Some key changes are currently unfolding, and the impact is most likely to be huge.

In a recent article by Wolf Richter titled “Fed Ends QE, Total Assets Drop. Liquidity Injection Ends” he accurately points out that the Fed buying of US treasuries has flattened and the amount of central bank liquidity swaps has declined. You can see a decline in the “Total Assets on the Fed’s Balance Sheet” which peaked the end of March and has been generally declining ever since.

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Some key changes are currently unfolding, and the impact is most likely to be huge.

In a recent article by Wolf Richter titled “Fed Ends QE, Total Assets Drop. Liquidity Injection Ends” he accurately points out that the Fed buying of US treasuries has flattened and the amount of central bank liquidity swaps has declined. You can see a decline in the “Total Assets on the Fed’s Balance Sheet” which peaked the end of March and has been generally declining ever since.

Further, he states “For the stock market, a new phase has started. It now has to figure out how to stand on its own swollen and inflated legs in the worst economy in a lifetime, with the worst corporate earnings reports coming its way, while stock prices are ludicrously inflated. So good luck.” Good luck indeed.

Interestingly enough, the fed balance sheet and the S&P 500 has been perfectly correlated UP since the revival of the 2008 crisis era programs and the all the newly created programs in March, which has been generously given out to governments, municipalities, corporations and individuals.

What has all this new money created? Zombies.

We’ve been talking about “zombie” companies that continue to operate by borrowing money, even though their earnings cannot cover interest payments. But banks don’t want defaults on their books, so they continue to lend. Zombie companies have been on the rise, particularly since the Fed began to “manage” the markets in 2008.

Now that appears to have morphed into “Zombie” markets that are “completely mispriced, they’re completely distorted” according to economist Mohamed El-Erian. I agree. Further, he pointed out that “The market feels very strongly that it basically is holding the Fed hostage” and therefore, will continue to subsidize everything.

What happened last September in the Repo markets reflected the Fed’s attempt at withdrawing support by running off their balance sheet by not reinvesting principal and interest payments on bonds purchased during the 2008 crisis. It should be clear that once started, extraordinary measures cannot be stopped. That is why what is at first “temporary” typically becomes permanent.

Personally, I think the extraordinary unemployment program will prove to be the same as well and has proved to be a key policy change as well.

Current policy has been “trickle down”. In other words, give to top (corporations and 1%) and money will flow down to the consumers. But now it appears that trickle down has become “Trickle-up”.

Roughly 70% of US GDP is consumer driven. We have now entered the fourteenth straight week of new unemployment claims over 1 million, impacting over 30 million unemployed individual consumers. With 16 states experiencing a spike in covid-19 cases, reopening’s have stalled and many, like Disney, are being forced to postpone planned openings. This will force even more small businesses out of business.

The problem is that small business drives about 50% of employment. Additionally, big business will look to cut costs and that means cutting even more jobs than they already have.

Still, the debate in congress rages on how to support incomes to millions of workers so they can continue to consume and support the economy. Universal basic income anyone? My bet is, it will be in place before the end of this year.

What do you think might happen when the general public gets ONGOING free money? They will spend it and send the economy into hyperinflation as the decline in the US dollar approaches warp speed. But that also means that spot gold prices hit warp speed.

I’m thinking you’ll be glad to hold gold when the inevitable occurs.

Slides and Links:

  1. https://www.cnbc.com/2020/06/16/economist-mohamed-el-erian-warns-about-the-risk-of-zombie-markets.html?__twitter_impression=true&recirc=taboolainternal

https://www.yardeni.com/pub/peacockfedecbassets.pdf

  1. https://www.wsj.com/articles/the-big-u-s-stock-indexes-are-telling-different-stories-11592904600
  2. https://wolfstreet.com/2020/06/18/fed-ends-qe-total-assets-drop-liquidity-injection-ends/
  3. https://www.bloomberg.com/news/articles/2020-06-23/americans-will-soon-need-the-extra-money-they-saved-in-lockdown?cmpid=BBD062320_CUS&utm_medium=email&utm_source=newsletter&utm_term=200623&utm_campaign=closeamericas&sref=rWFqAg1Y
  4. https://www.cnbc.com/2020/06/16/imf-set-to-slash-economic-forecasts-amid-crisis-unlike-no-other.html?recirc=taboolainternal

https://www.marketwatch.com/story/the-decline-of-the-us-dollar-could-happen-at-warp-speed-in-the-era-of-coronavirus-warns-prominent-economist-stephen-roach-2020-06-22

  1. https://www.marketwatch.com/story/the-decline-of-the-us-dollar-could-happen-at-warp-speed-in-the-era-of-coronavirus-warns-prominent-economist-stephen-roach-2020-06-22