries.?
While there are unique incentivize to ensuring that you are providing capital to politically preferred interest (something as simple as you won’t be fired.) Again… they will say public investments – but we will recognize it as state- financial oversight of the economy – or dirigisme.
Napier argues that central banks are now “impotent.” And he is right. The Fed can’t lower interest rates alone – especially when bureaucracy chooses to ignore our oil-and-gas needs, while rampantly spending money on their preferred political cause.?
Who is going to stop them? Jerome Powell and Christine Lagarde?
I think it’s important that Napier explains immediately that this form of politicization has been around forever.
“This is nothing new, as it was the system that prevailed from 1939 to 1979,” he said. “We have just forgotten how it works, because most economists are trained in free market economics, not in history.”
That’s a critical distinction in the final sentence. We have forgotten how this process works. It was extremely common between 1939 and 1979 – before Margaret Thatcher and Ronald Reagan showed up. We’re undergoing a “40-year transition.”
But for a nation like the U.S. – which is increasingly dividing across party lines – it could create accelerate crisis again.
All while neutering the Fed’s impact on inflation.
History doesn’t repeat, but it rhymes. And with this period in history, we see that politicization neutered the Fed back in the 1970s just as it is doing so now.
In great observation, Napier mentions a speech given by former Fed Chair Arthur Burns in 1979. I assume it was the one Burns delivered in Yugoslavia – The Anguish of Central Banking.
When discussing why the Fed lost control of inflation during the 1970s, Burns explained the impact of the government’s widespread use of political might to direct capital in the direction of its choosing: There was Vietnam (no small economic cost), The War on Poverty, The Great Society, the Space Race, and plenty of other government projects.
“Burns said it wasn’t his job to stop the war or the Great Society programs,” Napier notes. “These were political choices.”
The Fed tried back in the 1970s, and people believe that the lesson is that the Fed needs to raise rates at a frantic pace. But the reality is that the lack of supply on one side and the politicization component on the other – neuters their impact.
Today, we have similar conditions.?
“People are screaming for energy relief, they want defense from Putin, they want to do something against climate change. People want that, and elected governments claim to follow the will of the people. No central banker will oppose that,” Napier notes.
Of course, politicized finance doesn’t lead to sustainable economic success.
As Napier notes, the United Kingdom spent outrageous sums of money in the 1950s and 60s on “coal mining, automobile production and the Concorde. It turned out that the UK didn’t have a future in any of those industries, so it was wasted and we ended up with high unemployment.”?
So, what would be the result of this new round of dirigisme?
Napier notes that the outcome will follow a similar path to previous experiments.
At first, lots of money spent in the pursuit of economic growth will create that growth. Massive capital expenditures will go into infrastructure, reshoring production, and more…
It will be swell at first. People will like this sort of action.
But it will ultimately lead to stagnation.
In the process, it creates a massive transfer of wealth from savers to debtors.
But I’d go further – suggesting that it will transfer wealth from Silicon Valley and Wall Street banks to the Blue-Collar economy that so badly needs capital expenditures?
Regardless, it will go on until the voters make it stop.
It felt like Congress tried to usurp all that power from the Fed in the wake of 2009, but Bernanke pushed QE through – and no one would complain about avoiding a Depression. But Richard Fisher did complain about this back in 2010.?
It’s not like Congress didn’t drop $787 billion out of the sky during the GFC.
But COVID-19 changed things. So too did Russia in Ukraine.
领英推荐
What will the next crisis be?
More important – whose pocket will be lined nicely by Congress??
? Tumbling Down the Rabbit Hole?
I had long described most policy decisions by the Federal Reserve as “Alice in Wonderland” level experiments.
You know… “Through the Looking Glass?”?
Allianz Chief Economic Advisor Mohamed El-Erain has a new term.
In discussing the Federal Reserve’s impact, El-Erain said that “the financial system is starting to go through the windshield.?
It’s hard to disagree there. Last week, the Bank of England announced even more support to its bond markets as a liquidity crisis rages, while the Federal Reserves is now quietly sending billions to the Bank of Switzerland to avoid a massive dollar shortfall. Good times…?
El-Erian is another voice who deserves attention. The long-time PIMCO executive has actively criticized the Federal Reserve since its botched “transitory Inflation” call in mid-2021.?
Remember, while the Fed said inflation would be transitory, it was still buying Treasury bonds and mortgage-backed securities and kept interest rates well below historical levels.?
That backfired. Look at housing assets alone.
There is a direct causal relationship between the Fed’s balance sheet size and the S&P 500’s performance.
Add liquidity to the system, and capital LOVEs to find its way into risk assets like equities.??
In addition, there is a causal relationship between the Fed’s holdings of mortgage-backed securities and housing prices.?
The Fed artificially kept mortgage rates lower in 2021 by expanding its MBS holdings to $2.7 trillion.?
In addition, a zero-bound Fed funds rate created an environment for cheap credit - as always. Today, the Fed blames the “work from home” movement for the rise in U.S. housing numbers.?
That’s just insane. It proves that not even the people on the Federal Reserve seem to understand the source of inflation.
Negative real rates are pushing inflation today…?
Just as cheap credit and low rates created the conditions for that run on housing from 2020 to 2021.
? It’s YOUR INVITATION to a Chart Party?
I had very limited contact to non-family members during my three weeks away from home during the Hurricane. I’ll take any party to which I receive an invitation.?
Chart I: Long Live the U.S. Dollar
This has gotten a bit out of hand.
What goes up will eventually go down. But the U.S. dollar has been the top performing asset class for the year.
This will ultimately correct, right? Otherwise, European nations and Japan will just end up becoming U.S. vassal states.?
CHART II: Big Money Placed on the Next Leg Down
Don’t look now, but the probability that interest rates move to 5.5% by May 2023 has just entered the conversation.
This is real money, making real bets on the matter. I think we’re heading to 5% much earlier than May... and likely won’t quell the inflation until possibly 6%. If Democrats somehow hold the House and Senate, expect a lot more “stimulus” and balance transfers.?
The odds of that happening sits around 25%.?
CHART III: Why Florida Can’t Be Its Own Nation ??
Well, this isn’t good for the future of the Florida Republic.
?We don’t have a petroleum refinery anywhere.
Time to start a Kickstarter or GoFundMe.
CHART IV: Trussonomics Is Collapsing. Can She Last?
So, this doesn’t seem like a good trend for savers.
The British Pound continues an epic slide on the back of the nation’s rollercoaster fiscal policies. There are now bets that Truss won’t make it as Prime Minister through the end of 2022.?
CHART V: Now This is Just Terrifying
I offered a chart above showing what happens when the Fed aggressively raises interest rates. There are plenty of emergencies taking us back to the 1970s.
But what if we only focus on annual changes in the Fed funds rate by percentage? Oh…
This looks terrifying.?
? How to Tell If You’re a Lying Liar?
If you told me today that you predicted the Houston Astros, San Diego Padres, and Philadelphia Phillies (with the Cleveland Guardians a game away) as your final four teams in the baseball playoffs… you are a liar.
It’s been an exciting Major League Baseball playoff this far… and an eager distraction from the electricity running off my spine and the mitigation of mold.
While I’d like to see Dusty Baker win a World Series as manager, I have a hard time rooting for the Astros. I’m not a Yankees fan, and I’d be rooting for Cleveland if they had chosen the name Spiders over Guardians during the rebranding.
So – that leaves me with Philadelphia – and that’s not going to please me.
Leaving me with former Baltimore Oriole Manny Machado and a city in San Diego that badly deserve a championship. So – that will do. I supposed.
? Stop Listening to These People, Please?
I can’t for the life of me understand how and why this man is still on the air…
With a platform like this – and since we are reliving similar conditions that fueled crisis in 2008, 2018, and 2020 – you’d think it would focus more on education. You’d focus more on explaining how jacking up interest rates will hammer companies like Nvidia.
? A Message to the Toddlers Running Around London?
I want to make this abundantly clear the idiots throwing canned tomato sauce onto Van Gogh paintings or pouring milk all over the ground of grocery aisles to address climate change.
Brazil. Russia. India. China. South Africa. Iran. Argentina.?
Also known as BRICSIA.
They don’t give a damn…
They are looking at energy problems and food problems in Europe right now and realizing that the temperature on earth in 75 years doesn’t matter if you don’t have an economy in five years.
They know humanity is only nine meals away from anarchy.
The critical thing that is so incredibly stupid out of it all is the NGOs, the politicians, the do-gooders, they think they accomplished something by getting China to commit to changing its ways on climate with promises to do so… in 2050?
Are they THIS NA?VE?
I had a conversation with a friend of mine in Europe who doesn’t pull any punches around global energy policy.
I live in Florida.
I watched Lee County rebuild an electrical grid in 25 days after Hurricane Ian.?
If the U.S. declared a climate emergency and built the future grid, it could all happen in one year.
Easy.
But it won’t.
Why??
There is too much money in “Reimagining the Green Economy.”
Too much money in fundraising… for political campaigns… for NGOs to hold conferences promoting green energy transition. Too much money in writing advocacy campaigns and hosting lavish dinners in Dupont Circle. Too much focus on getting to go to Davos to rub shoulders with billionaires still funding oil.
If we solved the energy grid transition problem by 2024, there would be no climate NGOs, no advocacy shops, no money that can be raised, and no six-figure jobs to go to schools to scare the living hell out of kids about climate.?
What will the people working at the Brookings Institute do?
What happens to all the environmental communications advocacy writers?
They have no survival skills.?
They don’t know how to grow food… they have little understanding of fundamental business.
The answer is obvious.
They’d have to find (or manufacture) a new crisis or cause.?
But there is THAT MUCH money in green politics today.
Think I’m wrong??
Look at California’s bullet train fiasco.
It took the New York Times 10 years to figure out that this planned train system was all a failed graft fueled by kickbacks, corruption, flawed engineering, and total mismanagement.
This was supposed to be a simple train from Los Angeles to San Francisco (along fault lines) to save the climate.
The total budget started at $33 billion and was supposed to be done by 2020. Before the project ended, it was incomplete, and the budget was north of $110 billion.
The amount of money made just talking and lobbying around a bullet train… paying contractors more than they were worth… and then building an infrastructure around state campaigns for voters to approve or disapprove was infinitely higher than making the damn train.
I always return to my favorite HBO classic crime drama, The Wire.
At the end of Season 2, Frank Sobotka turns to the lobbyist whom he’s been paying to get the Baltimore docks dredged to save his union. He laments how the United States has changed and how he spent so much money on a lobbyist to do very little. ?
“We used to make shit in this country, build shit,” he says. “Now we just put our hand in the next guy’s pocket.”
We used to build bridges and infrastructure. We were at the pinnacle of engineering. These multi-billion-dollar stimulus packages are big raids of the public treasury… with little expectation that anything will get done.?
Money will pour into think tanks or agencies to “reimagine” our nation in whatever flowery language and utopian nonsense will be pitched. Maybe some of it will be left over for a bridge or two.
There’s too much money to be made to pursue and debate problems. Politicians love problems…
They hate solutions, so there is rarely enough money left over to fix them.
Maybe we’ll see the Capex boom predicted by Napier. But that would require building stuff.?
? Postcards from the Florida Republic?
I met some interesting characters in Delray, Florida, this week.
On the final evening, I had dinner at a French restaurant called La Cigale on SE 5th Avenue. It was fabulous… though I waited a little while for a bar seat…
And as always… I’m a magnet for odd bar conversation.
A man who resembled and sounded a little like Tim Gunn sat beside me. He was with two other people, and they were throwing back martinis. It turns out that two of them were from Maryland, which quickly kick starts a conversation for me…
The man to my right worked in insurance. His compatriots – I didn’t ask what they did. But they were all VERY adamant about me trying the wrapped pork special. I did.
What came next was another little rabbit hole. Within a stone’s throw of introductions, he told me (again, perhaps the martinis) that he was the father-in-law of Udo Spreitzenbarth.
Now, who in the heck is Udo?Spreitzenbarth?
To Google, I went long after dinner.
He’s a famous photographer.
Lots of Vogue covers. Tons of Tyra Banks images.
Think Zoolander photography in the real world.
?Udo – whom I didn’t know existed, and I’m sure he has no interest in my whereabouts – appears to be significantly linked to the fashion and Hollywood scene.
In his public portfolio, he took this picture of Daymond John.
Take this picture in.?
This is a line-in-the-sand picture.
You are in one of two camps.?
A person who laughs and thinks it’s ridiculous… or someone who thinks it’s incredible.
There’s not much middle ground on this one.?
I will show this picture to people at job interviews.
I’ll ask them what camp they are in…
The correct answer is: “That’s incredible.”
That’s all for this weekend. I’ll focus less on economics next weekend – and more on trading this market.
It’s good to be home.
Garrett Baldwin
Editor, Postcards from the Florida Republic