The Fed’s Harrowing Search for Ample Reserves

Posted on May 31, 2024 by MN Gordon

Inserted between the push and pull of consumer price inflation and interest rates is the direct market intervention of central planners.  Decisions made one day can have lasting penalties upon the next.  Yesterday’s monetary policy blunders by the Federal Reserve bring forth adverse conditions today.

If you recall, during the quantitative easing (QE) orgy that took place during repo-madness and on through the coronavirus fiasco, the Fed exploded its balance sheet.  Up from $3.7 trillion in September 2019 to $8.9 trillion in May 2022.

The Fed, in practice, created credit out of thin air and used it to buy U.S. Treasuries and mortgage-backed securities.  Moreover, having the collective wisdom of several thousand economics PhDs, the Fed found it proper and fitting to buy these assets while yields were at 5,000-year lows.

The results of that low-yielding asset buying binge are highlighted each week in the Fed’s H.4.1 data.  As of May 30, earnings remittances due to the U.S. Treasury tallied at minus $171.9 billion, up 163 percent from the same week a year ago. Continue reading →

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Happy Motoring in the Time of Biden

Posted on May 24, 2024 by MN Gordon

Have you ever heard of the dunes sagebrush lizard?

Most people haven’t.  Chances are you haven’t heard of it either.  Not unless you’ve spent time stumbling about the remote areas of West Texas and southeastern New Mexico.

That’s where the spiny creature lives.  Amongst the dunelands and shrublands.  This little 2-inch lizard burrows deep into the sandy dune areas beneath shinnery oak trees in the Mescalero and Monahans Sandhills.

And while you may not have heard of the dunes sagebrush lizard, its fight for existence will soon impact your life.  On May 17, the same day the DOW closed above 40,000 for the first time ever, it was listed as endangered by the U.S. Fish and Wildlife Service.

This means that this little lizard and its habitat are now protected by federal law.

Perhaps this new legal protection status came a little too late.  Most dunes sagebrush lizard habitat is long gone.  And what remains is fragmented into little patches.

According to the Center for Biological Diversity, 95 percent of its habitat has been lost to oil and gas development and the mining of sand for fracking.  The intent of the USFWS is to preserve what little habitat is left so the lizard can flourish. Continue reading →

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This Inflation Script Won’t Last

Posted on May 17, 2024 by MN Gordon

The Shiller’s cyclically adjusted price-to-earnings (CAPE) ratio for the S&P 500 is currently 34.66.  This is representative of a stock market that has lost all touch with reality.  It even exceeds the 31.48 CAPE ratio hit in 1929, just before the stock market crashed and the onset of the Great Depression.

But it’s not the highest it has ever been.  There are two instances when the CAPE ratio has been higher than today.  December 1999 – at the height of the dot com bubble, just before the crash – when the CAPE ratio hit 44.19.  And October 2021, when the CAPE ratio reached 38.58.

For clarification, the CAPE ratio looks at the price of stocks relative to their average earnings, adjusted for inflation, over the past 10 years.  This provides a big-picture view, which smooths out the year-to-year swings in earnings.

According to the CAPE ratio for the S&P 500, today’s stocks are super-duper expensive.  This doesn’t mean they will crash tomorrow.  In fact, they could become even more expensive.  What it means is, at today’s prices, stocks are very risky in terms of any potential reward they may offer. Continue reading →

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What You Must Know About Interest Rates

Posted on May 10, 2024 by MN Gordon

The buzz has faded away.  The intoxicating effects of the mass money printing and debt binge during the coronavirus years has come and gone.  But the hangover remains.  And while the money printing has subsided – for now – the debt binge has continued.

The consequences of high consumer price inflation, massive government debt, and countless economic distortions, were never really worth it to begin with.  As the last of the stimulus is consumed and wasted away, a great reckoning awaits.

What will happen when the labor market rolls over and debt overloaded consumers lose their jobs?  We may soon find out.

In fact, longtime market analyst Gary Shilling sees a recession coming by the end of the year, with unemployment rising up to 7 percent.  He also believes stocks, which have been driven higher by speculation, could drop as much as 30 percent.  And that the decline could be violent.

“You look at all the kind of speculation that we’ve had out there, it’s indicative of a lot of overconfidence, and that usually gets corrected and corrected violently.” Continue reading →

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