We took the ferry back to the mainland after our stay on Île d’Yeu with two kittens in our luggage.
The kittens were scheduled for drowning if no homes could be found.
Elizabeth volunteered to adopt them.
One of them got out of the box on the drive home. This morning, traumatised, he is still hiding somewhere in the truck.
But now we are back at home and at work. We are connecting the dots as best we can. And today, we have some new dots to work with.
Fed chief Janet Yellen offered some ‘guidance’ yesterday. Bloomberg:
‘“We continue to expect that the ongoing strength of the economy will warrant gradual increases” in rates, she told a press conference after the Federal Open Market Committee [the Fed’s rate-setting body] announced that it will slowly begin to pare its bond holdings next month.
‘As expected, the target range for the federal funds rate [the rate which banks lend short-term funds to one another…and the base rate for the entire economy] was held at 1% to 1.25%.’
At the Diary, we believe Ms Yellen will never willingly return to normal interest rates.
This is a US economy that runs on fake money lent at fake rates. Its investors, its businesses, its consumers, its government, and its Deep State insiders — all are now adapted to the fraud.
Our economy is now reality intolerant. If ever we were to go back to real money, saved by real people and lent at real, market-discovered rates…the jig would be up.
Ms Yellen has been in rate-hiking mode for the past two years.
This year, the Fed has increased the federal funds rate all of 50 basis points (half of a percentage point).
At this pace, we’ll get to a fed funds rate of 4% in 2023.
Of course, that will only happen if nothing goes wrong — if it doesn’t rain…the creek doesn’t rise…and the economy doesn’t get the sniffles. Or else, the Fed will change its mind.
But wait… There was more to Ms Yellen’s message. The Fed will begin ‘normalising’ its balance sheet, too.
Remember all those bonds it bought as part of its QE (‘quantitative easing’) programs — $3.6 trillion of them — to enrich its crony friends in the financial economy?
Well, now it says it will sell them back into the economy…or simply let them mature and expire.
We know what happened when the Fed — and other central banks — bought those bonds. Stocks tripled (Dow 7,000 to Dow 21,000).
What’s going to happen when the Fed starts dumping those bonds back into the market?
We don’t know…but we don’t want to own a lot of them when we find out.
Wait again… You don’t really think that the Fed is going to normalise its balance sheet — and unwind QE — do you?
Its announcement tells us it aims to start gradually. With baby steps…of $10 billion a month.
Let’s see. That’s $120 billion a year. At that pace, how long would it take to get back to ‘normal’?
More than 20 years!
But since we’re back at home…looking at the scraps of paper and marginal notes scattered across our desk…let’s try to put things in order.
A dear reader helpfully suggested something he called the Bonner Doctrine — a kind of heat map illustrating some of our dot connections. He writes:
My summary of your primary points:
‘1. The Austrians [a school of economists that believes you can’t trick up an economy with hollow credit and/or paper money] are right. To deny this, one must suspend reality and believe that debt and paper constitute and multiply wealth.
2. Current equity valuations are based substantially on low rates. Even Bonner Doctrine detractors admit this when they argue: ‘Well, in the current low-rate environment, stocks are fairly valued, maybe even undervalued.’ Or when they put it more simply: ‘Compared to bonds, stocks are cheap.’
3. The major central banks can’t substantially raise rates. The world’s governments, along with its post-1971 financial system, can’t bear it.’
So far, so good. Then, our dear reader connects some dots of his own and comes to a conclusion:
‘Taken together, the result…is ‘reflation’. As we both know, however, ‘reflation’ is what will blow the current framework apart!’
Yes, reflation is coming. And yes, this is an economy that can’t tolerate higher inflation/interest rates.
But how will it come about? When?
We wish we knew.
We suspect that the feds will abandon all pretence of returning to normal at the first hint of financial crisis.
Then — with no Paul Volcker at the Fed…no debt ceiling over Congress…and no hold-the-line president in the White House — the sky’s the limit.
Dow 50,000! Why not?!
But between here and there could be some appalling and calamitous shocks.
Tomorrow…more on the Bonner Doctrine…
For Markets & Money