J-A-P-A-N = C-H-I-N-A

Go to lynalden.com and read her November 8th article titled Banks, QE, and Money Printing. Work through her examples in detail. She explains it very well.

Thanks - will read through!

QE is an asset swap. The Fed swaps bonds for a bank reserve credit on their account. They just switch some numbers from one side of the balance sheet to the other. Theoretically this means the bank is allowed to lend more, but reserves haven't been a bottleneck for a very long time.

@Alonso - Thanks for sharing the reference to Lyn Alden's work. Read through it but it just reinforces the view I had, unless the QE is fiscalized the mechanism for asset price inflation is not clear IF banks are already well capitalized.

This might help. . . . who is the largest owner of Japanese equities via an ETF . . . Central Bank of Japan who is the largest shareholder of FANGS and a few other us stocks . . . Swiss Central Bank Both inexpensively created the "money" and purchased the equities. You and I have to work for it the old fashioned way. Doesn't seem equitable does it!

Now listening again the inconsistencies are growing - if he believes FX is a supply game then please explain why the Yen appreciated against the Dollar during Abenomics in the face of Fed QT. My takeaway from the interview is that I should consider central bank liquidity because it clearly still works in the expectations channel

I'm revisiting this interview. Jeff Synder at Alhambra Investments has an excellent YouTube series called Eurodollar University where he explains at length that Fed QE is not money printing. It is as asset swap, no more, as Eivind (below) confirms. The recent RV interview with Russell Napier covers the same point in detail. Mr Napier who has pivoted from deflationary outlook to inflationary outlook, bases his view on an expectation of massive fiscal (MMT) type money printing in the form of government guaranteed lending by commercial banks, with rates pinned down through extreme financial repression ("Cap Day"). SVM has deconstructed this interview in a further recent RV discussion. The oft repeated assertion that the Fed has created $trillions of liquidity that has flowed into risk assets is more nuanced. It is the perception that it has that is at least part of the answer (a key Snyder point). Obviously different with JCB and Swiss Central Bank that are buying risk assets directly.

India is dead weight. 80% of the population craps outside, with no access to any sort of toilet and regular running water. The nations of SE Asia, which in combination are larger, have buried India econmically already and are eight times richer, and pulling away. The Asian RCEP agreement gives them an insurmountable advantange and leaves India (as well as the US) hopelessly excluded on the outside lookiing in. At by far the most valuable and largest trading bloc in the world, with one-third of global populaiton and 51% of Global GDP PPP (versus the relatively useless/meaningless Nominal GDP the US tends to cite). No future for India and a limited, poor future for the US this century.

Noticed that as well. Late 80s and 90s, little to no correlation. But since the GFC, it tracks pretty well. Question is what is different about the two eras? One, is interest rates. Driving rates to zero for a decade assists in financing home purchases and home prices, is beneficial to gold prices, and drives stock prices. Hence the correlation over the last 10 years versus 1990s when bonds were a viable option to attract investment dollars. Other thoughts?

I have said this before, that while I agree with Van Metre and like him for now, the point of the game for those of us "investing", trading or "predicting" is that deflation may come but us small peons can't capitalize on it --- if anyone can --- so the point for us is to understand that the short deflationary period is just an introduction to what you are saying: A grand combination of confidence loss and then, monetization. You're welcome, I just allowed you all to forego any subscription extension, unless of course you like the daily entertainment.

I don't have an endgame view, so I'm not sure how I got it wrong. I've stated the financial system will crash and it will be worse than the GFC. I believe we are in agreement.

@Steven V -- well your reply points out some of it. Assuming the financial system will crash in a "worse than the GFC" paradigm is illogical under the endgame Von Mises pointed out. It is a possible outcome, but not the most likely one, and potentially a red herring in terms of the investable and tradable outcomes to focus on. Check out the history of equity markets during hyperinflationary periods. You will see patterns like the ones in the Weimar period, where equities lost substantial value in real terms, but their nominal valuation rose by hundreds or even thousands of percent due to a combination of rampant speculation and savvy players recognizing what was happening. For the powers that be, meanwhile, the lesson of the GFC was that they didn't do enough, and they didn't do it fast enough. Having learned that lesson, they will keep doing more -- and more -- and the system has tremendous ability to prevent crashes as we think of them in the traditional financial sense. That was part of Von Mises' point -- the endgame is expressed as a destruction of the currency because all other pathways to adjustment are effectively headed off. The real purchasing power of the currency is the only thing they can't control in the end. The Great Depression could have been prevented or truncated if they had done more; the 2008 crisis could have been prevented or truncated if they had done more; they get that now. What they don't get is that all of the mechanisms wind up in erosion of the currency. But if you see this start to play out, waiting around for stocks to melt down, or bonds to melt up, is quite possibly the least productive positioning to have. In the throes of a dying currency regime, we are more likely to see the Dow at 50,000 than 15,000.

@JL I don't think we are in disagreement. I just don't think my view of a replay of the GFC will trigger a hyperinflationary event or the point of complete currency destruction. I think there are a couple of other steps in between before we get to the endgame.

@Steven V -- You are still missing what I'm driving at. You tilt against the machine, and the probability is that the machine steamrolls you rather than breaking down spectacularly in the manner you expect. Look, a market crash is policy error: — the crash of 1929 and the Great Depression were policy errors — the global financial crisis was a policy error — the March Covid crash was addressed almost instantly They are very, very good at stopping or reversing crashes. And they are getting better as their boldness increases. Monetary plus fiscal can basically stop almost any crash or dislocation in its tracks, or reverse a volatile event quickly, with sufficient political will. That is my main point. You underestimate the power of a 10,000 pound gorilla in expecting for, and overly weighting toward, another big crash. Now, am I saying the 10,000 pound gorilla is invincible? No. I am saying what Von Mises more or less said. They have an incredible range of options, and more budget flexibility than most realize, but their achilles heel is an inability to stop the macro-level erosion of currency purchasing power over time. This likely doesn't resolve with your GFC. It resolves more like with what China is doing, where they get better and better at absorbing dislocation events, like a cartoon character swallowing an ever larger series of bombs, with the ultimate transmission effects showing up in eroded purchasing power of the currency, which doesn't happen at once, but over an extended period of time — while those who were waiting for an event of the type that happened decades ago didn't happen again, other than in the form of faster dislocations that are aggressively reversed (as in March 2020).

Steve, what will happen, then? Do you think the central banks won't respond to insolvency events? Do you think deflation will last long enough for anyone to "make a trade"/play? I don't.

Yes please! It would be very interesting to hear how this data is interpreted by someone with a different theory!

I agree. I would LOVE to see Steve cover this one. Michael is fantastic and gives us a ton to consider. His appearances are always dense.

Good question, it is not clear what is meant by 'liquidity'. M0, M1 or M2 money supply? M0 (FED reserves) has almost doubled this year, but M2 (representing money in private bank accounts) is only up 20%.

Great points. I am assuming that resource and value equities plus agricultural may be the place to focus.

Yeah, not a big call. But, it's still 25%+ move above recent highs. Given the risk associated with the current, US economy, seems like it would have made the move about $2k already. Honestly, it's dumbfounding that there isn't more institutional interest, and interest on down, in the gold. One more trade in bonds and that's it. Then what is everyone going to do, take a complete and utter bath? Nasty, nasty.

Thats just 2021. If my gold goes to 2500 I shall be very happy. However, the risk for gold is to the upside given all the nonsense "printing" giveaways, whatever you want to call it, that has transpired in just 10 months. My target minimum for gold is $5k within 2-5 years.

Also can't liquidity just vanish very quickly? So we never have to pay our debts?

Yes that statement caught me by surprise too. Obviously I am reading the wrong commentary / books.

Depends which stocks...

Also as Bonds yields show any serious indication of rising for the medium/long term huge swathes of holders will bail to avoid capital losses and will mover either cash, equities of gold/bitcoin. I have no bonds, having missed Raoul's bond boat and cash gives me nothing at this point, so stocks (the right ones...not Tesla for example) and gold bitcoin seem appropriate right now.....

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I'm already out. Hedgeye calling Quad 2 had that effect on me. Can always get back in during the next Quad 4...

Yeah, I used to subscribe to hedgeeye but let it lapse, I don’t like trading around that much but maybe go ahead and sell some Treasuries.

Depends which equities...

I'm pretty sure he said $25,000 - it's even in the video description...

Just misspoke the 2500, pretty clear he meant 25k based on his Math Gold-BTC relationship.

I imagine any rise in yields simply won't be allowed as banks whack it down via QE infinity - but there may be brief collapses in gold, as we had the past 2 weeks where US10Y rose 0.2% and gold got hammered.

Ha! I will have to tell him that. I kind of liked the fact that he was illuminated but the background was dark.

I'll consider it but I'm not sure I can do an effective job. Some interviews are more challenging than others! I've read CrossBorder Capital's reports in the past and I struggled with them.

25k would be something like roughly 80% up, if I’m not mistaken?

You need to look at M2. Banks not lending is precisely why QE is no longer working and why CB digital currencies are inevitable.

M2 is completely irrelevant for liquidity in asset markets. None of the Ms include the trillions of eurodollars in circulation. The interbank dollar market has been the "real" dollar central bank for the last 60 years - the Fed was irrelevant before I was born - which is why QE has NEVER worked (other than the purely psychological effect on the equity markets of the financial media screaming "DOLLAR FLOOD, BOND ROUT!!" for more than a decade.

I think your point is spot on. But I would say that CB intervention compresses yields to a point that indirectly forces market participants to scavenge for yields inevitably elsewhere, reaching higher and higher on the risk ladder. So, as far as I find very interesting the Equity/safe assets ratio discussion (with the caveat of maybe knowing a bit more about the methodology underling the concept of "safe" through the timiline of the chart), my humble impression is that we're indeed living a huge scarcity game, but not driven by a huge pile of liquidity, despite by an artificially induced risk appetite of mkt participants. We've seen a Volatility decompression, a phisiological one past elections. My educated guess is that we're going to see a whole lot more of it in the upcoming months

Bond yields are low because money is tight, and the market expects (and have been expecting) deflation/disinflation for the next 30 years. No need for more complicated explanations when that makes complete sense. Occam's razor at its finest.

I also want to say Mr. Howells gives a great presentation, and I love speakers that bring good charts and data.

Howell, not Howells -- sorry!

It is the bar chart that appears at approximately 9:40