The Economy

Of course he was a director on the San Fran Fed Board. Every bank CEO of a bank of any size is one of the directors of their district's reserve bank. By law, they have to hold stock in their district's reserve bank in order to operate. It's how our banking system is set up. Those regional bank boards are comprised of CEOs like him, because technically the Fed is supposed to be an independent organization that is kind of owned by the banks in their region.

Practically, if you were thinking that he's the guy who was making the monetary policy he is operating under, it's not the case at all. It's the most whacked thing about what the Fed really is. ... political appointees control monetary policy (they rotate the regional bank presidents in and out of actual voting positions and they have fewer seats than the political appointees do).

In any case, his role as a director gave him about as much role in Fed policy as you and I have, TBH. I mean, he has a direct line to Mary Daly (who is a non voting member at the moment) just like every other bank in the region has, and I am sure she takes his calls and listens to him because after Wells Fargo, this was the second biggest bank in her region. But he's finding out about their rate decisions at the same time you and I are finding out about them. Even Mary Daly -- who supposedly directly influences those decisions (and again, she doesn't even have an actual vote right now, and even if she did, don't kid yourself, Jay Powell makes a decision and then everyone gets on board with what he wants), can't tell him for sure what the Fed is going to do on the Monday before the Tuesday they meet.

 

The Fed wasn't aware it was going to start raising rates in 2022. Jay Powell isn't a moron, he's just in a job that requires him to be a monkey dribbling a football. He knows that the world can't handle anything above the zero bound. Just as Janet Yellen did. Their only hope is that they can keep the financial crisis they have fomented by being the agents that monetized trillions of dollars of government debt (which sent private malinvestment through the roof on the back of the price fixing of the debt markets they need to do to make that happen) from happening until after they are gone. Let someone else get caught holding the bag. Unfortunately, in order to do that, each of them is fomenting a much bigger crisis later.

We needed a complete deleveraging in 2008. It would have meant devastating economic pain. You could largely blame Alan Greenspan for why we were in that position. Instead, to avoid that pain, Bernanke, then Yellen and then Powell made it worse and managed to kick the can down the road way longer than I would have imagined they'd be reckeless enough to. The larger the mispriced debt levels they were creating, the bigger their price fixing interventions have needed to be. It's how they accumulated a $9 trillion balance sheet, creating money out of thin air to buy trillions of dollars of debt at ANY price (in the process, driving the price of thet debt up, in order to keep yields down and keep defaults from happening).

They took a massive bad debt problem that they had created in the first place with their hubris. ... and kept it propped up with more mispriced debt lopped on top of it, which has now taken the malinvestment to much greater dollar amounts.

Which is why the consumer price inflation that finally forced his hand was "transitory" and they had it all under control. ... right up UNTIL they started the rate hiking cycle because magical thinking wasn't keeping people's grocery bills from rocketing higher.

The timeline will be something like this:
2021: Transitory.
2022: Oh shit!
2023: Oh shit-squared. Who could have anticipated this happening? Quick, pivot!
2024: It's endemic. Sorry. It's not OUR fault.

 

The problem with munis for me has been the credit risk I was seeing if / when things turn south as bad as they could in a financial crisis. Otherwise, even though you are looking at negative real returns, the tax free yield would have at least looked more attractive to me than cash. Since about 2009 or so, seeing what they were doing with quantitative easing, I have wanted no part of credit risk. Whether people understand this or not, they have been playing Russian Roulette.

We are in a massive bond bubble that is going to deflate hard when they finally lose control and we actually start seeing defaults. They will do everything they can to avoid that at this point -- bailouts, socializing the costs if they can, trying to paper over trillions of dollras of credit problems that now exist with "monetary policy" that = driving rates down to prevent failure (and in the process creating more failure).

Right now because of the consumer price inflation they have been forced todeal with, they are trying to let the air out of the balloon slowly, and they are going to realize there is no way out.

Unfortunately, the consumer price inflation now isn't allowing them to do more of what they have gotten away with for a very long time now, so it's a no win situation for the way they think and act.

On the one hand, it shouldn't surprise anyone that a bond market bubble has driven everything else that has happened. They have been suppressing yields for decades, which has driven bond prices relentlessly higher. Yields and prices work inversely to each other. And since 2008, they have been directly intervening in the debt markets to BUY debt with money they are creating out of thin air, which has driven bond prices through the roof. This is what I have been cognizant of all along.

It's great as long as the bubble blowing machine is working. But it has to end badly at some point (with defaults), and it is going to be an accident that they can't contain that causes that ending, and I want no credit risk when the value of those bonds dropping hard at some point and the economic fallout happens from the losses people are going to take. Which is why munis look like the entire bond market to me -- way overpriced. I get why people buy them. ... people operate in the moment and in the environment they created year after year, those bonds didn't look overpriced RELATIVE to the other places you could hunt for yield (or capital appreciation). But that is monetary inflation in a nutshell. It has driven asset values higher (to the point of speculative bubbles) on the back of trillions upon trillions of dollars of mispriced debt, and when that goes on for an inordinately long period of time people can't see just how expensive things really are. They start to just see how something looks relative to other things.

But we are in an everything bubble, and the mechanism driving it has been the bond market. ... The bond bull market that is likely coming to an end right now began in 1982, after Paul Volcker did the exact opposite of every Fed Chair since and drove rates higher because consumer price inflation finally forced his hand. Since then, it's just been escalating amounts debt monetization -- first soley through the Fed overnight rate that Greenspan used to fire the bubble blowing machine back up. ... and it gave us the S&L crisis, then Longterm Capital Management, the emerging markets crisis, the dot-com bubble, etc. The malinvestment he was spurring via the Fed's overnight rate was restrained by the overnight rate as a tool, but for how long he kept the Fed's overnight rate below what would have been the natural rate (while people called him "maestro" for basically stealing growth from the future), it drove the malinvestment in the economy higher until we got the housing / financial crisis. By then, the overnight rate alone couldn't stop the deleveraging (the country would have been devastated by what needed to happen), so Ben Bernanke had to begin direct intervention in the debt markets via asset purchases.

That is what was behind what has been a highly artificial 40+ year bond bull market. ... and every other asset that has run up in value over that time is derative of their destruction of the debt markets.

The problem now is that we have a whole generation of people who have been reared not realizing how artificial the environment has been for so long. So you have a generation of money managers who have never seen a bond BEAR market (the way they used to occur via normal cycles). We're only getting a small taste of it so far with the rate-hiking cycle they embarked on. If rates actually were sitting right now where they would need to be to have an impact on the consumer price inflation they think they are addressing, liquidity in the bond market (starting with U.S. treasuries, which is supposed to be the most liquid market in the world) would dry up. Just on what they have done raising rates 500 basis points, there are already liquidity issues for anyone who has been looking to sell.

 

Board favorite Roblox is another one.

When you are having runs on banks and they are afraid of contagion, it's obviously a serious thing. But the other half is that the clients of this bank include a lot of precarious companies whose valuations were being driven to the stratosphere.

A lot of them have zero earnings, a story. ... and have been fed trillions of dollars of "free money," and it went on FOR A LONG TIME.

This is likely going to be the biggest effect of this. ... funding costs had already been driven higher due to the rising rates. Now credit risk is on everyone's radar screen. You have so many companies that are about to drown in their debt. Prior to now, they could raise tons of capital easily (that capital was "free money" in the form of venture capital operating in a runaway speculative environment), or roll over larger and larger piles of debt at little cost. At the extreme, when the pandemic came on. ... the Fed stepped in to buy their debt directly to keep failure from happening.

Now they are facing a nightmare: 1) venture capital has dried up and 2) their funding to roll over their enormous debts is way more expensive. We haven't seen the effect of this yet. A lot of companies are staring at having to refinance debt in the next 12 to 24 months. And the cost has gone up dramatically.

This is why we are almost guaranteed that the Fed now "pivots" and facing two bad choices they take runaway inflation over trillions of dollars of looming debt defaults that permeate everything. ... governments, business, consumers.

The question for me is. ... is this a tidal change that the"pivot" that is likely coming can't turn back. It's like a party. ... someone just turned off the lights suddenly. If they try to turn the lights back on, will everyone pick up the party where it left off?