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Inflation: Making the Complex Simple Part 2
Click HERE for Part 1 of this article.
Before progressing, it is worth revisiting Stoking The Embers of Inflation, a paper we wrote with Brett Freeze in 2018. At that time, the money supply was declining, and we argued, contrary to popular thinking, it might generate more inflation. In the months that followed, annual CPI rose to 2.90%, the highest level since 2012. Today, we argue a sharply rising money supply may not generate much inflation.
Confused? 
In Part 1 we wrote: “The truth lies in the supply and the demand for money. Unfortunately, the supply of money gets the headlines, while its demand is an afterthought.”
This article’s underlying theme, and the one described in depth in the article mentioned above, is the Monetary

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Inflation: Making the Complex Simple Part 1
The quarterback signals for the Y receiver in the trips formation to shift left toward the right tackle. At the same time, the running back moves to the quarterback’s right. The slot Z receiver runs a fake jet sweep and doubles back. The left tackle and guard are ready to pull to the right, and the center will counter to the left. A safety creeps toward the line and the Sam yells to the strong-side linebacker to shadow the tight end.
The quarterback drops back and throws a pass up the middle for a 20 yard gain. What looks like a simple football play on television, is a complex choreography of 22 football players, coaches, and numerous strategies.
Humans constantly digest massive amounts of data. To make sense of our surroundings,

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Zen and the Art of Risk Management

“Most investors are primarily oriented toward return, how much they can make and pay little attention to risk, how much they can lose.” –Seth Klarman

Growing wealth occurs over a long time horizon, including many bullish and bearish market cycles. While making the most out of bull markets is important, it is equally important to avoid letting the inevitable bear markets reverse your progress.
Making this task much more difficult are extreme market environments and inane investor beliefs at such times. When markets are frothy and grossly overvalued, greed takes over, leading to lofty performance expectations and excessive risk stances. Equally tricky is buying when fear grips the markets.
In both extremes and all points in between, we must

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Willful Blindness is Driving the Death of the Dollar and Societal Rift

“It was assumed, even only a decade ago, that the Fed could not just print money with abandon. It was assumed that the government could not rack up huge debt without spurring inflation and crippling debt payment costs. Both of these concerns have been thrown out the window by large numbers of thinkers. We’ve seen years of high debt and loose monetary policy, but inflation has not come.
So the restraints have been cast aside.”
– David Brooks- New York Times-  Joe Biden Is A Transformational President

Regardless of whether you agree or disagree with David’s politics, he makes an incredibly bold statement above. In no uncertain terms, he argues, massive amounts of monetary and fiscal stimulus can be

What Interest Rate Triggers The Next Crisis?
The Ten-year U.S. Treasury note yields 1.61%.
10-year high-quality corporate bonds yield 2.09%.
The rate on a 30-year mortgage is 3.05%.
Despite recent increases, interest rates are hovering near historic lows.  We do not use the word “historic” lightly. By “historic,” we refer to the lowest levels since the nation’s birth in 1776.
The graph below, courtesy of the Visual Capitalist, highlights our point.

Despite 300-year lows in interest rates, investors are becoming anxious because they are rising. Recent history shows they should worry. A review of the past 40 years reveals sudden spikes in interest rates and financial problems go hand in hand.
The question for all investors is how big a spike before the proverbial hits the fan again?

“Come on let’s twist again, Like we did last summer!Yeaaah, let’s twist again, Like we did last year!” 
– Chubby Checker
During the last half of 2020, bond yields were flat-lining at historically record low yields. The message was clear: bond investors did not fear inflation. The tone changed abruptly in early January when the ten-year U.S Treasury yield rose above 1.00% in yield. In February, five-year Treasury yields crossed 0.50%, which raised alarms for global investors.
Despite stock market trepidation over rising yields, the Fed remains calm. It appears some Fed members are applauding higher yields. The following four comments came from three Fed members on February 25, 2021, the day in which the five-year Treasury notes gapped higher by 25 bps.
Jim Bullard: “The rise in bond

Is Plinko The Best The Fed Can Do?
Plinko was made famous on the TV show The Price is Right. To play the game, a contestant drops a coin into one of the many slots at the top of the Plinko board. Then they watch the coin fall, bouncing off pegs until it reaches the bottom. The contestant hopes the coin ends in a generous reward slot at the bottom.
The picture below will jog your memory.

Unfortunately, a silly game of chance like Plinko is a great analog to explain current monetary policy and its flaws.
COVID QE
When COVID shut down the economy, the Fed immediately doled out massive amounts of monetary stimulus. In the first two months of the crisis, the Fed bought nearly $3 trillion of assets via QE. That is more than twice what they purchased during the worst moments of the Great

Will “Go Crazy” Drive The Bear Out Of Hibernation?
The economy will “go crazy” this summer.” There is not a day that goes by in which we do not hear an economic forecast with an extreme optimism based on pent-up demand.
The argument certainly appears plausible and is widely subscribed to by professionals. To wit, JP Morgan: “we expect consumers to blowout expectations for the rest of the year.” Per Business Insider: “Goldman Sachs raised its forecast for 2021 US gross-domestic-product growth to 6.8% from 6.6%.”
To help put context around whether the economy will “go crazy,” we focus on consumer spending habits during the lockdown and the financial means which drove those habits.
If the “go crazy” scenario is correct, monetary velocity will rise and ignite a powder keg of money supply.

Bye Bye Brokers
The Game Stop (GME) shenanigans are another reminder of the systematic risks lurking in the financial markets. Equally important, the incident highlights how certain players prevent markets from running more efficiently. The inherent dangers and market inefficiencies are not only borne by market participants but by every citizen.
This article discusses a technological advancement, allowing financial markets to operate more efficiently. In particular, we discuss the tokenizing of assets and show how blockchain technology can make our markets and, therefore, the economy more efficient.
We thank Charlie McGarraugh and commend his ability to explain a complex topic in plain English. For more on tokenizing assets, we highly recommend listening to his recent appearance on

Can The Fed Both Tap On The Brakes and Floor The Gas?
Fed speakers repeatedly promise policy tightening is a story for next year or the year after. To quote Jerome Powell – “We’re not thinking about raising rates, we’re not even thinking about thinking about raising rates.”
Short term interest rates are approaching zero percent and will likely fall below zero shortly. The culprit is an unusual circumstance at the U.S. Treasury. As we discuss, the Fed may have no choice but to tighten monetary policy to offset the condition.
For investors banking on continuing massive stimulus, what unexpectedly lies ahead may not be the same as the road we have been traveling.
Buckle Up
Andreas Steno Larsen, of Nordea Bank, wrote a thoughtful article on a significant liquidity event on the horizon. His

The Game Stop (GME) Fairy Tale And Its Lesson
Once upon a time, there was a zombie corporation named Game Stop ($GME). For the last few years, it has been circling the bankruptcy drain. Similar to Blockbuster, its business model, renting and trading video games and equipment, is going the way of digital streaming. GME’s brick and mortar operations held a competitive advantage versus most competitors. Unfortunately, in today’s digital streaming world, they are minnows, prone to attack by the likes of Amazon.
We tell the story of GME because it’s fascinating. More importantly, however, it holds an important lesson about the level of speculation the Fed is fostering.
Preamble- Know Who You Are Squeezing
As we wrote this article, the short squeeze phenomena were shifting toward the silver

The Fed’s Ever-Growing Golden Footprint
A special thank you to Alexander Stahel for providing us historical data on real interest rates.
What is a Dollar?
The value of a dollar is a figment of your imagination. A “greenback” is a worthless piece of paper backed by an intangible promise- the “full faith and credit” of the U.S. government. Its value rests on a necessary belief that one can transact with it today and tomorrow. Therein lies the value of any fiat currency.
Similarly, gold has little tangible value other than what we ascribe to it. Gold is not currently an authorized currency in any developed nation. But, it is held in proportionally small amounts by many governments as an informal reserve. Besides opinions of worth, the difference between the dollar and gold is gold has

The Fed’s Inconvenient Truth: Inflation Is “M.I.A.”
“The amount of money in the US economy is 25% higher than it was at the start of 2020, eclipsing any pace of money growth seen since the Federal Reserve was established (1913)” RB Advisors Deputy CIO Dan Suzuki.
In recent weeks we have seen a non-stop flow of ominous statements like the one above.
The author is 100% factual and it should be a cause for deep concern. Historically, such surges in the money supply were often met with significant inflation.

While the sharp increase in the money supply provides context to the depth of our economic problems, our inflation warning bells are not ringing, at least not yet. Here is why.
What is Inflation?
Inflation, or aggregate price increases, results from economic activity, along with the

Is Inflation In Your Best Interest Or The Feds?
“We want to see American citizens pay higher prices for milk, butter, eggs, bread, and toilet paper. To reach our goal, we will adjust monetary policy to make these goods and other goods and services more expensive in the future.”
How long before mobs storm the Mariner Eccles building (Fed headquarters) if Jerome Powell were to make such a statement?
Is our mock proclamation that different from Powell’s comment on 12/16/2020:
“With inflation running persistently below 2%, we will aim to achieve inflation moderately above 2% for some time so that inflation average is 2% over time and longer-term inflation expectations remain well-anchored at 2%.”
During Powell’s most recent press conference, not one reporter asked how the public benefits from

The Fed Is Juicing Stocks
We came across the following bullet points from a Seeking Alpha article titled- The Fed is not Juicing the Stock Market.
It makes for a great headline, but the Fed is not the cause of this rally.
Every dollar the Fed has pumped into the economy is spoken for, and it is not in equities.
The truth is a lot more boring and scary than the conspiracy theory.
After explaining how the Fed is not culpable for rising stock prices, the author ends the article with the following challenge: “So please, I invite anyone to explain to me, like I was a 5-year-old, what exactly is the mechanism that explains “the Fed is juicing the market,” when we know exactly where all the Fed’s money is, and we know that it isn’t in the market.”
We are always up for a challenge.
The following

Plus ça change: A French Lesson in Monetary Debauchery 
Fiscal policy shifted into turbo-charged, warp speed, overdrive early into the COVID related recession. To facilitate the borrowing binge, the Federal Reserve took unprecedented monetary actions. In 2020, the fiscal deficit (November 2019- October 2020) rose $3.1 trillion and was matched one for one with a $3.2 trillion increase in the Fed’s balance sheet.
The Fed is indirectly funding the government, but are they printing money? Technically they are not. However, they are inching closer through various funding programs in coordination with the Treasury Department.
Will the Fed ever print money? In our opinion, it is becoming increasingly likely as the requirements to service the interest and principal on existing debt, plus new

Can We Trust Mr. Market’s Booming Economic Outlook?

The Sopranos- Season 1 Episode 5 “College”
Meadow Soprano speaking to her father Tony: “Are you in the mafia?”
Tony: “That’s total crap. Who told you that?”
Meadow: “I lived in the house all my life. I’ve seen police come with warrants. I’ve seen you going out at three in the morning.”
Tony: “So, you’ve never seen Doc Cusimano going out at three in the morning on a call?”
Meadow: “Did the Cusimano kids ever find $50,000 in Krugerrands and a .45 automatic when they were hunting for Easter eggs?”
Tony: “There is no mafia.” 

As we discussed in The Fed’s Monetary Animal House, appearances can be deceiving. Most major stock indexes are up double-digit percentages year to date, implying significant economic growth and a booming outlook for

Half-Truths Are Half Lies By Definition

“When one side of a story is heard and often repeated, the human mind becomes impressed with it insensibly” – George Washington

Daughter- Can I go out with friends?
Father- Have you asked your mother?
Daughter- Of course I have.
Father- Okay, have fun.
In the plot above, the daughter only tells her father half of the truth. She fails to disclose that her mother said “no.”
Like the daughter’s craftiness, many markets are surging on narratives built on just one side of a story. For speculators and gamblers, that seems to suffice. For investors aiming to build and preserve long term wealth, we suggest understanding every side of a story.
Of the many tales we hear to justify record equity valuations, low-interest rates are among the more popular. Make

The First Trillion is Always the Hardest- Analyzing Apple Mania
“Fundamentals might be good for the first third or first 50 or 60 percent of a move, but the last third of a great bull market is typically a blow-off, where the mania runs wild and prices go parabolic.” – Paul Tudor Jones
From 1976 when Apple (AAPL) began in Steve Jobs’s garage to 2019, its worth rose to $1 trillion. Subsequently, from March 20, 2020, the trough of the COVID market crash, to today, the value increased by another $1 trillion. Over 44 years to hit the first trillion, and less than half a year for the second. Apple is up 240% from the March lows.
We consider ourselves value investors. That means we prefer to invest in companies that are “underpriced.” Over time, this strategy typically translates into better

We are coming upon that time of year when the markets play second fiddle to debates about which twelve seed could be this year’s Cinderella in the NCAA basketball tournament. For college basketball fans, this particular time of year is dubbed March Madness. The widespread popularity of the NCAA tournament is not just about the games, the schools, and the players, but just as importantly, it is about the brackets. Brackets refer to the office pools based upon correctly predicting the 67 tournament games. Having the most points in a pool garners bragging rights and, in many cases, your colleague’s cash.
Interestingly the art, science, and guessing involved in filling out a tournament bracket provides insight into how investors select assets, structure portfolios, and react during volatile

The 1987 stock market crash, better
known as Black Monday, was a statistical anomaly, often referred to as a Black
Swan event. Unlike other market declines, investors seem to be under the false premise
that the stock market in 1987 provided no warning of the impending crash. The
unique characteristics of Black Monday, the magnitude and instantaneous nature
of the drop, has relegated the event to the “could never happen again”
compartment of investors’ memories.

On Black Monday, October 19, 1987, the
Dow Jones Industrial Average (DJIA) fell 22.6% in the greatest one-day loss ever recorded on Wall Street. Despite varying perceptions, there were
clear fundamental and technical warnings preceding the crash that were detected by a few investors. For the rest,
the market euphoria raging at

“When it becomes serious, you have to lie.” – Jean-Claude Juncker, former President of the Eurogroup of Eurozone finance ministers
On July 16, 2019, Chicago Federal Reserve President Charles Evans made a series of comments that were blasted across the financial news wires. In the headlines taken from his speech on the 16th and other statements over the past few weeks, Mr. Evans argues for the need to cut interest rates at the July 31st meeting and future meetings.
In this article, we look at his rationale and provide you with supporting graphs and comments that question his logic supporting the rate cuts. We pick on Charles Evans in this piece, but quite honestly, he is reiterating similar themes discussed by many other Fed members.
The issues raised here are important because the Fed

In a previous article, The Fed’s Body Count, we stated:
“Markets and economies, like nature itself, are beholden to a cycle, and part of the cycle involves a cleansing that allows for healthy growth in the future. Does it really make sense to prop up dead “trees” in the economy rather than allow them to fall and be used as a resource making way for new growth?”
We come back to that thought in this article inspired by the notion that investors find themselves in a forest increasingly littered with dead trees. In today’s market parlance, the dead trees (corporations) are called zombies.  This article details the corporate zombie concept in-depth and provides a few examples to illustrate the topic.

It is no small irony that one year after the end of the great recession, a television show

If you think the Fed may only lower rates by .50 or even .75, you may be grossly underestimating them.  The following article was posted for RIA Pro subscribers two weeks ago.
For more research like this as well as daily commentary, investment ideas, portfolios, scanning and analysis tools, and our new 401K manager sign up today at RIA Pro and test drive our site for 30 days before being charged.
Currently, the December 2019 Fed Funds futures contract implies that the Fed will reduce the Fed Funds rate by nearly 75 basis points (0.75%) by the end of the year. While 75 basis points may seem aggressive, if the Fed does embark on a rate-cutting policy and history proves reliable, we should prepare ourselves for much more.
The prospect of three 25 basis point rate cuts is hard to grasp given

John Kelly – White House Chief of Staff
James Mattis – Secretary of Defense
Jeff Sessions – Attorney General
Rex Tillerson – Secretary of State
Gary Cohn – Chief Economic Advisor
Steve Bannon – White House Chief Strategist
Anthony Scaramucci – White House Communications Director
Reince Priebus – White House Chief of Staff
Sean Spicer – White House Press Secretary
James Comey – FBI Director
“Every week is shark week in the Trump White House,” wrote The Hill contributing author Brad Bannon in August of 2018.  A recent Brookings Institution study shows that the turnover in the Trump administration is significantly higher than during any of the previous five presidential administrations. The concern is that for a president without government experience, a rotating cast of top administration

Since President Trump first discussed firing Jerome Powell, out of a sense of frustration that his Fed Chair pick was not dovish enough, he has regularly expressed his displeasure at Powell’s lack of willingness to do whatever it takes to keep the economy booming beyond its potential. Strong economic growth serves Trump well as it boosts the odds of winning a second term.
This thought of firing the Fed Chair took an interesting turn yesterday when Mario Draghi, Jerome Powell’s counter-part in the ECB, commented that he was open to lowering interest rates and expanding quantitative easing measures if economic growth in the E.U. didn’t start to pick up soon.
This led to the following Trump tweet:

Mario Draghi just announced more stimulus could come, which immediately dropped the Euro

In, The Lowest Common Denominator, we quantified the extent to which growth of consumer, corporate, and government debt has greatly outstripped economic growth and our collective income. This dynamic has made the servicing of the debt and the ultimate pay back increasingly more reliant on more debt issuance.

Fortunately,
taking on more debt for spending/consumption and to service older debt has not
been a problem. Over the past twenty years there have been willing lenders
(savers) to fund this scheme, even as their reward, measured in yield, steadily
declined.

Unfortunately,
two of the largest buyers/holders of U.S. Treasury debt (China and the Federal
Reserve) are no longer pulling their weight. More concerning, this is occurring
as the amount of Treasury debt required to fund

Debt allows a consumer (household, business, or government) to
pull consumption forward or acquire something today for which they otherwise
would have to wait. When the primary objective of fiscal and monetary policy
becomes myopically focused on incentivizing consumers to borrow, spend, and
pull consumption forward, there will eventually be a painful resolution of the
imbalances that such policy creates. The front-loaded benefits of these tactics
are radically outweighed by the long-term damage they ultimately cause.

Due to the overwhelming importance that the durability of economic
growth has on future asset returns, we take a new approach in this article to
drive home a message from our prior article The
Death of the Virtuous Cycle. In this article,
we use two simple examples to

“The biggest problem that most people have is that they read Wall Street research reports and they believe the Wall Street hype… Wall Street analysts are very, very easy to fool, they’re generally parrots for what management tells them.” – Sam Antar, former CFO Crazy Eddie

In 2018, Goldman Sachs underwrote 513 corporate debt issuance deals totaling $94.5 billion. They were paid an average fee of 0.48% or approximately $453.6 million for those efforts.

In a recent
research report entitled, Corporate Debt
Is Not Too High, Goldman Sachs discusses why they are not concerned with the current levels of corporate debt despite
record levels of corporate debt when compared to the nation’s GDP as shown in
the chart below.

Goldman’s
argument cites the following four reasons:

Since the post-financial
crisis era began more than a decade ago, record low-interest rates and the
Fed’s acquisition of $4 trillion of the highest quality fixed-income assets has
led investors to scratch and claw for any asset, regardless of quality,
offering returns above the rate of inflation. 

Financial media
articles and Wall Street research discussing this dynamic are a dime-a-dozen.
What we have not heard a peep about, however, are the inherent risks within the
corporate bond market that have blossomed due to the way many corporate debt
investors are managed and their somewhat unique strategies, objectives, and legal
guidelines. 

This article
offers insight and another justification for moving up in credit within the
corporate bond market. For our prior recommendation to