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Federal Reserve Mission Creep

08-03-2020

Everyone who reads this column knows how I feel about the Federal Reserve, its catastrophic policy errors over the last couple of decades, and how that has led to misallocated capital, as well as plenty of other unintended consequences, not the least of which is 0% interest rates and massive can-kicking from those with long-tailed financial liabilities of all sorts.

Putting the E-S-G In the F-E-D However, the amount of damage the Fed has done in the past might in fact pale relative to what it's liable to create prospectively, given its seeming belief in its own omniscience. The mission creep among central banks is on the verge of becoming something truly delusional. Christine Lagarde wants to use central banking to try to attack global warming, and I suspect there are folks at the Fed that feel the same way. The New York Fed has discussed using its powers to advance the cause of "diversity," and no doubt other districts agree. Then just this weekend, money-printing maniac Neel Kashkari revealed he now thinks he's Dr. Fauci, as he was giving advice regarding the virus:

"If we were to lock down hard for a month, six weeks, we could get the case count down so that our testing and our contact tracing was actually enough to control it…If we don't do that, and we just have this raging virus spread throughout the country with flareups and local lockdowns for the next year or two, which is entirely possible, we're going to see many, many more business bankruptcies."

He has a lot of nerve opining on something that lots of medical people still disagree about (especially when, in his supposed area of expertise, he has been a proponent of so many bad ideas). It remains to be seen if his prescription for fighting the virus is accurate, but his concern is exactly what his policies would create.

Straight From the Chamber of Secrets Kashkari has made no secret about his love of printing money, but the catalyst for this rant was actually an article in Bloomberg this weekend headlined, "Two Ex-Fed Officials Propose a Faster Way to Stop a Recession." In it, Simon Potter, former head of the Fed's Market Group and System Open Market Account, and Julia Coronado, former economist for the Fed Board of Governors, discussed their plan for "recession insurance bonds." It's kind of a convoluted process and a somewhat nonexplanatory title, but the net of it, according to Mr. Potter, is that, "The bonds will be on the asset side of the Fed balance sheet; the digital dollars in people's accounts will be on the liability side."

Setting aside the technical jargon, what he proposes should happen is basically have Congress allow the Fed to inject money directly into people's bank accounts. In other words, helicopter money has turned into digitally delivered money.

The reason I bring this up is because, in the most recent End Game podcast, which was just posted, Grant Williams and I interviewed Russell Napier. After having seen the central bank policies as either deflationary or disinflationary for the last decade or so, Russell has flipped the script and now believes that we're going to experience inflation. This is for several reasons, not the least of which is because the policies being pursued by governments and central banks are going to cause more of the money that central banks print to get out into the financial system rather than stay "locked up" in financial markets.

Recipe for Disaster Our next End Game guest has also been in the deflation camp, but remains there (he's part of one of the most successful bond management teams of all time in terms of track record). The number one thing he is worried about, which folks can hear about next week when episode six is released, is what will happen if the Fed tries to turn its liabilities into money. That is his number one concern. If that occurs, i.e., something along the lines of the proposal by former Fed radicals Potter and Coronado, he thinks we are going to have inflation, currency destruction and all kinds of other horrible outcomes.

At any rate, I wanted to put this on people's radar because I was sensitized to it after doing the interview late last week and then it popped up this weekend (thanks to the Lord of the Dark Matter for pointing it out to me).

A More August Future for the Dollar Turning to the market action, the Nasdaq led the tape higher, as it gained 1.5% through midday, with the Dow and S&P gaining roughly half that. From there, the market traded a little higher into the close (in another display of big-cap tech valuation insanity).

Away from stocks, green paper was higher, and I would suggest that after the beating it took in July, the dollar is about due for a bounce. Fixed income was a little heavier and the metals were really wild last night, first surging, then sinking, then surging. Today, they initially headed south, with silver losing 1% and gold losing 0.75%, before managing to close about flat. The miners were a fair bit weaker, but not ridiculously so.