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2022-08-01 07:00 by Karl Denninger
in Market Musings , 608 references Ignore this thread
Market Has Best Month!
[Comments enabled]

That headline, which is of course all over from Friday's close, is one of the most-stupid things I've read in years.

The most-amusing part is that you can have both accurate and stupid in the same article, and this is no exception.

The S&P went from 3741 to close at 4130 Friday, a gain of about 10.4% or 389 handles.

But on 3/14 it traded 4166, and on 3/29 4637, which is a 471 point gain or 11.3%, larger on both measures over half the time.

Of course that was a false God; the plunge began afterward, falling one thousand points in an express elevator ride southbound to 3636.

The ramp-job this last week was mostly about people placing bets that, from my point of view, are wildly idiotic.  The basic belief, which has now persisted for about a month (thus the ramp over the last month) is that The Fed will not actually stomp on inflation and, in the next month or two, will reverse course by either not removing liquidity via portfolio roll-off, will lower rates once again or both -- irrespective of the impact on inflation.

I remind you that the very same belief was in play in the early part of 2008.  The Fed had declared "subprime is contained" and, despite Bear Stearns blowing up through the summer months we saw a marked recovery in what had been a wild dive southbound in the markets.

Then came September, of course.

Inflation is much worse than a stupidity crisis in banking, however.  Once it gets embedded into the psyche of the people its very hard to break it, because inflation tends to drive behavior.  If you believe everything will be more expensive in the future you shift demand forward to today on things you can shift.  Not everything, of course, can be, and this is one of the reasons The Fed more-or-less ignores food and energy, because those are "must buy all the time" things, and as a result while it sounds crazy to ignore them for the most part its well-grounded in psychology.

The problem comes when those ramps in price turn into inflationary expectations on things you don't have to buy all the time and have discretionary control over.  Once that happens its extremely hard to extinguish and only sustained and material DROPS in price change the psychology of the public, just as it was the sustained and material increases that did so in the other direction.

It of course does not help one bit when you have various scolds, from the WEF to the current administration openly calling for higher prices in certain things, or even worse -- destroying availability entirely.  Witness the WEF's recent statements that we "should" ban private car ownership, for example, or Biden's attacks on energy.

The market has acquired a Pavlovian response over the space of a couple of decades and, in combination with Congress which has run up wild deficits and thus public debt, there is a common belief that The Fed can't raise rates high enough to matter.

This is flat-out wrong for a number of reasons, not the least of which is that all Treasury debt held by The Fed costs the Treasury nothing irrespective of the interest rate on said debt because The Fed remits the interest paid on it back to Treasury!  Yes, they deduct from that their operating expenses but those expenses do not change with the interest rate so for all intents and purposes such changes cost the government zero.

It is true that publicly-held debt does indeed roll over, but do remember that this is exactly the point; it is only on newly issued Treasuries that the rate rises.  If I hold a 10 year Treasury bond that had a 2% coupon that 2% never changes for the entire 10 years.  When the ten years is up then the debt has to be rolled (since we presume they can't pay it off) and then the higher interest rates do bite.  But not today.

There is another aspect of this which is that only externally-held debt actually exits the US economy in the form of interest expense; the rest gets spent.  The largest external debt holders are, depending on where you cut it off, about 10-15% of the total and thus while that's real its hardly the end of the world.  In addition Treasury interest is taxable as income and most holders are subject to very high marginal rates (since they're wealthy on a percentage basis) it is not what it seems.

If I have to pay $1 billion in interest as Treasury but $370 million of it comes back as income tax then the real impact is $630 million, not a billion.  While it certainly is real money the often-repeated claim that "The Fed can't raise rates because Treasury can't pay" is garbage.  Congress can go even further by diddling the tax rates on Treasury debt, further effectively reducing the interest coupon!  While there will be plenty of screaming about that if and when they do the fact remains that Congress can in fact machine their way out of what the foolish claim is an impossible scenario, The Fed knows this and in fact has all the flows of funds in their hand because they are producer of the Z1, which is the flow of funds statement, and given the four year maturity cycle there is plenty of time to do it without causing a default.

The political impact of all of this is another matter, but mechanically yes, The Fed can raise rates without bankrupting Treasury.  Math just is, and if you and I have a deal where I give you five $20s and you give me back two of them I may have technically paid you $100 but in fact I really only paid you $60.

There are times betting against the market can be insanely profitable, although timing can be difficult.  Back in 2008 one of the mantras about "subprime being contained" was that the math made it impossible for institutions like Countrywide to collapse.

That was wrong, I pointed out at the time that it was wrong and why -- and they did collapse.

Don't get caught on the wrong side this time; the distortion is much worse now and the fact that indeed The Fed can remedy it without collapsing Treasury are both facts.

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Robodog 462 posts, incept 2011-06-12
2022-08-01 08:18:58

This reply is off-topic for most of the post but on-topic for the first part:

Mike Green, Logica Advisors, has been generous with his research on the effects of passive investing flows as a market backstop when the dips go down.

Like inflation, expectations will undoubtedly play their role too; when stock market values suffer, unrealized losses will likely affect 401K savers' quarterly contribution allocation decisions.

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Defiance to tyrants is obedience to God. ~Franklin
Just like heaven. The Cure
In the light of day. U.K.
On the silent wings of freedom. Yes
Cmoledor 1k posts, incept 2021-04-13
2022-08-01 08:33:52

Always wondered why they dont count food and gas into the inflation meter. Now I know why. Thanks Karl. Always the teacher.

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The whole world is one big fucking scam
Why are you giving a vulgarity warning here? Our genial host is an advocate of both skullfucking and sodomy via rusty chainsaw. Credit to Rollformer

Reason: Im dumb as the fuck
Nashville 84 posts, incept 2018-02-27
2022-08-01 08:33:57

So, the takeaway is that the FED can indeed raise rates in the short-term to kill off inflation without collapsing the Treasury. But, collapsing the economy or those businesses (25%+) that rely on issuing debt - that's another matter. Also, should we define short-term as between NOW and the elections or later in 2023? Te stock market is both curious and confused.
Flappingeagle 4k posts, incept 2011-04-14
2022-08-01 09:11:32

Quote:
The ramp-job this last week was mostly about people placing bets that, from my point of view, are wildly idiotic. The basic belief, which has now persisted for about a month (thus the ramp over the last month) is that The Fed will not actually stomp on inflation and, in the next month or two, will reverse course by either not removing liquidity via portfolio roll-off, will lower rates once again or both -- irrespective of the impact on inflation.


Unless I am mistaken, the Fed's charter, which is law, mandates stable prices and full employment. With inflation as high as it is, it looks to me as extremely, extremely likely, that the Fed would sacrifice employment to stop inflation.

The belief that the Fed will reverse course seem to me to just be a talking-point for the media to use. After all, the media cheered the ramp-up, now they need someone to blame other than themselves for all of the cheering being in error.

I've also posted in another thread that the stock market is a lagging indicator. Let's see how it indicates once the slowdown from higher rates has time to percolate through the system.

Flap

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Here are my predictions for everyone to see:
S&P 500 at 320, DOW at 2200, Gold $300/oz, and Corn $2/bu.
No sign that housing, equities, or farmland are in a bubble- Yellen 11/14/13
Trying to leave the Rat Race to the rats...
Disgusted 368 posts, incept 2021-07-20
2022-08-01 09:21:02

My thinking is the Fed would have to raise rates so high that they create a full on demand destruction deep recession or depression to get inflation under control. There are too many reasons for the high inflation that have nothing to do with monetary policy. They are because of the stupid policies of the Pants Shitter administration. There is no soft landing period. Either they crash the economy which creates another massive set of problems or they try to play it cute and high inflation becomes ingrained in the economy and the minds of everyone. In other words we a fucked, period. There is no "fix" that doesn't include a lot of pain. Good luck bitchez, my advice is to buy more ammo while you still can.
Calrissian 101 posts, incept 2021-04-12
2022-08-01 09:29:39

I'll merely note, I will hope Print Central raise rates again Sept'21st.
If they do, it'll make for the first higher cycle high in over forty years.

Further, the chartists should want to see the US 10yr yield break AND hold >3.25%
If we can see that... then I'll be fully onboard the 'Fed are okay to kill the market' notion.

I hope Karl's original view is right, not least, as the market drama would be VERY entertaining.
Nadavegan 567 posts, incept 2017-05-03
2022-08-01 09:41:28

They are trying, dear God they are trying, to prop up Brandon. It would almost be adorable if it wasn't so evil, kind of like a child with an imaginary friend. Except these evil fuckers will never outgrow their delusions, they will only force us to go along with them and take the "Thelma And Louise" ride over the edge of the canyon.
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Shadowmask 3k posts, incept 2021-05-24
2022-08-01 10:13:59

It's a decrease in the increase, therefore a doubleplus not ungood.
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Smacktle 7k posts, incept 2009-01-20
2022-08-01 10:14:06

"The problem comes when those ramps in price turn into inflationary expectations on things you don't have to buy all the time and have discretionary control over. Once that happens its extremely hard to extinguish and only sustained and material DROPS in price change the psychology of the public, just as it was the sustained and material increases that did so in the other direction."

I think ammo is a good example of this. The price has gotten so high that people have stopped buying as much and the stores are overstocked. Starting to see prices come down online also with a lot of "sales".

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YES! FUCK TWITTER

Reason: FUCK SUGAR!
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Oliver1655 347 posts, incept 2012-08-02
2022-08-01 10:31:56

Nadavegan wrote..

Except these evil fuckers will never outgrow their delusions, they will only force us to go along with them and take the "Thelma And Louise" ride over the edge of the canyon.


Or dangling by a thin steel cable determined to take everyone into the abyss with them.


Mannfm11 8k posts, incept 2009-02-28
2022-08-01 11:43:38

If the Democrats hold power, inflation will be late 70's level. They are spending a fortune on a hole with nothing at the bottom and taking actions to destroy supply. The Fed can do nothing as long as the Congress tries to outrun it.

What has my eye is the decline in the long bond rates. I can understand oil, because the Administration has put a many day supply on the market. This has stabilized world inventories, for the time being at the expense of national security. They are rattling sabres of war, which will bring a total denial of oil and gas to the domestic economy and a supply crisis.

Speaking of oil and gas, if Europe doesn't get gas from Russia, it freezes in the dark this winter. They are talking about taking whores baths over there. Insanity is doubling down on stupid and we are seeing it across the Western world. I'm not sure an election will solve this, as the next Congress will get this hot potato. Only a change at the top of a lot of Western countries and the arrest of WEF people will stop this insanity. They think they are going to rule the world. Maybe they already do.

If Europe does go into the winter with no energy supplies, it should be a shot across the bow that not starving is preferrable to backing some insane theory the world is going to boil. In fact, the theory might be self fulfilling as it could bring on atomic war. The loss of demand from Europe will upset the world. Even if the energy is available elsewhere, getting it to Europe is a problem.

THIS STARVE THE WORLD POLICY cannot go on. I call it the Green New Starve. How long it takes sanity prevail will go a long way in solving the inflation problem.

There is money coming from somewhere. No money ever exits the stock market, as the buyer has to bring in the same money the sellers take out. Only more inflation puts in more money. If they let nature take its course, valuation models will have to change as treasuries move to a more normal 5%, if they expect to maintain a 2% inflation model. Nothing works at 5%. Playing this game of suppressing long term financial instrument returns will result in financial disaster, as it will all liquidate at once.


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The only function of economic forecasting is to make astrology look respectable.---John Kenneth Galbraith
Keepingmyoptions 301 posts, incept 2007-10-21
2022-08-01 12:30:58

There are few guarentees in investment. Here is one:

The Democrats will pump the stock market and beg for oil into the fall elections.

I have no other investment ideas.

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We are in a bicycle economy. The only way to stay solvent is to keep trading, or tip over.
Tdurden 1k posts, incept 2015-01-29
2022-08-01 12:55:03

Any bets on how many more time Brandon is going to get "rebound covid"? My bet is that whatever meth cocktail they've had him cranked up with isn't working anymore so now they're just going to try to hide him until after they've dealt with their Kamala problem.

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"I'd like to live just long enough to be there when they cut off your head and stick it on a pike as a warning to the next 10 generations that some favors come with too high of a price." -Vir Cotto Babylon 5
Isidore 24 posts, incept 2021-10-20
2022-08-01 14:15:00

What would it take to remove the central banks from every financial equation? With their ability to ramp or crash seemingly everything, is it possible any modern society can not be dependent on them for prosperity?
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Tickerguy 186k posts, incept 2007-06-26
2022-08-01 14:15:29

@Isidore - The clearing function is essential. SOMEONE has to do it, so you would have to replace that with something of equal reliability.

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The law of scoreboards is not subject to repeal.
Fuck around and find out.
New business: Karl's Guillotine sales and repair; you slice 'em, we dice 'em.
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Iou 1k posts, incept 2009-03-16
2022-08-01 15:27:03

What can't be paid will not be when the music stops. Either way this goes I'm looking forward to watching those that participated in the plunder over the last 40 years get what they deserve. They will either be left flat broke or hanging from a post curtesy of rioting mobs. Which will it be?
smiley

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"When plunder becomes a way of life for a group of men living together in society, they create for themselves, in the course of time, a legal system that authorizes it and a moral code that glorifies it."- Frdric Bastiat
Disgusted 368 posts, incept 2021-07-20
2022-08-01 17:12:45

Tdurden, here would be a fun Tuesday, FJB strokes out from the meth cocktail they are pumping him full of. Right at the same time China's version of an AMRAAM, flies right up Piglosi's ass when she's getting close to Taiwan. The whole Feral Gov. of criminals vapor locks as they try to swear in the Kackling Whore as president. Nobody knows what to do as they all lose their minds, while I just watch and laugh at it all with my popcorn and beer. It's time for some fun dammit.
Neal 177 posts, incept 2014-01-09
2022-08-01 19:12:05

@TG, yes the congress can change the tax rate on the interest earned by foreign bond holders. Those bond holders can do more than bitch and moan about how unfair it is, they can decide not to roll over and not to partake of new issues. I presume the tax take would also rise on corporate and muni bonds as well and again they can decide not to roll over. Ditto would apply to anything foreign investors earn income from in the US would it not? So more than the few trillion dollars might start being cashed in as investments are unwound and the capital invested in other markets. Cant be good for the USD or the economy.
Hard to tax at a high rate the foreigners when they decide to not play in your sand pit.
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Tickerguy 186k posts, incept 2007-06-26
2022-08-01 19:14:27

@Neal - smiley

Uh huh. They have the same problem any other holder does. You can't force early redemption and if you sell early you may take a large capital loss. If you bought 10 year Treasuries six months ago you're stuck for the next 9-1/2 years. If taxation changes, tough balls.

I think you need to quit thinking said "foreign holders" have the cards here. They do not. Yes, the US Treasury can be forced to stop spending in deficit on a forward basis. There is flat-out zero that can be done to force them to alter tax policy; that is entirely under their control.

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The law of scoreboards is not subject to repeal.
Fuck around and find out.
New business: Karl's Guillotine sales and repair; you slice 'em, we dice 'em.
Ronniemcghee 261 posts, incept 2012-07-28
2022-08-01 19:15:07

I'm looking at one of those websites that has the national debt level constantly ticking upward.

No economist here - but I'm interested to know what would need to happen micro/macro economically to get that national debt ticker to freeze.

BTW ~
Is this a joke?
Because if it is, you're a legend!

Inline
Mannfm11 8k posts, incept 2009-02-28
2022-08-01 19:53:31

Ronniemcghee wrote..
I'm looking at one of those websites that has the national debt level constantly ticking upward.

No economist here - but I'm interested to know what would need to happen micro/macro economically to get that national debt ticker to freeze.


I think some assholes would slam shut and no kind of ExLax would work, nor a power enema. There is plenty of zero term money to last awhile. Contrary to popular belief, there is only 1 group to tax, those who work for a living. We are paying the price for free right now and when the middle class starts paying on time for free, these won't be many dyed in the wool Democrats left. Rich will be defined as $100K a year. The Code will be worse than the 1954 Code.

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The only function of economic forecasting is to make astrology look respectable.---John Kenneth Galbraith
Nicodimas 78 posts, incept 2009-05-27
2022-08-01 19:56:51

https://www.nytimes.com/2022/07/31/us/su....

https://www.yahoo.com/news/towns-housing....

Denniger talks about this all the time..


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Tickerguy 186k posts, incept 2007-06-26
2022-08-01 20:02:08

It's a self-correcting problem.

If you're one of the fucked, leave.

If any material percentage do, the rich and famous have their chalet -- but nowhere to buy gas, food, or anything else. No power, no sheriff, nothing.

And no firefighters when the inevitable happens.

Fuck 'em.

Let them all burn to death.

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The law of scoreboards is not subject to repeal.
Fuck around and find out.
New business: Karl's Guillotine sales and repair; you slice 'em, we dice 'em.
Neal 177 posts, incept 2014-01-09
2022-08-01 22:36:33

Yeah TG, I get that the bondholders would take a loss on cashing in early on those bonds to avoid any tax hike. But I presume that there are bonds maturing all the time. If they dont reinvest those funds and indicate they will no longer invest in future as those bonds mature then surely the markets will react to that?
Congress then has 2 options, back down on the tax hike if they want to woo foreign bondholders or the other option is that they decide that foreign bondholders are never going to reinvest so may as well ramp the tax higher. How high can tax rates go? 100%? Maybe even higher. Or just do what they did to Russians and steal it.
And now with BRICS+ getting legs and other options opening up some might decide that the US is like a lightbulb that shines brightest as it is about to fail and steer clear of the USD and US markets before they pop.
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