The pivot that isn’t coming
While we wait for the Federal Reserve to pivot to money printing, I might put forth the suggestion that it simply isn’t going to happen.
There are signs that the objective of the Fed is far bigger than simply killing off inflation. The Federal Reserve is jointly owned by the commercial banks, who rely on US Dollar dominance for both their income and their influence. There is simply no chance that they will give up the USD without a fight.
A pivot to QE from here would fundamentally undermine the Federal Reserve such that they and the Dollar may never recover. They are well-resourced and (though it pains me to say it) intelligent people. Here are a number of alternative scenarios we might see over the next 12 months:
- Buying long; selling short
The Fed might well put a lid on longer term interest rates by buying longer maturity debt and issuing shorter term debt, resulting in no net QE. This would have the advantage of providing more of the short term liquid bonds that people like and allow banks to unload the longer term debt.
This would calm things but it creates a huge issue going forward. As more debt becomes short term, US budgets are increasingly susceptible to upswings in interest rates. This one looks tempting for its short term benefits. Likelihood: 50%
- Swap Lines
We saw these at the height of the pandemic. Essentially these are loans to overseas countries where they can access cheap dollars directly from the Fed which stops them having to sell US Treasury bonds to pay back debts. This only works in the short term of course because the lines need to be repaid. They would have an immediate impact on overseas selling pressure. Likelihood 100%, mostly because it has already happened, the Swiss drew down on one this week. Is it slightly odd that in exactly the week the Credit Suisse starts to wobble the local government manages to summon up a magical USD swap line? It sounds suspiciously like a back door bailout.
The other benefit to the American’s of the swap lines is that it cures the reliance on US dollars by providing even more US Dollars, so it solves the problem overseas governments have but also cements dollar dominance. Like giving a heroin addict heroin, nobody would argue that in that moment the recipient doesn’t feel better.
- Nuanced rule changes
In most developed countries around the world banking capital requirements mean retail banks need to maintain a certain level of equity based on their assets. This even applies to “risk-free” assets like US Treasuries, so there is a non-zero cost to holding them. If these rules were temporarily suspended you would see an immediate and likely enormous spike in the demand for UST’s. This would be good for the Fed and the US Government but extremely bad for all of us making banks very vulnerable to bond price movements going forward. It’s dangerous and undermines regulators. Still, it is so little understood by nearly everyone (myself included) that it seems enormously tempting and would have a huge impact. Likelihood: 75%.
The short version is, recession is obviously coming but a pivot is not. 75bps incoming. 10 year yield heading for 5%. This is not about helping American workers or anyone else. The Fed is a private entity and it is in the business of saving itself and its beneficiaries.
When the fireworks come they will really be something to behold.
Bitcoin took 6 months to get to its first 1,000 users. It took 5 years to get to 1 million users.
At current growth rates, 1 billion users will be hit in the next 3 years. That’s 12% of the world.
It’s not just random charts plucked from the internet that indicate wider adoption though. In much of the world there is a tremendous economic imperative to adopt bitcoin. Turkey, Lebanon, Sri Lanka and much of South America are all showing very rapid adoption because of the fundamental weakness in their underlying currency.
The bottom line is that bitcoin is both useful and scarce. People all over the world want to own it and use it in larger and larger numbers.
To your obvious question of “why isn’t the price going up then?”. It is. If you only engage with it when it’s front page news, you will likely be much less successful than people who engage with it when it isn’t.
A year to remember
It’s a bit early for the dreaded review of the year but 2022 is going to have some features that very few years have ever had. The lock-step decline in equities and bonds has been quite something but there has never ever been a year where both bonds and stocks lost more than 10%. Except for 2022.
There is a bit to go here and bonds might yet make a storming comeback before 31 December (quite possibly via a major change of tune post the mid-term elections).
It’s not just about the absolute value of the declines. The concern when something happens that has not happened before, is that a lot of financialised products are built around “our modelling says this will never happen” and so we can safely leverage into x because if y happens, hedge z will pay off. Except in 2022, hedge z has died and performed worse than the core strategy and it’s an absolute disaster.
This will be especially true in pension funds which are large holders of equities and bonds and do all sorts of insane leverage strategies based on liability maturity.
Here’s a similar visualisation. Stocks did much worse in 1931 but there are still two months to go. You couldn’t completely discount the possibility that 2022 truly becomes a year for the archives. Whatever happens, bondholders won’t forget it and many of them won’t recover.
Great news from the US accounting standard setter they are “all moved in!”. Yes, their new offices are ‘full of light’ and ‘new technology’. It makes me want to see their old office though, was it a cave?
When they weren’t unpacking yellow boxes they were doing some interesting work. Here is their latest decision on the accounting for “crypto assets”. It seems to have snuck through under the radar but is potentially very significant.
It is worth explaining that to date companies like MicroStrategy and Tesla that hold bitcoin on their balance sheets are required to permanently write down those assets when the price falls. When the price rises, they cannot recognise the increase.
So if you bought bitcoin at $40,000, it’s now $20,000 you must write it down. Under the current rules, you can never write it back up when it rises.
This was always completely ridiculous but the rules are the rules and the accountants were content with it while adoption was small. Now we have major NASDAQ companies with a lot of bitcoin on their balance sheet. It has become an embarrassment. This change was overdue but it is to be welcomed now that it is here. It also makes holding it a lot more attractive for companies and banks because they can treat it like all their other financial instruments.
Disclosure item: I am a Chartered Accountant, I have been to the FASB and I have moved offices using one of those yellow boxes and been excited about the new office being full of light. Tremendously heartening to see not much changes in the profession, I wish them well in their new accommodations.
International Plain Language Day has been celebrated across the globe by almost nobody since 2011. So obscure is this ‘celebration’ that I naturally assumed Christine’s Twitter account had been brutally hacked.
The IPLD website hosts some pretty strange stuff including this image with yellow t-shirt guy asserting his “right to understand”. I find it very strange that someone should assert their right to understand. I’m inclined to think, just open a book, you loser.
The website tells us we should celebrate our achievements in simple communication, and since 2011, has listed zero examples of such success. I’m not surprised, as periods in history go, the more recent past has a terrible record regarding plain language and simple communication. Indeed, euphemistic lies are now par for the course. In particular, from people like Christine Lagarde. Some choice Christine quotes from the recent past:
On inflation as ECB President in 2021. Plain language including some ‘soul-searching temporality”
“We talked about inflation, inflation, inflation,” she said.
“We did a lot of soul-searching to actually test our analysis, and we are confident that this analysis of the temporality of these categories is correct and will lead to a decline over the course of 2022.”
As Managing Director of the IMF before torching billions of dollars of other people’s money on the obviously going to fail Argentina bailout.
“I look under the skin of countries’ economies, and I help them make better decisions and be stronger, to prosper and create employment.”
Delivered without irony as President of the ECB, critising ‘statements and slogans’.
“I’m very much a believer that it’s action that matters much more so than, you know, the flurry of political promises and statements and slogans that are used during political campaigns.”
Lagarde’s most recent quote lives up to her track record. What she really means when she says plain language is important at times of inflation is that she will be saying things we don’t like.
For example, “I’m putting up interest rates even though we are in a recession”. “I made a dogs breakfast of things so you will lose your job and maybe your house, sorry”. Or, “we really don’t have a clue, but if you were me you’d keep going and cop the flack because the pension scheme at the ECB is something to behold”
That’s plain language. I look forward to hearing more of it from her.