Trump’s role in the staggering rise of the world’s oldest currency

Sell the dollar, buy gold. Few investment strategies have worked better than this over the first year of Donald Trump’s second presidency, and it looks set to continue that way.

In the past year, the dollar has undergone its worst overall devaluation since the 1970s. At the same time, the price of gold has surged nearly 75pc to record highs.

No commodity acts better than gold as insurance against inflation, financial instability and geopolitical turmoil.

Call it “Trump Derangement Syndrome” if you like, but financial markets are increasingly betting on all three.

Almost everything the Trump White House does seems deliberately designed to undermine the dollar, last weekend’s renewed attack on the independence of the Federal Reserve being only the latest example.

None of it makes any sense, including the almost certainly hollow promise to cap credit card charges.

Price controls? Milton Friedman will be turning in his grave.

Read the rest here.

‘Sell America’ trade: Dollar drops, gold surges as Trump’s Fed pressure campaign raises fears about U.S. system

Precious metals are jumping to records. The U.S dollar is dropping. Stocks are choppy.

Monday is all about the “Sell America” trade after Federal Reserve Chair Jerome Powell’s bombshell announcement that he’s under criminal investigation — which market participants see as a sign of President Donald Trump’s interest in stripping away the central bank’s political independence.

“This is unambiguously risk off,” said Krishna Guha, head of global policy and central bank strategy at Evercore ISI.

Guha said a so-called “Sell America” trade could play out similarly to what was seen in April, when the stock market cratered after Trump first announced his plan for broad and steep tariffs. Global investors will place a higher risk-premium on U.S. assets, while safe-haven trades like gold should take a leg up as a response to the turmoil, he said.

The Dow Jones Industrial Average fell nearly 500 points at one point in morning trading, while the U.S. dollar index shed 0.3%. But the popular safe-haven trades of gold and silver surged to all-time highs in the session.

“Clearly, the market doesn’t like it,” Ed Yardeni, president of Yardeni Research, told CNBC on Monday.

Read the rest here.

Gold Posts New Record

Gold currently trading at ~$3,566 /oz amidst expectations of the Fed cutting interest rates (whether by choice or under presidential coercion), and the risks of a weaker dollar and higher inflation. 

Update: Gold closed at $3,599 /oz. 

Ambrose Evans-Pritchard: Trump is playing with fire in his attacks on the Federal Reserve

The US Federal Reserve must henceforth be considered the personal political agency of Donald Trump. America’s monetary credibility has been utterly trashed.

The world’s superpower central bank will set interest rates at his whim, much like the Turkish central bank under the Erdogan regime.

Markets must now assume that Trump will compel the Fed to soak up America’s exorbitant debt issuance and hold down long-term interests by a form of de facto yield curve control.

They must also assume that Trump will force the Fed to press the pedal to the floor and slash interest rates far below the natural Wicksellian rate until the midterm elections are safely out of the way next year.

Trump has crossed the Rubicon by purging an independent member of the seven-strong Fed board, each appointed for 14 years with Senate confirmation and protected tenure to shield them from pressure.

He has already sacked the protected head of the Federal Trade Commission and got away with it, so the latest abuse should hardly come as a surprise.

If there were any authenticity to the sacking of Lisa Cook, one of the federal governors, under the legal category “for cause” it would have entailed a genuine probe under due process.

Trump’s obvious purpose is to bring the Fed under his full control immediately and, above all, to issue an implicit warning to any member of the Federal Open Market Committee who refuses to toe the line that they too will be disposed of if anything can be found against them – and something can always be found.

“It’s an authoritarian power grab that blatantly violates the Federal Reserve Act, and any court that follows the law will overturn it,” said Elizabeth Warren, the veteran Democrat on the Senate Banking Committee.

Her caveat is noted. It takes some courage for intimidated judges to “follow the law” in Donald Trump’s America.

The dollar was already on borrowed time as the world’s hegemonic reserve currency before the death of the Fed. The process will now accelerate, with potent implications for the dollarised system of global finance.

The Bank for International Settlements estimates that $13tn (£9.6tn) of offshore global debt is denominated in US dollars, or $35tn if you include embedded liabilities in swaps and other derivatives.

Trump can bulldoze his way through resistance within the US – and he can strong-arm foreign allies into concessions, until they cease to be allies – but there is one great immovable power that is beyond his reach.

He cannot force the global bond market to buy US treasuries and fund his debt.

The Achilles’ heel of Trumpism is that the US has a net international investment position of minus $24.6 trillion, or 82pc of GDP. It has a personal savings rate of 4.7pc, a fraction of US post-war levels or of global levels, and is living off a constant supply of foreign credit to cover day to day spending.

Read the rest here.

One additional factor not getting a lot of attention in all of this is that Trump has been investing hundreds of millions of his own money in US bonds since he won re-election. If he can force down interest rates, he stands to make a killing.

Trump's Witch-hunt at the Federal Reserve

The president is desperately looking for a legal pretext that would allow him to fire Federal Reserve Chair Jerome Powell. Details here.

You Can Thank the Fed for Boosting the Powerball Jackpot

The Federal Reserve is boosting the Powerball jackpot without even buying a ticket.

Since there was no winner in Wednesday night’s drawing, the Powerball prize rose to $1.5 billion, the third-largest lottery jackpot in U.S. history. It is a substantially bigger prize than a year ago, before the Fed began raising interest rates this year to tame inflation. That is because the advertised jackpot is the future value of the prize after being invested in government bonds over 30 years.

Higher interest rates mean bigger lottery jackpots. Larger prizes tend to entice more people to buy tickets, said J. Bret Toyne, executive director of the Multi-State Lottery Association, which runs Powerball.

“While some businesses might suffer from rising interest rates, for lottery games that have annuity for the prizes, it is more of a tailwind,” he said.

Here is how it works: 34% of Powerball ticket sales fund the big jackpot, said Mr. Toyne, with another 16% going to the lower-tier prizes. (The other 50% goes to various state programs, operating costs, and retailer commissions.) If a winner chooses a lump sum payout, the person gets that 34%. If instead the person takes the jackpot in annual payments over 30 years, the prize money is invested in a portfolio of bonds.

The Federal Reserve on Wednesday lifted interest rates by another 0.75 percentage point in Chairman Jerome Powell’s quest to tamp down inflation. The central bank’s benchmark federal-funds rate now sits in a range between 3.75% and 4%.

For the next drawing Saturday, the cash set to be available in the jackpot is more than $745 million, according to Powerball. That would be the lump-sum prize. But lottery officials advertised the total jackpot as $1.5 billion, the estimated value of the bond investments.

No winner has chosen the annuity since 2014, according to lottery records.

Economists say it is better for winners to take the lump sum so they can invest it with the intention of earning a better return on the cash. The potential downside of choosing the lump sum over annual payments is the greater risk of losing the money.

“The advertised jackpot is kind of a deception,” said Victor Matheson, an economics professor at College of the Holy Cross.

Still, the allure of a 10-figure jackpot has drawn in more bettors.

Economists who have researched lotteries say that once jackpots reach around $500 million, non-regular lottery players are more likely to jump into the game. That figure is also the value that tends to draw increased media attention.

Read the rest here.

The lottery is of course, a racket. But it can be amusing. For a couple bucks you can daydream about what you would do with an unimaginable amount of money. That said, the annuity is an advertising gimmick. The true value of the lottery is always the current cash value (before taxes). 

Inflation: Team transitory is getting nervous

All year the Federal Reserve’s message on inflation has been consistent: This year’s surge is transitory, and inflation will soon return close to the central bank’s 2% target.

Yet look more closely, and it is clear officials are turning less sanguine—and that explains growing eagerness to start raising interest rates.

Last September, long before the supply bottlenecks emerged, the median forecast by Fed officials was for core inflation (which excludes food and energy) in 2022 of 1.8%. Every few months since then they have nudged that up, and in the forecasts released Wednesday they see core inflation next year at 2.3%.

While current-year forecasts get pushed around a lot by temporary factors such as a jump in oil prices, the next-year forecast reflects where inflation is expected to settle once temporary factors recede. The message from the Fed’s latest projections is that “transitory” is lasting an awfully long time. Indeed, next year’s projected 2.3% is the highest next-year core inflation forecast since projections were first published in 2007, according to Derek Tang of Monetary Policy Analytics.

This might explain why the Fed is accelerating plans to raise interest rates. The Fed is now buying $120 billion a month in bonds and wants that to fall to zero before it starts to raise rates. On Wednesday, the Fed signaled it would likely start tapering those bond purchases in November, which means the process would be over by mid-2022, clearing the way for a rate increase. Half of Fed officials think rates will start rising by late next year. Just last March, a majority of officials didn’t see that happening until 2024.

What changed? It isn’t because the economic outlook is stronger. In fact, officials now see slower growth and higher unemployment than they did in March. Chairman Jerome Powell explained that some officials simply wanted more confidence the expected recovery would materialize. But inflation risks clearly play a part.

Read the rest here.

Ambrose Evans-Pritchard: The Fed has lost control of bond markets

Wild moves in the $21 trillion US Treasury market have become disorderly. Shockwaves are pulsating through the international financial system and threaten to snuff out Europe’s economic recovery before it has even begun.

Central bankers have long been fretting over what might happen if incipient inflation and gargantuan debt issuance starts to set off an exodus from global bond markets. They had their first real taste late on Thursday. The cost of borrowing rocketed. 

The US Federal Reserve in particular must navigate a narrow strait between the opposite perils of Scylla and Charybdis: damned if it does nothing, and allows the turmoil to continue; but equally damned it capitulates again, opts for easy stimulus to suppress yields, and falls even further behind the curve (in the eyes of bond vigilantes). 

As matters now stand, the Fed has lost control over US monetary policy. Investors are betting that the overhang of excess M3 money created since Covid began will combine with the Biden Administration’s war economy stimulus  - 13pc of GDP, including the pre-Christmas package - to lift the economy rapidly out of its long deflationary malaise.

Rightly or wrongly they are pulling forward an inflationary implication. Futures markets have priced in a full rate rise in 2022 and two more rises in 2023. This is self-fulfilling and will soon start rippling through financial contracts unless corrected.

Put another way, bond traders are dictating policy. They are tightening long before the Fed is ready or thinks that the coast is clear. So much for the charming idea of “running the economy hot”.

Nobody was spared on Thursday after investors shunned what was supposed to be a routine auction of seven-year US Treasury bonds, but instead sparked the worst bid-cover ratio on record (2.04) and a violent intraday spike of 30 basis points. 

The spillover smashed into the vast Japanese bond market, where 10-year yields blew through the upper band of the Bank of Japan’s yield control regime.

Australia’s Reserve Bank had to intervene with emergency QE to hit its yield target. Junk bonds fell out of bed, giving up almost all the gains since vaccination euphoria began last year. 

Equities have stopped rising in lockstep with bond yields for the first since the pandemic began. The Nasdaq bloodbath on Thursday was a sight to behold.

Ark Invest, the momentum ETF, is down 18pc over the past two days and is fast becoming a systemic threat in its own right, epicentre of a nexus of leverage. Saxo Bank warned that the “Tesla-Bitcoin-Ark risk cluster” could set off a toxic feedback loop that sucks other interlinked tech stocks into a downward vortex.

Read the rest here.

Luke Gromen discusses macroeconomic trends

Report: The Federal Reserve to adopt multi-year pro-inflation policy

In the next few months, the Federal Reserve will be solidifying a policy outline that would commit it to low rates for years as it pursues an agenda of higher inflation and a return to the full employment picture that vanished as the coronavirus pandemic hit.

Recent statements from Fed officials and analysis from market veterans and economists point to a move to “average inflation” targeting in which inflation above the central bank’s usual 2% target would be tolerated and even desired.

To achieve that goal, officials would pledge not to raise interest rates until both the inflation and employment targets are hit. With inflation now closer to 1% and the jobless rate higher than it’s been since the Great Depression, the likelihood is that the Fed could need years to hit its targets.

The policy initiatives could be announced as soon as September. Addressing the issue last week, Fed Chairman Jerome Powell said only that a year-long examination of policy communication and implementation would be wrapped “in the near future.” The culmination of that process, which included public meetings and extensive discussions among Fed officials, is expected to be announced at or around the Federal Open Market Committee’s meeting.

Read the rest here.

Meanwhile gold hit a new record high today, closing up more than 2% at $2036/oz.

The Fed Is Killing the Two Main Functions of Wall Street: Price Discovery and Prudent Capital Allocation

On Thursday, knowing that a three-day Easter weekend was coming and the attention of the public would be elsewhere, the Federal Reserve announced that it would allow two of its emergency lending programs to begin buying junk bonds. Those are bonds with less than an investment-grade credit rating, meaning they have a greater likelihood of defaulting. The Fed is not simply accepting junk bonds as collateral for loans, it will actually be buying junk bonds — potentially hundreds of billions of dollars of them. 

Two of the popular junk bond ETFs, iShares iBoxx High Yield Corporate Bond ETF (symbol HYG) and SPDR Bloomberg Barclays High Yield Bond ETF (symbol JNK) closed the trading day on Thursday up 6.55 and 6.71 percent, respectively, on the announcement. Those ETFs had been plunging in price for most of the month of March. 

For years now, prudent investors have been forgoing risky investments like junk bond ETFs and accepting a much tinier yield on U.S. Treasury securities. Now, high rollers like hedge funds that bought junk bonds and junk bond ETFs and received the higher yields, are getting bailed out of these risky bets. The markets will now, going forward, price junk bonds on a closer plane with Treasury securities, assuming the Fed will not let them fail. 

This is effectively killing the pricing mechanism of Wall Street. A U.S. Treasury note has the unconditional guarantee of the U.S. government to make the timely payment of interest every six months and pay the principal at maturity. Junk bonds are backed by nothing more than deeply-indebted corporations, which can, and do, frequently file for bankruptcy protection, making their bonds sometimes sell for pennies on the dollar. But going forward, junk bond ETFs will be priced on the premise that the Fed may ride to the rescue.

Read the rest here.

Get ready for the recovery of the 1%

There were two important economic events on Thursday. The government reported that 6.6 million Americans filed for unemployment, an all-time record. And the Federal Reserve announced a new program to flood the economy and financial markets with $2.3 trillion in liquidity — including buying up junk bonds from debt-laden companies.

Which one moved the market? The Fed move, driving the Dow Jones Industrial Average up 500 points by midday.

The market jump, unemployment surge and Fed rescue efforts all converged to form a new split in the economy, between the asset-rich and the rest of America.

Much like the early days of the financial crisis recovery, the wealthy (or the top 10% who own more than 85% of the stocks and financial assets) were quickly saved by the Federal Reserve and Congress.

In 2009, the stock market jumped more than 50% from its low, thanks to the TARP program and other Fed and government support. It took the rest of American almost a decade to recover lost wages and their home values.

The diverging fortunes of the haves and have-nots led to a massive, post-crisis backlash against the wealthy. It gave rise to the Occupy Wall Street Movement, the Tea Party, anti-establishment politicians and a roaring debate over inequality.

Now, while the root cause of the crisis is vastly different, and no one is talking about greedy sub-prime bankers who brought the trouble on themselves, the coronavirus and response is likely to lead the country down a similar anti-elite path...

Read the rest here.

The Federal Reserve Now Owns 15 Percent of the U.S. Treasury Market

According to the U.S. Treasury, as of February 29, 2020, there was $16.9 trillion in marketable U.S. Treasury securities outstanding. Of that amount, at the end of February, the Federal Reserve held $2.47 trillion or 14.6 percent – making it, by far, the largest single holder of U.S. Treasuries anywhere in the world.

By this past Friday, the Fed’s ownership of the Treasury market had increased to $3.12 trillion. It had grown by an unprecedented $650 billion in one month’s time. And on March 23, the Fed announced that it would buy unlimited amounts of both Treasury securities and agency mortgage-backed securities “to support smooth market functioning.”

But exactly how can a so-called “free market” function smoothly if the country’s own central bank is cornering the market. Salomon Brothers paid a $290 million fine and came close to getting slapped with criminal charges by the U.S. Department of Justice in 1992 for manipulating prices in the Treasury market. And make no mistake about it, the Fed’s massive purchases are having a demonstrative impact on driving up prices in the Treasury market while driving down yields – meaning the income that determines if senior citizens in America can buy real groceries or have to live on one pot of soup for the week.

At the end of 2007, before the Wall Street crash in 2008, a senior citizen could invest $10,000 in a 10-year Treasury note and get $400 a year in income, or 4 percent. Today, that same $10,000 generates just 0.67 percent or $67. Seniors who were living on their Treasury income have experienced an 83 percent drop in income while food costs and pharmaceutical costs have soared.

If the Fed keeps up this pace of Treasury buying, it will own the entire Treasury market in about 22 months. If you look at the New York Fed’s list of the Treasury securities that are being submitted to it for sale by Wall Street’s trading houses versus the amounts the New York Fed is buying, you will see that Wall Street is puking up Treasuries in something akin to projectile vomiting.

This is clearly another one of those unanticipated consequences of a corporate-controlled Senate that passed the massive tax cut for corporations and the one percent in December 2017 and created a $1 trillion+ deficit as far out as the eye can see with no plan for who was going to buy all of the gargantuan amounts of Treasury debt that had to be issued as a result.

Because yields on Treasury securities have collapsed by 83 percent since the financial crash, investors, including risk-adverse senior citizens, have been driven into the stock market in order to capture the higher dividends paid on stocks. That’s also been great for the richest top 10 percent of Americans who own the vast majority of the stock market.

Read the rest here.

Trump Isn’t the First President to Make War on the Federal Reserve

Nixon bullied his Fed chair into lowering interest rates — a political move that wrecked the economy for years.
 

Taking to Twitter late last month, President Trump made clear that when it comes to the economy, the real enemy is not in Beijing, but just down the street from the White House, in the headquarters of the Federal Reserve. The Fed’s chairman, Jerome Powell, had recently led his board in lowering interest rates by 25 basis points, a smaller increment than the president desired. “China is not our problem, the Federal Reserve is,” the president wrote.

Such audacity may feel uniquely Trumpian, but it isn’t. Though our modern political culture holds that the Federal Reserve is independent, other postwar presidents have bullied Fed chairmen just as egregiously. President Lyndon Johnson pushed Fed Chairman William McChesney Martin against a wall after Martin dared to raise the discount rate half a percentage point.

But the worst example is President Richard Nixon’s campaign to coerce “his” Fed chairman, Arthur Burns, into promulgating policy that guaranteed devastating inflation. Worst, because it worked — and demonstrated that this economically vital, supposedly apolitical agency is more vulnerable to presidential meddling than we’d like to believe.

Read the rest here. 

Amity Shlaes is no left-wing moonbat. She is an old right conservative whose recent biography of Calvin Coolidge is sitting on my bookshelf. But what even she dares not mention, is that the world is drowning in debt and the central banks are already up to their eyeballs in money printing and aggressive manipulation of interest rates and financial markets. Their sole function at this point is to keep the bubbles inflated for as long as possible. Trump really aught to read "This Time is Different- Eight Centuries of Financial Folley" by Carmen Reinhart and Kenneth Rogoff (also on my bookshelf). I'd offer to lend him my copy, but there aren't any pictures.

Did the FED dodge a bullet?

The American economy has shed 347,000 jobs over the past two months, roughly comparable with the rate of loss seen during the Great Recession. It is remarkable that the US Federal Reserve should even have been thinking of phasing out life-support in such circumstances. 

 Read the rest here.

FED hints at end to stimulus; stocks bonds fall

Federal Reserve Chairman Ben S. Bernanke said Wednesday that the central bank expects to begin scaling back its massive economic stimulus later this year and end the program by mid-2014 if the recovery continues apace.

The Fed has been spending $85 billion a month to buy long-term bonds and boost the economy. The effort has been credited with propping up the housing market and fueling record highs in the stock markets...

...Stock markets, however, were not as enthusiastic as investors took the remarks as a sign that the Fed is preparing to tighten its policy stance after years of easy money. Major stock indexes dropped when Bernanke began the press conference, then kept sliding. The Dow Jones average and Standard Poor’s 500-stock index closed down nearly 1.4 percent Wednesday, with the Dow dropping more than 200 points. The yield on 10-year Treasuries jumped nearly 8 percent amid a selloff in the bond market.

Read the rest here.

Federal Reserve Paper Warns of Possible Monetary Crisis

A new paper for the US Monetary Policy Forum and published by the Fed warns that the institution's capital base could be wiped out "several times" once borrowing costs start to rise in earnest.

A mere whiff of inflation or more likely stagflation would cause a bond market rout, leaving the Fed nursing escalating losses on its $2.9 trillion holdings. This portfolio is rising by $85bn each month under QE3. The longer it goes on, the greater the risk. Exit will become much harder by 2014.

Such losses would lead to a political storm on Capitol Hill and risk a crisis of confidence. The paper -- "Crunch Time: Fiscal Crises and the Role of Monetary Policy" -- is co-written by former Fed governor Frederic Mishkin, Ben Bernanke's former right-hand man.

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Ron Paul chairs hearings on monetary policy 9-21-2012

Dr. Paul chairs congressional hearings on monetary policy with Jim Grant and Lew Lehrman as principal witnesses. The Democratic members of the committee didn't even bother to show up.

Bernanke on the brink

We are reaching — or may already have passed — the practical limits of “economic stimulus.” Last week, the Federal Reserve adopted an open-ended bond-buying program of $40 billion a month to goad the economy into faster growth. But even before the announcement, there was skepticism that it would do much to lower the unemployment rate, which has exceeded 8 percent for 43 months. The average response of 47 economists surveyed by The Wall Street Journal was that a similar program might cut the jobless rate 0.1 percentage point over a year.

Read the rest here.

Federal Reserve Launches Aggressive Money Printing

Ben Bernanke brought the monetary bazooka Thursday when the Federal Reserve's policy-making committee announced it was taking action to further dampen interest rates with its third round of quantitative easing. This time, the QE will take the form of purchasing $40 billion in mortgage-backed securities a month until the labor market improves (i.e. indefinitiely).

"If the outlook for the labor market does not improve substantially, the committee will continue its purchase of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability," the FOMC statement said.

Read the rest here.