History of the Fed and what its expanded mandate will do to the price of crude

This is a brilliant summary.

History of the Fed’s Mandate:

• Maintain purchasing power of USD (1914);
• Reduce market volatility via monetary policy (added during WWI);
• Stand by and watch the crash they crated (added 1929);
• Hold tight to create WWII (1931)
• Confiscate gold (added 1934);
• Become world reserve currency(1946)
• Work newly minted CIA and keep the wars going to increase world debt (1948);
• Wait patience matter (1955);
• Force world trading partners to demand Gold for USD and close gold window (August 15, 1971);
• Tread water awhile and watch the stagflation (1975);
• Act like you care about the economic misery index with “Whip Inflation Now” buttons (1978);
• Blame Reagan (1981-89);
• Plunge Protection Team (1987);
• Act like the business cycle has ended (1999);
• Irrational exuberance (2003);
• Bailouts (2008- 11);
• 2% inflation target (2015);
• Don’t stop the presses (2020);
• Lather, Rinse Repeat 1-17 plus - the ice caps are melting (2021)

This was a comment below the WSJ story that explained how central banks were expanding their mandate to prevent global warming, here.

My concern is not whether banks will save the planet or not, but how this action will affect the price of oil. It seems to me that if you drain demand for securities issued by upstream oil, you should push the price down. But if you fail to push down the demand for the commodity itself, you’ll push up the price of oil. Maybe the solution is to short $XOM, but go long $CL1.

Tweets to savour

• The first people they lay off during the next down turn will be the ones who asked if they could keep working remotely.
• Tether is a Ponzi. I know you know, but eventually more people will know than don’t know and it will take down not only Tether but also BTC & Dogecoin.
• You can only own 4 stocks (25% in each) and must hold for the next 4 years without any tinkering. Which 4 do you choose? Click through. There are some great replies.
• Tech, inflation, and the tyranny of the numerator. This is a post on how the flood of liquidity generated by the Fed ends up in some assets and not others. It challenges the idea that the FAANG are going down simply because inflation expectations are going up. I don’t fully understand the argument, but my take is that Fed printing has to end up in assets somewhere, and investors have chosen momentum stocks because … well, they know that momentum stocks keep going up. I guess this is what you might call Reflexivity. The author is a guy called Lyall Watson. I don’t know if he’s right, but I think that he must have a point that it can’t be just people doing DCF calcuation on $NFLX future free cash flow and using a higher rate. He makes the good point that we should use real interest rates to discount real cash flows, and if anything real rates are probably getting more negative, as nominal rates are going to be pinned to the lower bound for a long time beyond the point when inflation becomes problematic.
• The Blocksize War. This war is not yet over, but comparing bitcoin with bitcoin cash, I’d say that small blocks are winning. I doubt if Elon has a clue about these issues.
• Alternatives to free market capitalism:
  • Stealing other people’s property
  • Enslaving others to produce for you
  • Relying on the charity of those who produce
  • Hunting/gathering and subsistence farming
  • Starvation

Bitcoin

There is a furious interest in Bitcoin this weekend as experts pile in to rubbish Elon’s lack of understanding of crypto. I heard that the inventor of Dogecoin was asked about whether he took into account energy consumption when he designed the cryptocurrency, and he replied that he created it in a couple of hours and really didn’t taken anything into account.

Inevitably, the bulge bracket banks are looking to stuff their clueless clients with another worthless scam: Bitcoin futures for soon-to-be retirees.

See below for more BTC references.

Have fun staying poor – if you want to save the planet

An Inconvenient Truth

This BBC article (and this earlier one) point out that extra wealth leads to extra emissions. It focusses on people in developed countries, but the fact is that developing countries are catching up, and will start to emit more carbon.

Energy stocks have been hammered because of the “stranded assets” theory that the global population will soon be driving around in Teslas powered by wind farms. I’m reluctant to say that an ex-Goldman banker, and serial central banker Mark Carney is an idiot, but frankly he must be if he thinks that the demand for oil in a couple of decades will not be higher than it is now. Maybe he’s not an idiot, and he’s just trying to manipulate the price of $XOM down so he can load up on long-dated OTM calls. Whatever the reason, I think it’s very dangerous to assume that fossil fuels have had their day.

But just ignore me, a Boomer. Listen to Mark, uh, also a Boomer.

(Actually, he’s probably just humouring his wife, who is some sort of Green lobbyist.)

Trends in the week

• Bitcoin repeatedly trying, and failing, to establish a new ATH,
• short interest in SPX at record lows: time for selling?
• ‘retail favourites’ ($TSLA, $APPL, $AMZN, $NFLX, $BYND, $ARKK) are falling very fast relative to the index; $QQQ is weak relative to $SPY,
• selling of treasuries is buildling.

These will not come as a surprise to regular readers. I’ve been predicting this for a very long time. But this time the market is not actively laughing at me. The market is choppy, and the strong rally of $SPX on Friday showed that it’s much to soon to call a bear market. But the bulls are now having to pick their stocks much more carefully.

Druck is bearish on $DXY

Druck talks on CNBC. He points out that the trend growth in retail sales represents a huge drawing forward of demand, generated by stimulus checks. He argues that the central case of interest rates going forward will make the debt financing cost of US Treasury debt unsupportable, which will cause a dive in the dollar.

Druck is smart enough to say that he may be wrong, but it seems clear to me that he is basically right. He looks at flows to conclude that overseas (non-US) investors have turned away from US Treasuries as the hedge asset for all equity investments. The impact on the dollar has been muted, because of heavy flows into FAANG stocks, but this is about to reverse, which he says represents the turning point for the dollar.

I am always sceptical of taking what Druckenmiller says at face value. He has no need for more wealth, but if he is going to make other people wealthy, he will do it through tax reducing charitable giving (maybe to Ivy League institutions). He will not do it by telling redneck investors how to front-run his trades.

Of course, he may have put on these trades, and just be trying to whip up a bit of retail momentum. Who knows? The thesis is seductive, but I feel that there must be a catalyst to move the dollar down much more. The problem is that the most likely dislocation event is a crash in equity markets. This will be strongly risk-on and will provoke a rise in both Treasuries and the dollar.