Lately I find myself ruminating on events from long ago. How choices then color the perception of present reality.
So much culture is shit.
In the United States of America we believe that the extraction of economic value under false pretenses is an inappropriate behavior known as fraud.
I woke up this morning to a 20% discount in the price of Bitcoin.
Inventory must be getting low.
It has me thinking though. This is an economically painful event for me. It is not the first and is unlikely to be the last such event. I’m a battle hardened veteran of the market and I know this too shall pass.
It does have me thinking though. I suffer this pain as a necessary prerequisite to future prosperity. Doing the work has shown me that this is good. Other assets are taking damage as well. Much of the market has been overpriced relative to intermediate term realities. They are catching up now and, if the invisible hand of God can be left to do the work, the economic system will be more efficient on the other side.
My concern is that the hand will be held in check by political forces. Maybe with good reason?
There is a new lie at the heart of the global economy and it hides some incredibly scary shit.
Disclosing the details would likely incite panic that would hurt friends and enemies alike, so I keep it to myself, but like, at some point this is going to break regardless. The math. I just… it is bad.
Many will say the trick is to look on the bright side and hope for the best. Markets are a collective work of fiction even at their best. We have smart, competent people manning the controls and somehow we’ll muddle through.
OK. But like, why do I have to suffer this economic damage for the greater good while a much larger and unsustainable problem is left to continue growing more dangerous?
If we’re breaking things for the greater good today, why not throw some gas on the fire and turn it into a real party?
Let’s start from the baseline of a benchmark treasury curve with 2s at 250bp and 10s at 475.
Your reality just broke.
The banks are insolvent. Treasury funding is an integer divided by zero.
Assume Jpow & Co can monetize all that into functionality. Where are home prices?
So I don’t know. The zero lower bound is real. You can gloss it with accounting trickery but only so far. You cannot construct a reality were everyday people will pay companies for the privilege of lending those companies their money. Not without committing fraud.
Inflation is the only solution.
Again, if we are going down this path, why not go all the way? Looking at the numbers we need more inflation than has been manifest thus far. By all accounts social spending programs are insolvent already. Sources suggest social spending is already beginning to impact defense appropriations and will become a central campaign issue for aspiring political leaders to grapple with two or three elections out. That was before global governments spent TRILLIONS of dollars on COVID relief, most of which is now sitting on balance sheets as additional debt to be serviced.
What makes these facts all the more concerning is that since 2008 or so the US Federal Reserve has been subsidizing the government debt market through quantitative easing. In effect the central bank has been printing money to buy debt from the Treasury, which the Treasury could then spend on whatever. Which it did, to the tune of $8 trillion dollars.
That spigot is being closed. Current policy is to reduce Treasury security purchases by $10 billion per month through mid 2022, when QE would effectively end. However, the Federal Open Market Committee is scheduled to meet in about 2 weeks and will likely accelerate that timeline. It is speculated that the US Treasury could be cut off from this funding source as early as year end.
Rate hikes are now expected to begin at early as Q2 2022.
All of the above indicate elevated jump risk for rates going forward.
The important question to ask concerns the marginal buyer of US Treasury securities. China is no longer a reliable funding source. The rest of the world is also struggling to fund their COVID relief investments. Tax rates can rise, obviously, but that forces other trade offs, most of which are worse.
The one thing I know for sure is that the future will be different from that which we have known. My intuition tells me it will be materially so.