~1850 words
Today, the group of people I have the privilege of annoying is the free trade crowd. Their belief that free trade always produces the most beneficial outcome is one of the main causes behind our economic imbalances, the heavy hand of central banks, the unsustainable dominance of the US dollar as the world's reserve currency, and the prevailing political sentiment of populism.
I'll start where we agree: without question, within a single currency region (or culture) the unrestricted, unimpeded freedom of trade results in the most optimal outcome for not only the parties involved, but the surrounding society as a whole. The problem occurs when trade happens across currency regions between one culture and another.
The incentive structure of our corporations, which forces CEOs to prioritize profits to appease shareholders over ethics to appease their workers - combined with the unquestioned belief in free trade - has created the distorted economic imbalances of today mainly through offshoring. And while there's an evolving sentiment of corporate leaders in the media talking about "ethical capitalism," the truth is there are limits because the bottom line is the bottom line and free market decisions are often forced in order to stay competitive - or to keep your job - despite the best of intentions. Similar to the epidemic of how many baseball players felt "forced" to take steroids to compete with their peers as they witnessed their outperformance while the commissioner looked the other way because historic home run chases were profitable and fun. It's not the players' fault steroid use spiraled out of control; it's the fault of Major League Baseball for not enforcing a standard.
Likewise, I don't blame CEOs over the past three or four decades who moved their manufacturing bases offshore to reduce labor costs. The initial ones were just doing their job of maximizing profits, and the latter ones were forced to stay competitive. I'm not sure to what degree the corporate leaders and their lobbyists in the 90's - who sold the offshoring vision to our politicians (and Bill Clinton in particular) - are to blame since the prevailing philosophical sentiment even among people to this day is that unrestricted free trade creates a win-win for everyone, so the corporations got their agenda pushed through Congress, which led to NAFTA, the WTO, and the hemorrhaging of 13+ million manufacturing (and ancillary) jobs offshore. This is the single biggest cause of our economic problems today and it continues to be underappreciated, or ignored, because no one questions the notion of free trade, so justifications about how we transitioned to a "service" based economy abound, but here is the insight everyone misses: the free market is suppose to organize economies around the comparative advantages of raw materials and natural resources within each country - NOT the differences of individual rights in each culture. Creating third world slaves is not a comparative advantage - it's a cultural choice. And it has consequences.
The global supply chains of today are organized around corporations seeking the cheapest labor with the least amount of worker rights; whereas, the natural order - if all cultures treated their citizens equally - would organize around the natural resources indigenous to each land (and the transportation costs influenced by geographic terrain). There is nothing natural about our modern supply chain - it's the result of cultural choices, which were influenced by the unquestioned belief that free markets always produce the most optimal outcome, so CEOs - incentivized by profit - and politicians - funded and influenced by corporations - created laws and trade deals to exploit cheap labor overseas and poof! went our manufacturing base. All the expansionary fiscal and monetary policies of the last thirty years are desperately trying to fill the domestic economic hole left in its wake, but it only masks the problem like heroin suppressing signals of pain.
The consequences of massive and mounting trade imbalances has shaped every aspect of our economy from the opiod epidemic in our devastated blue collar towns to the widening political divide driving the prevailing sentiment of populism to the fiscal deficit spending and monetary madness attempting to ease the loss of manufacturing. The flow of dollars out of the country in the form of our trade deficit helped create the base for the global Eurodollar system of today, which amplified the world's over dependence on the US dollar and created an unsustainable "exorbitant privilege" for the US to become a superpower because it allows our fiscal and monetary profligacy to delay the consequences of runaway inflation and the rising interest rates that would naturally keep it in check.
The idea that we are benefiting from this perverse arrangement is disingenuous and blinded by ideology. Yes, corporations can exploit overseas labor and manufacture cheap gadgets for US consumers to buy, but we don't simply exchange our pieces of fiat paper for the TVs, phones, and computers foreigners produce. They take those US dollars and buy our property and our businesses, or invest in whatever they want, so essentially, if you strip away the medium of exchange, we're trading our US real estate, and businesses, for disposable devices. That's the reality of running a trade deficit. The fact that our trading partners bought our Treasury Bonds for so long is their mistake. As soon as they stop (and it seems like they are slowing down), we will have to finance our government deficits internally, which is why this entire unnatural "free trade" philosophy that infected our CEOs and politicians like a virus, and created unsustainable economic imbalances must be corrected, or the system will force it upon us. The wrong way to do it is with tariffs. So, what's the right way? I'm glad you asked.
Like the universal unit of account, what the world needs is a mutually agreed upon global standard. Anything less is a haphazard tit-for-tat trade war that solves nothing, and while I do understand that a global standard seems politically impossible, the current imbalances will end in such a devastating crisis that it will force open the minds of everyone involved to real solutions, so one day miracles will indeed become possible.
I call this global standard to correct our current system the Border Neutralization Adjustment (or BNA), which is designed to neutralize the cultural differences in worker rights, so the global supply chain can once again organize around natural resources. As opposed to tariffs that target specific products and countries, the BNA would be based on a computer algorithm that calculates a wide range of inputs from each culture (like wages, benefits, entitlements, shipping, regulatory costs...) to determine how much the same product would cost to manufacture in each country and then use the differences as an automatic "tariff" that's added in trade across those regions (also factoring in currency differentials). For example, if it costs $30 to make a certain motherboard for a laptop in China, but it would cost $55 to make it in the US (due to our wages, benefits, and regulatory costs...) then the Border Neutralization Adjustment would add $25 to import that product from China. If the BNA between Brazil and China is only $5, then the adjustment would reflect that, so each country would have a BNA calculation in relation to every other country for every component of every product, which a well designed computer program could figure out in real-time. And if you think China would not be interested, wait until their manufacturing base flees to Africa or some other 3rd world country and they realize they made the same mistake we did.
I understand not only the profound change this would cause in supply chains, which is why it would have to be phased in over a long time, but also the enormous resistance this idea would meet, but that doesn't make the result any less true: a Border Neutralization Adjustment would incentivize local manufacturing across the globe, which would dramatically reduce our fossil fuel usage, and it would encourage raising worker rights to a higher standard in areas where humans are exploited for profit by corporations. The result would be supply chains as close to the end consumer as possible and organized around the natural resources that are the real comparative advantages of each country.
Yes, this would mean the prices of our gadgets (and all our imports) would go up significantly, but it would also mean a return of the higher paying, stable jobs that fled offshore under the false idea that free trade always leads to the most optimal outcome. Yes, it would mean our fiscal and monetary profligacy would have more immediate consequences since we would no longer be exporting our dollars (and therefore inflation) overseas. Yes, it would create a shortage of overseas dollars that would need to be converted or written off the books of offshore shadow banks (and likely bailed out by the Fed). Yes, companies like Fedex, UPS, and other global shippers could lose a lot of business. Yes, it would force a global military cooperation because the US could no longer afford to run an empire. Every change creates winners and losers, but the point is our current system is culturally created around the idea that free trade always leads to the most optimal result when clearly it does not, and the imbalances it created over the last four decades are reflective of that, and destined to fail.
If supply chains flee China due to unilateral tariffs in a haphazard trade deal, corporations will simply seek out other countries with low wage workers to exploit. The only real solution is a global standard like a Border Neutralization Adjustment to reverse the trend in offshoring that evolved over the last 40 years (which happens to coincide with falling interest rates). Whether our current system needs to end in a crisis that opens people's minds to real solutions, or whether we continue to patch together band-aid individualistic ideas fueled by division and populism is yet another choice we face that will dramatically shape our future.
Here's the calculus in a nutshell: profit seeking corporations funded politicians to create trade deals to exploit cheap labor overseas. Millions of stable jobs fled offshore from First World countries to Third World countries in the name of free trade. Inflation got exported in massive trade deficits, which contributed to 40 years of falling interest rates and made expansionary fiscal and monetary policies impotent to inflate anything but asset bubbles. US consumers got cheap gadgets. China got US dollars, which they recycled into Treasury bonds, funding profligate politicians. Central bankers misdiagnosed the problem and scratched their heads about the lack of inflation. Politicians cranked up the deficit machine. The wealth gap widened, voters got mad and elected a showman promising to bring back jobs because trade wars are easy to win. But jobs didn't come back because unilateral tariffs don't work. Central bankers pour over data and shrug their shoulders: full employment and no inflation, so they cut rates and resum QE. Politicians spend like lotto winners... Rinse, wash, repeat: wealth gap widens, voters get angry, lunatic politicians emerge. Nothing gets solved. No one questions free trade. Bubbles get bigger, pressures the currency. The currency pops.
OR...
We realize our mistakes and make proactive choices to fix them - before it's too late.
Sunday, November 3, 2019
Sunday, August 4, 2019
The Universal Unit Of Account
~2800 words
Dear Politicians and Central Bankers,
Our financial system is deeply flawed, but so are all of the proposed solutions to replace it (a gold standard, Bitcoin, Libra, any permissionless distributed ledger, SDRs, commodity backed currencies, digital sovereign currencies...) and the reason is because they all lack a universal unit of account, so I will make another attempt to explain why this is the most important quality of a robust monetary system and how it will make financial crises obsolete.
Here are the flaws of our current Eurodollar/Petrodollar fractional reserve fiat system:
1. It's based on centralized credit issued by banks (and shadow banks) that lack personal accountability, which has led to a daisy chain of interconnected derivatives and counter party risk that makes the whole system vulnerable to a big failure of one of its parts.
2. The lack of competing currencies within a single country creates monopolies of government fiat that must be accepted as legal tender, and since there's nothing backing the sovereign currencies to restrain government spending (like gold), and the politicians in each country have no personal accountability because they will be out of office when the bill comes due, the system incentivizes endless debt to appease the voters, which inevitably puts the entire system at risk.
3. Too much of the world financial system is priced in, or pegged to, one country's currency: the US dollar.
4. MOST IMPORTANTLY (and the solution to all of this): there is no universal unit of account to act as the unchanging measurement for all currencies to fluctuate against and the master check-and-balance to keep excesses from forming in the first place.
These flaws combine to create massive and unsustainable imbalances in wealth, debt, and trade, which forces central bankers to continually reflate asset bubbles because a sizable and sustained drop in asset values will put the entire worldwide financial system at risk due to the interconnected nature of its centralized derivatives structure.
The solution is a robust, worldwide, digital system based on competing currencies, decentralized credit, and a universal unit of account. Our destiny is a globally agreed upon system that is uncompromising in its balance and fairness. It's just a matter of time before each country realizes it.
The Universal Unit of Account
The easiest way to understand a universal unit of account is to imagine all the products and services in every country of the world priced in one currency. To avoid using a gov't currency, let's use silver, which is roughly $16/ounce, so 1 US dollar is .06 ounces of silver. In this system, when you fill up your gas tank, instead of paying $3/gallon, the sign would say .18 ounces of silver/gallon. In France, instead of seeing 1.54 Euros/liter the sign would say .10 ounces of silver/liter. The silver, of course, could be represented by a paper substitute, but everything would be priced with the same universal standard. The implications of this are profound.
Using one worldwide standard to measure the purchasing power of currencies IS the restraint that limits the issuance of excessive debt because the value of all currencies would fluctuate against an unchanging standard, so if one country (in our silver standard example) ran up crazy amounts of debt, other countries could reject their currency and require their trade imbalances be settled in silver, so a check-and-balance is thrust upon the politicians of the world to keep their currency stable.
However, there is no need to use silver, or gold, or anything tangible as the universal unit of account, especially since commodity prices fluctuate to supply and demand, so you'd have to use a fixed exchange rate, which creates an unnatural force upon the market price. Another drawback of using a tangible asset to back currencies is how it restricts borrowing from our future labor to the amount of available gold or silver on hand, unless we repeated the same mistake of devolving into fractional reserve lending, which ultimately leads to breaking the chain of the asset backed currency completely because the demand for credit will force politicians and bankers to break the restraint, so returning to some form of a gold or silver standard (or any asset backed currency) would result in the same outcome. Fortunately, there's no need for a tangible asset at all. What we need is an unchanging, universal standard to measure the purchasing power of currencies in the same way that inches and centimeters measure length. This is what a fixed exchange rate with a tangible asset is trying to accomplish.
The way to implement a universal unit of account is to freeze the present value of the US dollar and use that value as the arbitrary, culturally chosen standard to convert the pricing of products and services across the world at the prevailing exchange rates into this new standard called Universal Dollars. From that moment on, all currencies would fluctuate against that fixed value of 1 US Dollar at the time of conversion, so over time even the US dollar would lose value against the fixed standard of its old self (if we continued our fiscal and monetary profligacy), but so would the Euro (and at the same time! - unlike now where they can't both go down together against each other).
So instead of using a neutral asset like gold or silver at a fixed exchange rate to settle international trade, other countries would have the freedom of rejecting a profligate nation's currency by making them go onto the market to buy whatever asset they want (like oil or steel or whatever...) and since a weakening currency will buy less and less of that asset, it forces restraint on politicians to keep their currency stable. But the benefits of not using a tangible asset as the universal standard go WAY beyond enforced stability of currencies and flexibility in trade settlement. The real benefit of a Universal Dollar standard is its capacity for truly decentralized credit and infinite currencies - something none of the other proposed monetary systems can offer.
Decentralized Credit
If we use a tangible asset as the universal unit of account (like gold, or silver, or oil, or Bitcoin, or SDRs, or sovereign currencies, or Libra...), we will remain stuck in the box of centralized credit, and limited by our capacity to acquire that asset for loans. For example, if we used gold, then the only source of credit would be someone who has gold to loan. This is how our banking system got created in the first place, and we know how that story ends: first, fractional reserve lending, then breaking the chain into fiat, then quadrillions of derivatives and interconnected counter party risk putting the whole system at risk.
One of the insights that Modern Monetary Theory gets correct is we don't have to borrow first in order to spend. Their mistake, however, is granting that power to the government, which has no accountability to restrain the spending, but there's no reason a person or a corporation couldn't spend their own currency into existence to whatever extent the market would accept because it would be backed by their product, service, or labor.
I already explained this in great detail in my Universal Dollar article. The point is: in a gold backed system, people and corporations can't spend gold into existence (which is both the point and the curse of gold), so a tangible asset backed system requires centralized banks to create loans because they're the ones who have the asset, and if you don't allow fractional reserve lending, the available credit is limited by the amount of gold on hand to loan (the same is true for all the other asset backed options - you need to possess it to issue credit). A system like that would eventually devolve into the system we have now. The only way to have truly decentralized credit is to implement a universal unit of account that isn't based on a tangible asset, which allows anyone the ability to issue their own credit because a free market of competing currencies will enforce discipline since the created currencies could be rejected at will and there would be thousands to choose from.
Competing Currencies
If we truly want to create a robust system immune from financial crises, we need to allow competing currencies within each country, and the freedom to choose or reject them. Until now, this was impractical because carrying around multiple physical currencies with different values was too cumbersome, but in the digital age there's no limit to the amount of currencies with various values that a digital wallet could handle. It does, however, require a universal unit of account for the currencies to fluctuate against.
Using Universal Dollars would allow anyone in the world to issue this worldwide currency in their own name, which they would be legally obligated to redeem with their product, service, or labor. Companies would arise to back the currencies of people on the fringe of acceptance, and everyone else would be restrained by their credit score, which would reflect the amount of currency they've already created and their income to redeem it, or in the case of a large corporation, the demand for their products and the choices the company makes to keep them viable in the future.
All of this is only possible if we utilize a universal unit of account that is not a tangible asset and only acts as the singular standard of purchasing power everything is priced in.
Let's compare and contrast several alternative monetary system ideas to illustrate why Universal Dollars is not only more robust and elegant, but it solves all the flaws of these other systems.
Gold/Silver/Commodity Backed
We already lived this story. The restraint on credit, which is the feature of a gold-backed system is also a bug, and it would cause this system to be broken once again, so we'd end up exactly where we are now. This system requires centralized institutions to create loans, so people would have to borrow first in order to spend, and unless we allowed fractional reserve lending (which would happen eventually anyway) the credit would be limited by the available gold on hand. Not to mention that commodity prices fluctuate with supply and demand, and the universal unit of account needs to be unchanging in the way a meter is always a meter. This system would fail.
Libra
Libra is definitely an improvement upon our current system of single gov't currencies since it's backed by a basket of them, which would help mitigate, but not prevent, too much change in Libra's value, but using sovereign currencies solves nothing about the lack of accountability in the issuance of government debt and it prevents decentralized credit because in order to issue it you would need the sovereign currencies or the Libra on hand to loan. Libra is no different than a new worldwide bank with a payment system via its messenger that 2 billion people already have access to, so it certainly helps bring "unbanked" people online, and makes money easier to send internationally, but it solves nothing about the flaws of our financial system.
If Libra was used as the universal unit of account, and all the world's products and services were priced in it, that would be a game changer, but it would still have all the flaws of using a tangible asset, so the system would remain anchored to centralized banks who have the sovereign currencies or the Libra on hand to issue loans. It would not decentralize credit at all, and it wouldn't do anything to limit the eventual destruction of the fiat currencies that back it. Libra does nothing but steal market share from the banking industry. Fail.
(I'm not saying we shouldn't allow it to happen because it could be the bridge to Universal Dollars in the future.)
*On a side note, all these concerns about data privacy - whether in Facebook and Google ad targeting, or with Libra - have a solution. All they have to do is change the coding under the hood, so all of our activity and purchasing patterns are tracked (for purposes of ad targeting), but it's done anonymously. Meaning, disconnect the identity of the individual from the data by accumulating their patterns to an unidentified number, then target all the relevant ads you want. We don't have to destroy their business model while protecting the individual from having their data fall into the hands of someone who can cause them harm. There just needs to be anonymous IDs and the only way to open it would be if that ID was acquiring materials to do harm to society. If Facebook and Google don't do this, someone else will. (And if you make a billion dollars from this idea, I can be reached through the contact form.) :)
Bitcoin (or any permissionless distributed ledger)
Bitcoin is a fascinating study of human behavior. I understand the ideal of having no one in charge who can impose their heavy hand upon you, but the disadvantages of no central authority are even worse. It lacks all security, it's not insurable, it's a breeding ground for fraud, it can't handle the transaction load, it's a waste of electricity, it's way too volatile, and it's deflationary, which would never work as a currency. If we made Bitcoin the universal unit of account by converting all the prices in the world into Bitcoin, it would have the same problem as gold - only far worse. Bitcoin would require centralized banks to issue loans since no one can issue Bitcoins into existence on their own, and once the final number of Bitcoins were mined, the amount of worldwide credit would be frozen despite any growth in population.
I don't understand the argument that it's a store of value. If it can't ever be used as a currency due to all its flaws, then it has no utility at all, so what exactly is the value being stored? Why would the nations of this world use Bitcoin when they can create their own digital currencies? Bitcoin only has value because people believe it has value. If you park US Dollars or Euros in Bitcoin to avoid a depreciation of the currency, then what? One day you still have to transfer your Bitcoins back into a currency that can actually be used in transactions, which is another way of saying you hope to one day sell your Bitcoins to someone in the future at a better price. This isn't a serious proposal for a monetary system, it's a call option on price appreciation.
Unless one of the other permissionless distributed ledgers can solve the problem of preventing the smartest hackers in the world from stealing the private key of grandma's wallet and taking ALL of her life savings, then none of them will ever work as the basis for a complete monetary system. In order for a digital currency to be viable you have to think about the reality of digitizing EVERYTHING you own. Are you going to do that without insurance? And who's going to insure a currency like Bitcoin when the reality is once grandma loses her life savings to a hacker, it's GONE, POOF! Forever. Fail.
(This is not a comment about the price path of Bitcoin - just its functionality as money.)
Digital Sovereign Currencies
Allowing central banks, and the governments of this world, to create blockchain versions of our current system using the US dollar, the Euro, the Yen...is the worst possible system that could happen by orders of magnitude. This would take our deeply flawed, corrupt system, and make it WAY worse. Imagine if the central banks created a permissioned ledger so they could control the monetary system and force everyone to digitize all their assets onto it. Sure, they'd be able to control fraud and save grandma from losing her savings to a hacker, but they would also be able to impose negative interest rates on everyone and there's nothing you could do about it.
There would be no way to know how much digital currency they created. If you wanted to design a monetary system to enslave humanity this is how you would do it. Any of the other alternatives would be exponentially better than this. Mark Zuckerberg in charge of the entire monetary system would be better than this. In our current system, if the banks charged us negative interest on our savings, at least we can withdraw our money and keep it under the mattress without the fee. In a world of digital sovereign currencies, our savings would fund banks and governments with increasing negative interest. This would truly be Orwellian in nature. Double fail.
The Universal Dollar
This is the only system that solves the flaws of centralized credit and a lack of personal accountability tied to its issuance. It should start as a hybrid system of sovereign currencies and our largest multinational corporations as a permissioned ledger run by the G-20 and the selected corporations and based on a universal unit of account to keep them in check. Over time, we could invite more of our largest multinational corporations to create their own currencies by spending them into existence as they create their products and services, which would then be redeemable for their currency and therefore backed by real value. Eventually, everyone would be able to issue Universal Dollars in their own name to whatever extent the market would allow (based on their credit score, and demand, and it could be insurable) because its issuance isn't restricted by a tangible asset backing the currency. (Compare a system like Universal Dollars where the currency is backed by real productivity against Bitcoin where the currency is backed by what? A consensus network funded by sovereign currencies? How is that anchored to economic growth? This is not value.)
The digital wallets of the future could be user-customized to prevent money from being extracted over a certain amount without multi-step authentication, and because it's a permissioned ledger the transactions can be insurable and reversed to prevent fraud, so we can all put everything we own onto the digital system without concern over it being stolen and gone forever. Everything could be trackable to an anonymous ID. Yes, being a permissioned ledger means there's an authority (the hybrid combination of multinational corporations and G-20 who run the ledger), but the advantages of fraud protection and the rule of law is the only way to digitize everything safely. A distributed permissionless ledger is just not viable as the basis of a monetary system.
For a more in-depth look at this, read my article The Universal Dollar.
The Choice
This is a clarion call for the leaders of this world. There are two divergent future paths ahead of us. We can bury our heads in the sand and pretend everything will be okay, or we can be proactive and prepare the future monetary system now - before our current one implodes. Devaluing the debts of the world into Universal Dollars will deliver us into an unbounded age of prosperity fueled by decentralized credit and worldwide competing currencies anchored to our ever evolving productivity, which will make financial crises obsolete. Let's hope it doesn't take a worldwide crisis to force the need for change.
If you are in a position of power, you stepped into a story already in progress with problems caused by the people who came before you, so your choices have been constrained by the rippling effects of history and the institution you serve, but you still have a choice. You can do what's in your personal self-interest and serve the institution you work for to preserve the status quo, or you can look to the bigger picture and serve the greater good of humanity.
The choice is yours.
Dear Politicians and Central Bankers,
Our financial system is deeply flawed, but so are all of the proposed solutions to replace it (a gold standard, Bitcoin, Libra, any permissionless distributed ledger, SDRs, commodity backed currencies, digital sovereign currencies...) and the reason is because they all lack a universal unit of account, so I will make another attempt to explain why this is the most important quality of a robust monetary system and how it will make financial crises obsolete.
Here are the flaws of our current Eurodollar/Petrodollar fractional reserve fiat system:
1. It's based on centralized credit issued by banks (and shadow banks) that lack personal accountability, which has led to a daisy chain of interconnected derivatives and counter party risk that makes the whole system vulnerable to a big failure of one of its parts.
2. The lack of competing currencies within a single country creates monopolies of government fiat that must be accepted as legal tender, and since there's nothing backing the sovereign currencies to restrain government spending (like gold), and the politicians in each country have no personal accountability because they will be out of office when the bill comes due, the system incentivizes endless debt to appease the voters, which inevitably puts the entire system at risk.
3. Too much of the world financial system is priced in, or pegged to, one country's currency: the US dollar.
4. MOST IMPORTANTLY (and the solution to all of this): there is no universal unit of account to act as the unchanging measurement for all currencies to fluctuate against and the master check-and-balance to keep excesses from forming in the first place.
These flaws combine to create massive and unsustainable imbalances in wealth, debt, and trade, which forces central bankers to continually reflate asset bubbles because a sizable and sustained drop in asset values will put the entire worldwide financial system at risk due to the interconnected nature of its centralized derivatives structure.
The solution is a robust, worldwide, digital system based on competing currencies, decentralized credit, and a universal unit of account. Our destiny is a globally agreed upon system that is uncompromising in its balance and fairness. It's just a matter of time before each country realizes it.
The Universal Unit of Account
The easiest way to understand a universal unit of account is to imagine all the products and services in every country of the world priced in one currency. To avoid using a gov't currency, let's use silver, which is roughly $16/ounce, so 1 US dollar is .06 ounces of silver. In this system, when you fill up your gas tank, instead of paying $3/gallon, the sign would say .18 ounces of silver/gallon. In France, instead of seeing 1.54 Euros/liter the sign would say .10 ounces of silver/liter. The silver, of course, could be represented by a paper substitute, but everything would be priced with the same universal standard. The implications of this are profound.
Using one worldwide standard to measure the purchasing power of currencies IS the restraint that limits the issuance of excessive debt because the value of all currencies would fluctuate against an unchanging standard, so if one country (in our silver standard example) ran up crazy amounts of debt, other countries could reject their currency and require their trade imbalances be settled in silver, so a check-and-balance is thrust upon the politicians of the world to keep their currency stable.
However, there is no need to use silver, or gold, or anything tangible as the universal unit of account, especially since commodity prices fluctuate to supply and demand, so you'd have to use a fixed exchange rate, which creates an unnatural force upon the market price. Another drawback of using a tangible asset to back currencies is how it restricts borrowing from our future labor to the amount of available gold or silver on hand, unless we repeated the same mistake of devolving into fractional reserve lending, which ultimately leads to breaking the chain of the asset backed currency completely because the demand for credit will force politicians and bankers to break the restraint, so returning to some form of a gold or silver standard (or any asset backed currency) would result in the same outcome. Fortunately, there's no need for a tangible asset at all. What we need is an unchanging, universal standard to measure the purchasing power of currencies in the same way that inches and centimeters measure length. This is what a fixed exchange rate with a tangible asset is trying to accomplish.
The way to implement a universal unit of account is to freeze the present value of the US dollar and use that value as the arbitrary, culturally chosen standard to convert the pricing of products and services across the world at the prevailing exchange rates into this new standard called Universal Dollars. From that moment on, all currencies would fluctuate against that fixed value of 1 US Dollar at the time of conversion, so over time even the US dollar would lose value against the fixed standard of its old self (if we continued our fiscal and monetary profligacy), but so would the Euro (and at the same time! - unlike now where they can't both go down together against each other).
So instead of using a neutral asset like gold or silver at a fixed exchange rate to settle international trade, other countries would have the freedom of rejecting a profligate nation's currency by making them go onto the market to buy whatever asset they want (like oil or steel or whatever...) and since a weakening currency will buy less and less of that asset, it forces restraint on politicians to keep their currency stable. But the benefits of not using a tangible asset as the universal standard go WAY beyond enforced stability of currencies and flexibility in trade settlement. The real benefit of a Universal Dollar standard is its capacity for truly decentralized credit and infinite currencies - something none of the other proposed monetary systems can offer.
Decentralized Credit
If we use a tangible asset as the universal unit of account (like gold, or silver, or oil, or Bitcoin, or SDRs, or sovereign currencies, or Libra...), we will remain stuck in the box of centralized credit, and limited by our capacity to acquire that asset for loans. For example, if we used gold, then the only source of credit would be someone who has gold to loan. This is how our banking system got created in the first place, and we know how that story ends: first, fractional reserve lending, then breaking the chain into fiat, then quadrillions of derivatives and interconnected counter party risk putting the whole system at risk.
One of the insights that Modern Monetary Theory gets correct is we don't have to borrow first in order to spend. Their mistake, however, is granting that power to the government, which has no accountability to restrain the spending, but there's no reason a person or a corporation couldn't spend their own currency into existence to whatever extent the market would accept because it would be backed by their product, service, or labor.
I already explained this in great detail in my Universal Dollar article. The point is: in a gold backed system, people and corporations can't spend gold into existence (which is both the point and the curse of gold), so a tangible asset backed system requires centralized banks to create loans because they're the ones who have the asset, and if you don't allow fractional reserve lending, the available credit is limited by the amount of gold on hand to loan (the same is true for all the other asset backed options - you need to possess it to issue credit). A system like that would eventually devolve into the system we have now. The only way to have truly decentralized credit is to implement a universal unit of account that isn't based on a tangible asset, which allows anyone the ability to issue their own credit because a free market of competing currencies will enforce discipline since the created currencies could be rejected at will and there would be thousands to choose from.
Competing Currencies
If we truly want to create a robust system immune from financial crises, we need to allow competing currencies within each country, and the freedom to choose or reject them. Until now, this was impractical because carrying around multiple physical currencies with different values was too cumbersome, but in the digital age there's no limit to the amount of currencies with various values that a digital wallet could handle. It does, however, require a universal unit of account for the currencies to fluctuate against.
Using Universal Dollars would allow anyone in the world to issue this worldwide currency in their own name, which they would be legally obligated to redeem with their product, service, or labor. Companies would arise to back the currencies of people on the fringe of acceptance, and everyone else would be restrained by their credit score, which would reflect the amount of currency they've already created and their income to redeem it, or in the case of a large corporation, the demand for their products and the choices the company makes to keep them viable in the future.
All of this is only possible if we utilize a universal unit of account that is not a tangible asset and only acts as the singular standard of purchasing power everything is priced in.
Let's compare and contrast several alternative monetary system ideas to illustrate why Universal Dollars is not only more robust and elegant, but it solves all the flaws of these other systems.
Gold/Silver/Commodity Backed
We already lived this story. The restraint on credit, which is the feature of a gold-backed system is also a bug, and it would cause this system to be broken once again, so we'd end up exactly where we are now. This system requires centralized institutions to create loans, so people would have to borrow first in order to spend, and unless we allowed fractional reserve lending (which would happen eventually anyway) the credit would be limited by the available gold on hand. Not to mention that commodity prices fluctuate with supply and demand, and the universal unit of account needs to be unchanging in the way a meter is always a meter. This system would fail.
Libra
Libra is definitely an improvement upon our current system of single gov't currencies since it's backed by a basket of them, which would help mitigate, but not prevent, too much change in Libra's value, but using sovereign currencies solves nothing about the lack of accountability in the issuance of government debt and it prevents decentralized credit because in order to issue it you would need the sovereign currencies or the Libra on hand to loan. Libra is no different than a new worldwide bank with a payment system via its messenger that 2 billion people already have access to, so it certainly helps bring "unbanked" people online, and makes money easier to send internationally, but it solves nothing about the flaws of our financial system.
If Libra was used as the universal unit of account, and all the world's products and services were priced in it, that would be a game changer, but it would still have all the flaws of using a tangible asset, so the system would remain anchored to centralized banks who have the sovereign currencies or the Libra on hand to issue loans. It would not decentralize credit at all, and it wouldn't do anything to limit the eventual destruction of the fiat currencies that back it. Libra does nothing but steal market share from the banking industry. Fail.
(I'm not saying we shouldn't allow it to happen because it could be the bridge to Universal Dollars in the future.)
*On a side note, all these concerns about data privacy - whether in Facebook and Google ad targeting, or with Libra - have a solution. All they have to do is change the coding under the hood, so all of our activity and purchasing patterns are tracked (for purposes of ad targeting), but it's done anonymously. Meaning, disconnect the identity of the individual from the data by accumulating their patterns to an unidentified number, then target all the relevant ads you want. We don't have to destroy their business model while protecting the individual from having their data fall into the hands of someone who can cause them harm. There just needs to be anonymous IDs and the only way to open it would be if that ID was acquiring materials to do harm to society. If Facebook and Google don't do this, someone else will. (And if you make a billion dollars from this idea, I can be reached through the contact form.) :)
Bitcoin (or any permissionless distributed ledger)
Bitcoin is a fascinating study of human behavior. I understand the ideal of having no one in charge who can impose their heavy hand upon you, but the disadvantages of no central authority are even worse. It lacks all security, it's not insurable, it's a breeding ground for fraud, it can't handle the transaction load, it's a waste of electricity, it's way too volatile, and it's deflationary, which would never work as a currency. If we made Bitcoin the universal unit of account by converting all the prices in the world into Bitcoin, it would have the same problem as gold - only far worse. Bitcoin would require centralized banks to issue loans since no one can issue Bitcoins into existence on their own, and once the final number of Bitcoins were mined, the amount of worldwide credit would be frozen despite any growth in population.
I don't understand the argument that it's a store of value. If it can't ever be used as a currency due to all its flaws, then it has no utility at all, so what exactly is the value being stored? Why would the nations of this world use Bitcoin when they can create their own digital currencies? Bitcoin only has value because people believe it has value. If you park US Dollars or Euros in Bitcoin to avoid a depreciation of the currency, then what? One day you still have to transfer your Bitcoins back into a currency that can actually be used in transactions, which is another way of saying you hope to one day sell your Bitcoins to someone in the future at a better price. This isn't a serious proposal for a monetary system, it's a call option on price appreciation.
Unless one of the other permissionless distributed ledgers can solve the problem of preventing the smartest hackers in the world from stealing the private key of grandma's wallet and taking ALL of her life savings, then none of them will ever work as the basis for a complete monetary system. In order for a digital currency to be viable you have to think about the reality of digitizing EVERYTHING you own. Are you going to do that without insurance? And who's going to insure a currency like Bitcoin when the reality is once grandma loses her life savings to a hacker, it's GONE, POOF! Forever. Fail.
(This is not a comment about the price path of Bitcoin - just its functionality as money.)
Digital Sovereign Currencies
Allowing central banks, and the governments of this world, to create blockchain versions of our current system using the US dollar, the Euro, the Yen...is the worst possible system that could happen by orders of magnitude. This would take our deeply flawed, corrupt system, and make it WAY worse. Imagine if the central banks created a permissioned ledger so they could control the monetary system and force everyone to digitize all their assets onto it. Sure, they'd be able to control fraud and save grandma from losing her savings to a hacker, but they would also be able to impose negative interest rates on everyone and there's nothing you could do about it.
There would be no way to know how much digital currency they created. If you wanted to design a monetary system to enslave humanity this is how you would do it. Any of the other alternatives would be exponentially better than this. Mark Zuckerberg in charge of the entire monetary system would be better than this. In our current system, if the banks charged us negative interest on our savings, at least we can withdraw our money and keep it under the mattress without the fee. In a world of digital sovereign currencies, our savings would fund banks and governments with increasing negative interest. This would truly be Orwellian in nature. Double fail.
The Universal Dollar
This is the only system that solves the flaws of centralized credit and a lack of personal accountability tied to its issuance. It should start as a hybrid system of sovereign currencies and our largest multinational corporations as a permissioned ledger run by the G-20 and the selected corporations and based on a universal unit of account to keep them in check. Over time, we could invite more of our largest multinational corporations to create their own currencies by spending them into existence as they create their products and services, which would then be redeemable for their currency and therefore backed by real value. Eventually, everyone would be able to issue Universal Dollars in their own name to whatever extent the market would allow (based on their credit score, and demand, and it could be insurable) because its issuance isn't restricted by a tangible asset backing the currency. (Compare a system like Universal Dollars where the currency is backed by real productivity against Bitcoin where the currency is backed by what? A consensus network funded by sovereign currencies? How is that anchored to economic growth? This is not value.)
The digital wallets of the future could be user-customized to prevent money from being extracted over a certain amount without multi-step authentication, and because it's a permissioned ledger the transactions can be insurable and reversed to prevent fraud, so we can all put everything we own onto the digital system without concern over it being stolen and gone forever. Everything could be trackable to an anonymous ID. Yes, being a permissioned ledger means there's an authority (the hybrid combination of multinational corporations and G-20 who run the ledger), but the advantages of fraud protection and the rule of law is the only way to digitize everything safely. A distributed permissionless ledger is just not viable as the basis of a monetary system.
For a more in-depth look at this, read my article The Universal Dollar.
The Choice
This is a clarion call for the leaders of this world. There are two divergent future paths ahead of us. We can bury our heads in the sand and pretend everything will be okay, or we can be proactive and prepare the future monetary system now - before our current one implodes. Devaluing the debts of the world into Universal Dollars will deliver us into an unbounded age of prosperity fueled by decentralized credit and worldwide competing currencies anchored to our ever evolving productivity, which will make financial crises obsolete. Let's hope it doesn't take a worldwide crisis to force the need for change.
If you are in a position of power, you stepped into a story already in progress with problems caused by the people who came before you, so your choices have been constrained by the rippling effects of history and the institution you serve, but you still have a choice. You can do what's in your personal self-interest and serve the institution you work for to preserve the status quo, or you can look to the bigger picture and serve the greater good of humanity.
The choice is yours.
Sunday, July 14, 2019
Market Thoughts 7/14/19
Powell basically wore a t-shirt that said "we're cutting in July." I personally think it's strategic error because they only have a handful of bullets to use and they can never let the stock market go down, and stay down, again. Ever. It took me until 2014-ish to figure that out, but they validated that view in January and June, so it's still alive and well. And, of course, the reason is both because of the reverse wealth effect, and the Pension crisis resulting from insane assumed returns, which must be supported by higher asset prices going forward forever. I don't get the impression this is appreciated enough. The stock market can never stay down again.
This is a unique time in history and I totally understand everyone who puts out all the charts of the similarities to previous markets tops, and no one actually knows, so maybe you'll be right, but I think all that data from the past is useless now. Everything changed in 2009 when the Fed started telling everyone they will never let the stock market stay down again. The only real limitation to perpetual levitation is if the dollar is plunging to new all-time lows and the Fed is FORCED to tighten to save the currency. This would also coincide with skyrocketing oil like you see in end of cycle expansions, so I think we're years from a stock market top. With this being the case, you would think the Fed would wait for consistently weak data or a falling stock market to use one of their precious bullets, but Powell didn't take the opportunity to walk it back, so I guess they plan on cutting.
How's this for an idea: Powell is a markets guy, right? What if he sees the extreme socialist views on the far Left and thinks it's in the best interest of the financial stability for the country to keep a bid under the market to help Trump get reelected? Is it that much of a stretch? And you would think Trump will be on his best Sunday school behavior until the election, so unless the polls next winter/spring start showing him way behind, why wouldn't the deepest pullback until then be contained to 5%? Bad data means more easing and campaign-mode Trump means less volatility, no? This, of course, excludes a black swan, but that's always the case.
The real question for things like the dollar/gold/bonds is whether we're in a one-and-done "insurance cut" muddle-through goldilocks-data phase or whether we're entering a full easing cycle to ward off a recession. The reason I flipped my long bias on the dollar is because the Fed has WAY more room to ease than the ECB. Where's the ECB going? They're already negative. In fact, the whole dollar rally from 80 was predicated on the idea that the US economy is back in full swing, and I'm not trying to argue there's not any real growth, clearly there is due to globalization particularly, but also from the overall sentiment and years of cheap money. But I do argue all that growth is completely dependent on fiscal and monetary policies being loose and expansionary. We saw in real-time the Fed's inability to normalize either the interest rate or their balance sheet, so shouldn't all us crazies who said it was impossible get vindicated? What if we're right about the end game being a collapse of the financial system?
I understand the bullish thesis of the dollar being based on the global "short" of all the loans made in the overseas Eurodollar system, which keeps the demand for dollars high, but that reasoning could also be used to be bearish the dollar because when interbank credit tightens, the Fed will be forced to flood the world with dollars through every discount window, swap line, and tool in its toolbox. And credit will only tighten if the global bubble starts to burst, so if the global central banks all return to easing mode, then the "global dollar short" should remain gasoline poured over everything without a spark to set it on fire, which means the real narrative driving the market should be more about the relative easing differential between the Fed and ECB and/or the Eurozone potential for disintegration, which was the real reason I was uber bullish on the dollar to begin with. So, ultimately, if the Eurozone can keep a lid on the political fire of countries to exit, and the "global dollar short" doesn't ignite due to a return to coordinated easing, and the Fed has way more room to ease than the ECB, then why wouldn't the dollar retrace its entire rally from 80?
In terms of a trade, I don't think there's much of an edge right now. The 200-day false breakdown reversal in the dollar was a bullish signal, but if it's taken out again, that's a real sign of weakness.
I'm waiting until either the 200-day is taken out again, or 98 is taken out to the upside, so this is just a reference point for my other trades like gold and oil. There's really no reason to be too bearish or bullish the dollar or the Euro until the giant triangle is taken out in the EUR/USD, which means this could be noisy for months.
Gold
The gold breakout is holding like a champ so far. In fact, it's forming a bullish flag-like structure. I've adapted my style to hold a core position, which is a normal size that I can easily sit through volatility like a backtest of the breakout, and to make strategic strikes with more size that I will take off into strength because I know if I don't, and it pulls back deeper than I thought, then I'll get shaken out at the lows. In this case I prefer to wait for a shakeout of some degree, whether that's breaking below the flag and reversing or breaking out above $1442 to increase size.
Gold Daily - this broke out into overbought conditions, so consolidating like this is very bullish as it works off overbought through time instead of price. The RSI on the weekly will be overbought for a long time, so eventually it will need to unwind, but that could be from $1600 first.
Oil
Obviously, oil responds to its own supply/demand issues more than gold, but I feel like trying to figure out the fundamentals of oil is a waste of time. I can't compete in that space, so I just play the technicals and when they align with the dollar, I look for opportunities to get more aggressive. Oil broke out of a minor trend line on Wednesday. I believe it has plenty of room to run into the $65-$67 levels, and will ultimately retest the long-term downtrend line around $70. However, it has not backtested the 200-day/trendline breakout, so this too is core position only for me. If it backtests the breakout, and reverses strong, then I plan to size up, especially if the dollar is weakening. (Just listening to myself type this out, I am definitely bearish on the dollar, which I did not realize.)
Oil Daily had several 200-day breakout failures, and then it finally broke through. The moving averages are about to cross. I plan on using either the 50-day or 200-day as a guide for a stop but taking profit into the resistance levels. I think oil will outperform gold to the upside.
Oil Weekly
Bonds
My belief is we live in a deflationary world that the central banks will continue to fight with temporary bouts of inflation through cheap money and QE until they ultimately lose because at the end they will have to save the dollar and burst their bubbles with market enforced tightening.
Inflation of prices in the real world need to be broken down into categories where you can isolate the cause. For example, healthcare prices have been skyrocketing for years, and the inflationists will point to that as validation of their view, but the real cause is government programs and baby boomers pushing up demand. College tuition is driven by government guaranteed loans that artificially boosts demand. Overall prices of real goods are driven by the credit in our fractional reserve world that pulls forward consumption and boosts demand, so all the debt in existence is inflation that already happened, and if everyone is in debt to their eyeballs, where's the demand for credit going to come from to create overall generalized inflation in a sustainable way?
College grads have less secure job prospects. Wages are stagnant. Manufacturing moved overseas. The Fed went full dove for years and the cheap credit surely boosted the economy, but it mostly fueled buyback schemes that inflated the stock market. That's where the inflation went. And I'm not saying we're not going to get commodity driven inflation if the dollar weakens, but that is not sustainable. The real cause of inflation for the dollar bears will come if we go to crazy town fiscally through "QE for the people" in some form of sending people free money, but you can't forget the Fed will be buying those bonds because MMT is impossible since it would eliminate the need for the bond market entirely, which is the collateral supporting the entire financial system and the "risk free" rate of return needed by so many funds, so it won't happen that way, therefore it's dangerous to think the long end is going to selloff due to fiscal recklessness when the biggest buyer in the world is there to inhale the whole treasury complex. (Note to the Fed: you should proactively change the Federal Reserve Act now before you are forced to, so you can buy up anything you want, particularly junk bonds, but you'll also want to buy equities in the future. Jus' sayin' - get on it.)
If you're a bond bear who refuses to learn from Japan and Europe, at least hedge your bad bet by buying the short end in proportion, so your losses are contained. I used to be a debt doomer too, but then I figured out the central bank is going to push the entire treasury complex to zero - because they have to - since then there won't be any interest payments for the government. Some folks think once the central bank owns the entire bond market, they can cancel the debt, but they won't do that because they would lose the ability to withdraw the currency from circulation if inflation gets out of control, so there's no reason to do that. They'll just pin interest rates at zero forever and monetize gov't spending until one of the major currencies loses public confidence and develops a narrative to be abandoned, then the whole financial system blows up, but that could literally be ten years from now (or more). In the meantime, the central banks have plenty of firepower to inflate and reinflate asset bubbles while the digital currencies of the future get worked out. I used to be a critic of the Fed, but now I think they're doing the only thing. Just keep the system going until the digital currencies arise (which, again, won't be Bitcoin), then we can devalue the whole world into a new monetary system that will likely operate concurrently as a hybrid for awhile. (more on this another time)
As for bonds, put it this way: we will never get sustainable real world credit driven inflation caused by real growth due to structural deflationary forces, so the only way the long end is going to sell off significantly is if the dollar plummets, so there's probably a pairs trade to put on if you insist being short bonds, but the better trade in my opinion is long the whole treasury complex and short the dollar because that could easily win on every aspect of the trade - huge. If the dollar skyrockets that would contain inflation and destablize the system, which will put a bid under treasuries, so you're hedged. And the dollar has the giant triangle of the EUR/USD to make an adjustment, meaning, the dollar trade will eventually become obvious, even if it thrashes around for awhile.
One more attempt to talk some sense into bond bears. Consider what just happened late last year as the equity markets plummeted because bonds were breaking down through that long-term trend line and finally creating some yield competition. The flight to safety bid is like a perma put under bonds. We live in a 1.5% - 2.5% world. So if you want to be bearish bonds you have to explain how we're going to become a 5% GDP world? Massive tax cuts combined with QE and MMT? Don't you think skyrocketing oil causing inflation to push on 3% would lead to some brake pumping by central banks to calm the angry public going WTF with gas prices dude? And how is the gov't supposed to pay the interest in a 5% world? It's too late, homie, we're going to zero across the board, if for no other reason than to allow the government to avoid the interest liability. It's just a matter of time.
Bonds Weekly - this could pull back into the 152 trendline, which is fairly steep, or even down to 147, which is a backtest of the horizontal breakout level of the H&S bottom. Either one will form a massive H&S bottom. Imagine how long a symmetrical right shoulder would take to form if symmetry happens.
Notes Weekly - the 124/125 level would form a shallow right shoulder, but if it pulled all the way back to 122 it would back test the H&S breakout.
Stocks
This is another example of holding a core position and waiting for selloffs to leverage up. I've already made the case about why I think there's huge upside in stocks. You have to remember the stock market is the nastiest market there is, so it would not surprise me to see the breakout levels get taken out to the downside at some point to shake people out before going higher again, but the point is I think we're in a low vol regime and I don't see why that will change. The Fed showed it's hand. You're either listening to what they're saying, and more importantly, WHEN they are saying it: "we got you" - or you're not. They will support every down tick until they have no bullets left. It's literally the only thing that matters. My hold time on AMZN and APPL is infinity, or a doubling, whichever comes first.
ES Daily - stocks broke out into overbought. The NQ is 100 points from its 10-day. While they certainly can grind higher and work off overbought through time, buying here is dumb - unless you're hedged by selling calls against it or buying puts, whatever. The stock market never lets breakout traders get a free ride. It's just a matter of time.
This is all I have to say for awhile. To summarize my overall view (not timing related): Long stocks, long oil, long gold, long treasuries, probably short dollar. I do have a post about Libra brewing in me, but it's summer. Best of luck to you. And me. lol.
This is a unique time in history and I totally understand everyone who puts out all the charts of the similarities to previous markets tops, and no one actually knows, so maybe you'll be right, but I think all that data from the past is useless now. Everything changed in 2009 when the Fed started telling everyone they will never let the stock market stay down again. The only real limitation to perpetual levitation is if the dollar is plunging to new all-time lows and the Fed is FORCED to tighten to save the currency. This would also coincide with skyrocketing oil like you see in end of cycle expansions, so I think we're years from a stock market top. With this being the case, you would think the Fed would wait for consistently weak data or a falling stock market to use one of their precious bullets, but Powell didn't take the opportunity to walk it back, so I guess they plan on cutting.
How's this for an idea: Powell is a markets guy, right? What if he sees the extreme socialist views on the far Left and thinks it's in the best interest of the financial stability for the country to keep a bid under the market to help Trump get reelected? Is it that much of a stretch? And you would think Trump will be on his best Sunday school behavior until the election, so unless the polls next winter/spring start showing him way behind, why wouldn't the deepest pullback until then be contained to 5%? Bad data means more easing and campaign-mode Trump means less volatility, no? This, of course, excludes a black swan, but that's always the case.
The real question for things like the dollar/gold/bonds is whether we're in a one-and-done "insurance cut" muddle-through goldilocks-data phase or whether we're entering a full easing cycle to ward off a recession. The reason I flipped my long bias on the dollar is because the Fed has WAY more room to ease than the ECB. Where's the ECB going? They're already negative. In fact, the whole dollar rally from 80 was predicated on the idea that the US economy is back in full swing, and I'm not trying to argue there's not any real growth, clearly there is due to globalization particularly, but also from the overall sentiment and years of cheap money. But I do argue all that growth is completely dependent on fiscal and monetary policies being loose and expansionary. We saw in real-time the Fed's inability to normalize either the interest rate or their balance sheet, so shouldn't all us crazies who said it was impossible get vindicated? What if we're right about the end game being a collapse of the financial system?
I understand the bullish thesis of the dollar being based on the global "short" of all the loans made in the overseas Eurodollar system, which keeps the demand for dollars high, but that reasoning could also be used to be bearish the dollar because when interbank credit tightens, the Fed will be forced to flood the world with dollars through every discount window, swap line, and tool in its toolbox. And credit will only tighten if the global bubble starts to burst, so if the global central banks all return to easing mode, then the "global dollar short" should remain gasoline poured over everything without a spark to set it on fire, which means the real narrative driving the market should be more about the relative easing differential between the Fed and ECB and/or the Eurozone potential for disintegration, which was the real reason I was uber bullish on the dollar to begin with. So, ultimately, if the Eurozone can keep a lid on the political fire of countries to exit, and the "global dollar short" doesn't ignite due to a return to coordinated easing, and the Fed has way more room to ease than the ECB, then why wouldn't the dollar retrace its entire rally from 80?
In terms of a trade, I don't think there's much of an edge right now. The 200-day false breakdown reversal in the dollar was a bullish signal, but if it's taken out again, that's a real sign of weakness.
I'm waiting until either the 200-day is taken out again, or 98 is taken out to the upside, so this is just a reference point for my other trades like gold and oil. There's really no reason to be too bearish or bullish the dollar or the Euro until the giant triangle is taken out in the EUR/USD, which means this could be noisy for months.
Gold
The gold breakout is holding like a champ so far. In fact, it's forming a bullish flag-like structure. I've adapted my style to hold a core position, which is a normal size that I can easily sit through volatility like a backtest of the breakout, and to make strategic strikes with more size that I will take off into strength because I know if I don't, and it pulls back deeper than I thought, then I'll get shaken out at the lows. In this case I prefer to wait for a shakeout of some degree, whether that's breaking below the flag and reversing or breaking out above $1442 to increase size.
Gold Daily - this broke out into overbought conditions, so consolidating like this is very bullish as it works off overbought through time instead of price. The RSI on the weekly will be overbought for a long time, so eventually it will need to unwind, but that could be from $1600 first.
Oil
Obviously, oil responds to its own supply/demand issues more than gold, but I feel like trying to figure out the fundamentals of oil is a waste of time. I can't compete in that space, so I just play the technicals and when they align with the dollar, I look for opportunities to get more aggressive. Oil broke out of a minor trend line on Wednesday. I believe it has plenty of room to run into the $65-$67 levels, and will ultimately retest the long-term downtrend line around $70. However, it has not backtested the 200-day/trendline breakout, so this too is core position only for me. If it backtests the breakout, and reverses strong, then I plan to size up, especially if the dollar is weakening. (Just listening to myself type this out, I am definitely bearish on the dollar, which I did not realize.)
Oil Weekly
Bonds
My belief is we live in a deflationary world that the central banks will continue to fight with temporary bouts of inflation through cheap money and QE until they ultimately lose because at the end they will have to save the dollar and burst their bubbles with market enforced tightening.
Inflation of prices in the real world need to be broken down into categories where you can isolate the cause. For example, healthcare prices have been skyrocketing for years, and the inflationists will point to that as validation of their view, but the real cause is government programs and baby boomers pushing up demand. College tuition is driven by government guaranteed loans that artificially boosts demand. Overall prices of real goods are driven by the credit in our fractional reserve world that pulls forward consumption and boosts demand, so all the debt in existence is inflation that already happened, and if everyone is in debt to their eyeballs, where's the demand for credit going to come from to create overall generalized inflation in a sustainable way?
College grads have less secure job prospects. Wages are stagnant. Manufacturing moved overseas. The Fed went full dove for years and the cheap credit surely boosted the economy, but it mostly fueled buyback schemes that inflated the stock market. That's where the inflation went. And I'm not saying we're not going to get commodity driven inflation if the dollar weakens, but that is not sustainable. The real cause of inflation for the dollar bears will come if we go to crazy town fiscally through "QE for the people" in some form of sending people free money, but you can't forget the Fed will be buying those bonds because MMT is impossible since it would eliminate the need for the bond market entirely, which is the collateral supporting the entire financial system and the "risk free" rate of return needed by so many funds, so it won't happen that way, therefore it's dangerous to think the long end is going to selloff due to fiscal recklessness when the biggest buyer in the world is there to inhale the whole treasury complex. (Note to the Fed: you should proactively change the Federal Reserve Act now before you are forced to, so you can buy up anything you want, particularly junk bonds, but you'll also want to buy equities in the future. Jus' sayin' - get on it.)
If you're a bond bear who refuses to learn from Japan and Europe, at least hedge your bad bet by buying the short end in proportion, so your losses are contained. I used to be a debt doomer too, but then I figured out the central bank is going to push the entire treasury complex to zero - because they have to - since then there won't be any interest payments for the government. Some folks think once the central bank owns the entire bond market, they can cancel the debt, but they won't do that because they would lose the ability to withdraw the currency from circulation if inflation gets out of control, so there's no reason to do that. They'll just pin interest rates at zero forever and monetize gov't spending until one of the major currencies loses public confidence and develops a narrative to be abandoned, then the whole financial system blows up, but that could literally be ten years from now (or more). In the meantime, the central banks have plenty of firepower to inflate and reinflate asset bubbles while the digital currencies of the future get worked out. I used to be a critic of the Fed, but now I think they're doing the only thing. Just keep the system going until the digital currencies arise (which, again, won't be Bitcoin), then we can devalue the whole world into a new monetary system that will likely operate concurrently as a hybrid for awhile. (more on this another time)
As for bonds, put it this way: we will never get sustainable real world credit driven inflation caused by real growth due to structural deflationary forces, so the only way the long end is going to sell off significantly is if the dollar plummets, so there's probably a pairs trade to put on if you insist being short bonds, but the better trade in my opinion is long the whole treasury complex and short the dollar because that could easily win on every aspect of the trade - huge. If the dollar skyrockets that would contain inflation and destablize the system, which will put a bid under treasuries, so you're hedged. And the dollar has the giant triangle of the EUR/USD to make an adjustment, meaning, the dollar trade will eventually become obvious, even if it thrashes around for awhile.
One more attempt to talk some sense into bond bears. Consider what just happened late last year as the equity markets plummeted because bonds were breaking down through that long-term trend line and finally creating some yield competition. The flight to safety bid is like a perma put under bonds. We live in a 1.5% - 2.5% world. So if you want to be bearish bonds you have to explain how we're going to become a 5% GDP world? Massive tax cuts combined with QE and MMT? Don't you think skyrocketing oil causing inflation to push on 3% would lead to some brake pumping by central banks to calm the angry public going WTF with gas prices dude? And how is the gov't supposed to pay the interest in a 5% world? It's too late, homie, we're going to zero across the board, if for no other reason than to allow the government to avoid the interest liability. It's just a matter of time.
Bonds Weekly - this could pull back into the 152 trendline, which is fairly steep, or even down to 147, which is a backtest of the horizontal breakout level of the H&S bottom. Either one will form a massive H&S bottom. Imagine how long a symmetrical right shoulder would take to form if symmetry happens.
Notes Weekly - the 124/125 level would form a shallow right shoulder, but if it pulled all the way back to 122 it would back test the H&S breakout.
Stocks
This is another example of holding a core position and waiting for selloffs to leverage up. I've already made the case about why I think there's huge upside in stocks. You have to remember the stock market is the nastiest market there is, so it would not surprise me to see the breakout levels get taken out to the downside at some point to shake people out before going higher again, but the point is I think we're in a low vol regime and I don't see why that will change. The Fed showed it's hand. You're either listening to what they're saying, and more importantly, WHEN they are saying it: "we got you" - or you're not. They will support every down tick until they have no bullets left. It's literally the only thing that matters. My hold time on AMZN and APPL is infinity, or a doubling, whichever comes first.
ES Daily - stocks broke out into overbought. The NQ is 100 points from its 10-day. While they certainly can grind higher and work off overbought through time, buying here is dumb - unless you're hedged by selling calls against it or buying puts, whatever. The stock market never lets breakout traders get a free ride. It's just a matter of time.
This is all I have to say for awhile. To summarize my overall view (not timing related): Long stocks, long oil, long gold, long treasuries, probably short dollar. I do have a post about Libra brewing in me, but it's summer. Best of luck to you. And me. lol.
Monday, July 8, 2019
Never Go Full Gartman
It's pretty clear my flip-flop on the dollar was wrong, so I gathered in my chips and will wait on what I hope is the part I got right: the Fed ain't cutting in July.
Right now the market has it priced at a 94.1% chance they're cutting 25bps, BUT what if the market is off by 94.1% because I think there's 0% chance they cut in July. What if Powell walks back the cut at his testimony this week by saying something like: "we are ready to act, but why would we waste one of our precious bullets in July when the stock market isn't going down yet?"
If so, I would think gold would backtest the breakout and likely fall back into range to shakeout the leverage; you would think stocks would selloff, but at this point does anything matter to the stock market? And most importantly treasuries should continue pulling back. And the dollar would break out.
This was supposed to be fun. What happened to the fun?
PS: Honestly, I think the right move is going full Gartman. That dollar reversal was a 200-day shakeout. It's going higher.
Right now the market has it priced at a 94.1% chance they're cutting 25bps, BUT what if the market is off by 94.1% because I think there's 0% chance they cut in July. What if Powell walks back the cut at his testimony this week by saying something like: "we are ready to act, but why would we waste one of our precious bullets in July when the stock market isn't going down yet?"
If so, I would think gold would backtest the breakout and likely fall back into range to shakeout the leverage; you would think stocks would selloff, but at this point does anything matter to the stock market? And most importantly treasuries should continue pulling back. And the dollar would break out.
This was supposed to be fun. What happened to the fun?
PS: Honestly, I think the right move is going full Gartman. That dollar reversal was a 200-day shakeout. It's going higher.
Wednesday, June 19, 2019
Buh-Bye USD
So that's the end of my bullish bias toward the USD, which should make for a fun environment for awhile since the reflation trade should be on now. Meaning, unless something dramatic happens, which I can't figure out - I guess improving data, or an uber dovish Draghi - everything should go up now. The best trades will likely be gold, silver, the miners, emerging markets...the anti-dollar trade. Bonds are stretched, but I don't see why the whole complex doesn't go to 0% rates and beyond. I'm thinking July won't happen, so there will likely be buyable pullbacks from the disappointment, or maybe some surprise good data. September seems more likely to me. I'm pretty heavy in Amazon and Apple and some NQ. Just got heavy into gold after the Fed today. Bought oil small and I'm gonna buy the miners on consolidations. I've been in the 2-year and 10-year not big or anything, but I don't think I can hold anymore. Maybe end of week and then I'll look for pullbacks into the averages.
I think you have to look at the dollar like this was all a pullback in an ongoing bear market, which has been the view of Peter Schiff and Jeffrey Gundlach all along. To me, that's not confirmed until the giant triangle in the Euro is taken out, but you'd be a fool not to consider it now.
Monthly dollar.
Monthly Euro
Why won't Apple and Amazon double from here? Amzn $1908, Apple $198
I would reconsider the reflation trade if the dollar took out the recent highs just over $98. And it better not. This should be fun. The first step will be the dollar taking out the 200-day to the downside. If I wake up and gold gave back the breakout I'm gonna need a therapist.
I think you have to look at the dollar like this was all a pullback in an ongoing bear market, which has been the view of Peter Schiff and Jeffrey Gundlach all along. To me, that's not confirmed until the giant triangle in the Euro is taken out, but you'd be a fool not to consider it now.
Monthly dollar.
Monthly Euro
Why won't Apple and Amazon double from here? Amzn $1908, Apple $198
I would reconsider the reflation trade if the dollar took out the recent highs just over $98. And it better not. This should be fun. The first step will be the dollar taking out the 200-day to the downside. If I wake up and gold gave back the breakout I'm gonna need a therapist.
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