Wednesday, February 07, 2018

The market is funny that way.

I think what is happening in the market is the result of the freakout we were suppose to have, but never finished.

2008/9/10 People were losing their minds over all the money being printed. Then..... we just got used to it because none of that money ever entered the stream. Obamacare and it's reserves tied up so much capital, that it never caused inflation. And now..... all that money is floating out there.

All the money used to recapitalize the banks that they could never lend because the market was too weak. I used to say it was all buried in someones back yard. And now....I'd be selling shovels because that money is going to see the light of day.

This potentially could get interesting. Said in the most sarcastic way.


  1. Capital of Texas RefugeeFriday, February 09, 2018 7:27:00 PM

    Nobody ever talks about the flip side of "money creation," which is "money destruction," so I figured I'd find a reasonable discussion of the process, but I didn't find much of one.

    So I'll provide a short version: when the principal behind collateralized debt obligations (CDOs) gets paid back for whatever reason, the money behind the debt obligation disappears from the money supply.

    The problem is when nobody takes out a new loan to keep the money that was created after the CDO went into maturity, and this can also lead to the disappearance of created money because of a need to invest in anything in order to maintain the existence of the money.

    Collateral calls wound up eating up the principal and also made much of the created money simply disappear back in 2008 because CDOs and other large-scale bundled investments were the profitable game for the biggest players.

    Here's some 20/20 hindsight for you:

    Cato Institute (July 2012) --
    "It's the money supply, stupid":

    "Since August 2008, the month before Lehman Brothers collapsed, the supply of publicly-produced base money has more than tripled, while privately-produced money shrunk by 12.5% — resulting in a decline in the total money supply (M4) of almost 2%. In consequence, the share of the total broad money supply accounted for by the Fed has jumped from 5% in August 2008 to 15% [in 2012]."

    "It is clear that while Fed-produced money has exploded, privately-produced money has imploded. The net result is a level of broad money that is way below where it would have been if broad money would have followed a trend rate of growth. ... [When] it comes to money in the U.S., policy has been, on balance, contractionary -- not expansionary. This is bad news, since monetary policy dominates fiscal policy."

    You're actually going to need that shovel for something else.

    What's happening is that the money supply is returning back to something resembling a normal state where the Fed isn't actively trying to shoot itself in the feet with badly applied metrics and politically-driven hopeful moves. The private markets been recovering on their own despite Fed injections of money, although O'Bozo The Clown wanted to con everyone into thinking that "they didn't build that" slow-motion recovery.

    Part of the implosion of private money has resulted in a need within the industrial sectors to over-produce, hoping that people during product replacement cycles would be content with buying more product than they might otherwise want. That's why we're seeing shopping mall parking lots full of vehicles, especially toward the upper end of the middle range: they're part of auto manufacturers trying to create money for themselves by arbitraging their own production cycles.

    That's probably also why we're seeing one abundantly stupid product cycle after another where every manufacturer within a sector tends to produce the same thing.

    So what you'll need the shovel for is for all of the over-produced industrial output that the market will do everything to try to bury, just so the market doesn't have to cope with the reality of things selling closer to their utility and commodity values.

    As you say, it's going to get interesting because nobody really knows whether this supply-side arbitrage game will produce the same results eventually as a non-interventionist or expansionist policy on the part of the Fed, but the Fed probably did create the slowness of the recovery.

    The freak-out is starting now because nobody knows where this recovery of private money is going, and the markets have been happy being good little welfare recipients for quite a lot longer than a single decade.

    If the Cato Institute's scholar is right, the US has been shooting itself in the feet on monetary supply policy since the end of the Bretton Woods agreements (1971-1973) in the US.

  2. So... if I understand you right - you think people are freaking out because they think private money will not be enough to offset whatever the Fed has spoon fed everyone? i.e a more deflationary cycle?

    I have to admit - just today I was trying to figure out what they could pull demand forward on. The government loves to do that. Houses check. Cars check. And really those are the two biggest financial things you do for the most part. I'm not sure what else can make that big of an impact on the market.

    I did really like the part on monetary destruction. I didn't know that.

  3. Capital of Texas RefugeeFriday, February 09, 2018 9:38:00 PM

    I look at Trump as a construction magnate who has had to live in the post-Bretton Woods economy where he's never really had enough money for some of his projects, and where he's had to go through several bankruptcies because of some of the economic pressure a counter-productive Fed policy has created.

    It is absolutely not a surprise to me that Trump via Mnuchin would want to change the public money supply versus private money supply balance, especially since he sees this matter from a construction magnate's point of view.

    I definitely believe that what's freaking everyone out is that there's no "market predictability" when you remove Fed intervention and let the markets behave more normally as a result of private money supply growing to become more important than government money supply.

    Asset traders are the country's biggest welfare queens, and in the post-Bretton Woods economy, they've been able to benefit from what has become a heavily rigged game. When the Fed can't push on an M1 or M2 lever anymore because they can be out-voted by the likes of Apple with its cash back in the US, all bets really are off.

    But I'll be even less surprised when the supply-side arbitrage game is being played with washing machines and clothes dryers, when there are warehouses full of 2018's "dry goods" production that will simply sit there until either the optimal price point has been reached or that it's more profitable to recycle the parts for "new production" of the same items at a higher price point.

    RAM and flash memory prices are going up right now, but do you think this has anything to do with a lack of production or instead that it's about supply-side arbitrage games? I'm also seeing supply-side arbitrage games being played with rental properties, which is one of the reasons I'm looking at moving to A Not Very Cool Place according to hipsters and other people I tend to detest.

    I think most people don't see this picture at all and are freaking out because they've become used to government welfare for investors, and that beyond rates of return and profits, many of these people actually value observable market stability the most.

    Unfortunately, highly stable markets aren't always good for improving economic conditions, so eventually some investors are simply going to need to lose.

    We'll probably get to watch the exit of the low-information investors that I like beating up on so much. :-)

    On the other hand, and much more amusingly for all of the "popcorn investors" out there who are simply enjoying the markets so they can consume bowls of popcorn in amused anticipation, Trump's gamble might wind up kick-starting the economy in a way the US hasn't seen since the 1950s, but only if the private money supply starts to eclipse the public money supply.

    If it doesn't work, the US economy was already doomed anyway, so why not?