DANIELLE DiMartino Booth, Money Strong, Jay Powell, J-Curve

Powell & Goliath – Riding Out the Jay Curve

How goes the business of “watching the paint dry”? As boring as the Fed planned? Maybe the stormy markets and Mother Nature are in cahoots and scheming to keep winter alive and as vicious as she’s ever been. From my snowy perch in New York, I can certainly report that Mother Nature sure as heck hasn’t received the memo that Spring has arrived. And neither have the markets.

Call it the risk parity unwind. Pin it on Bitcoin’s downfall. Blame Facebook and trade tensions. But for my money, it’s all about Quantitative Tightening. Or as Nomura’s George Goncalves rightly identifies, what’s really got the markets on edge, is the triple tightening of rising LIBOR, rate hikes and QT. Tack on the European Central Bank’s intentional taper and the Bank of Japan’s inadvertent taper and it’s anything but watching paint dry.

But then, it was always naïve to assume that the diametric opposite of Quantitative Pleasing would be any fun, and foolish to believe the “watching paint dry” meme. For now, the markets are largely unconvinced that all of this tightening will come to pass, or at least that’s what surveys and stocks’ relatively good behavior convey.

The short rate market remains a might bit more skeptical. The LIBOR-OIS spread is on everyone’s radar just like the bad old days of the Great Financial Crisis. For any of you who need a refresher, just think of it as the difference between one interest rate that incorporates credit risk and the risk-free rate, as in the fed funds rate.

Wide is bad, narrow is good. At over 100 basis points, a full percentage-point-plus, the spread is at the widest since the 2007-2009 bloodbath in credit markets. The financial sector is sniffing out risk in the air. Now, some of this has to do with repatriation and a funding shortage, a technical issue that should resolve itself.

But as Citi’s Matt King points out in a short report you should try to get your hands on, the relative calm will soon be disturbed. As King explains, as soon as the Treasury stops paying out tax refunds, continued T-bill issuance will lead to an increase in the Treasury General Account at the Federal Reserve. This will in turn deplete bank reserves by the same amount. And that will reduce the available capital to conduct currency swaps, a decidedly bad thing.

Speaking of the Fed, today is a very important day for one Jerome “Jay” Powell. He will take to the podium at his first post- Federal Open Market Committee press conference. Buoyant stock markets are said to reflect rumors that Powell will wax dovish.

One thing is for sure. Much to the disappointment of those who want to exact revenge on the speculators and a special class of degenerates they refer to simply as “banksters,” Powell will not be pushing through any half-point rate hikes. He may be hawkish, but he isn’t reckless. That is not to say Powell is a pushover. As we heard him say and repeat in his recent Congressional testimonies, it is not the Fed’s duty to put a floor under stock prices.

What Powell should do is announce that press conferences will henceforth follow every FOMC meeting. This simple and elegant move would send shudders through the market but it would also give Powell the flexibility afforded by having every FOMC meeting be “live.” Besides, it’s time for the Fed to grow up. Hiding behind four meetings a year has long since outlived any utility.

For more on the challenges awaiting Powell, please enjoy this week’s installment, Powell and Goliath: Riding Out the Jay Curve


Hoping you’re enjoying Spring weather somewhere and wishing you well.





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Danielle DiMartino Booth, CLEARDANGER.sm


Will Autos Crash the U.S. Economy?

After ten years, is the time finally upon us? We will soon enough know. Today marks the first Minutes release that carries the promise of cleanliness. As I’ve written to on multiple occasions, in disapproval mind you, in 2008, Janet Yellen suggested that the FOMC Meeting Minutes be manipulated to massage the intended message the FOMC should have conveyed.

If investors had misread the statement, or if the world had changed in the three weeks since the statement was released, well then just change the verbiage of the Minutes to reflect the Fed’s new and improved outlook. How convenient.

But Yellen will not have been in the house when today’s Minutes were set to be released. That means they might, just might, reflect what really was said around that mammoth table in the Eccles Building.

If we do read of a raging inflation debate, you can bet your bottom dollar we’re getting clean goods. If the verbiage is nice and soft, well then, that will reflect poorly on Jerome Powell’s leadership abilities. It will be an admission that the Fed should have soothed frayed nerves the intraday minute the Dow was down 1,600, not even waiting for the close.

I do so hope it’s the former of the two, that Powell takes this second step to restoring decency, decorum and dignity to the institution. The first step towards becoming a truly apolitical and independent institution will thus stand – the Powell being mum to stock market gyrations part.

If stocks are rattled now, just wait until the storm building in the auto sector comes onshore. Several weeks back, I was taken to task for even suggestion that such a fate awaited the U.S. economy. What do they say about making lemonade with lemons?

This week I’ve taken the opportunity of being called out to make some calls to the best and the brightest covering the auto sector. The analysis and data they provided from multiple sources provided plenty of back-up to support my initial assessment. If anything, I fear forecasts calling for new car sales to decline to a 16.7-million annual rate are overly optimistic.

On a personal note, as a mother of four school-aged children, I am truly distressed to witness the acceleration of school violence. The incident made me recall yet another beautiful Peggy Noonan column. As she wrote:

“It’s hard to know another person’s motives,” a friend once said. “But then it’s almost impossible to know your own.” We are often mysteries to ourselves. The area between your true self and the mystery—that’s where trouble happens.

That passage reminds me of a great book once recommended to me to read. I can only pray our nation’s leaders have the wisdom, upon reflecting on the sad state of violence in our schools, to stand up for our nation’s children. It’s well past time to conduct background checks that prevent weapons that have one place and one place only – that is, the battlefield – from falling into the hands of those inclined to make tragic trouble that sacrifices our babies and those who nobly endeavor to teach them.

With that, I do hope you enjoy this week’s installment, Clear & Present Danger: Will Autos Crash the U.S. Economy?

To all of our nation’s students, safekeeping, and as always, wishing you well,



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The Unbearable Lightness of Trading, Danielle DiMartino Booth, Economy

The Unbearable Lightness of Trading

This morning, I looked up to the sky and saw a lone goose flying due north. The thermometer registered a chilly 31 degrees. In the distance, I heard a flock of geese squawking as if to call their errant flying mate back to the fold.

No doubt, many investors feel they too have lost their way these past few weeks, as if their internal compasses have malfunctioned. Dashed is the calm, replaced by jarring twists and turns as markets veer decidedly off course.

The root cause of the disturbance is interest rates. As miniscule as the moves in rates have been, we’ve learned the hard way how very sensitive these fragile markets have become. As one Twitter follower noted, a bond fund with a 10-year duration – think risk sensitivity – will decline in value by 10 percent if interest rates rise by one percentage point. Touchy, touchy!

And that’s the plain vanilla variety of risk. Though plenty of market sages have warned of the perils of risk parity and short volatility strategies, it wasn’t until Monday’s flash crash that we learned how much more sensitive they are to small moves in interest rates that in turn push up volatility.

As CNBC’s Rick Santelli warned Tuesday, we’d better know we’re competing with the, “If, then crowd.” Echoing Jim Grant, Santelli likened the risk parity/short volatility trade to 1987’s portfolio insurance. What’s an investor to do if everything priced to volatility is vulnerable and capable of being a trading trigger? Santelli’s answer in true, trademark pith: “Be careful of esoteric products bundled in neat packages.”

Into this fray stepped one Jerome Powell. Can you imagine Monday being his first day on the job, one he started by releasing a videoed statement in which he confidently assured the world of the financial system’s resilience? At least Greenspan had two months to gather his bearings before his own Black Monday dispensed with the façade.

Maybe Powell could have done without his predecessor hitting the Sunday morning news circuit with what appeared to be an epiphany that stocks and commercial real estate were overvalued. Seriously? Now?

For the time being, there are few if any signs of contagion. The fixed income space has been remarkably well behaved. That’s good news considering the European Central Bank’s Monday announcement that it would be increasing its allocation to corporate bonds in the remaining months of its quantitative easing program. Lovely.

If nothing else, I can only hope we’ve begun to appreciate how very distorted markets are rendered when price controls become the norm. Look no further than Venezuela to see what the end game is if price controls are imposed indefinitely, with brute force.

Knowing I once lived in Caracas, one subscriber was kind enough to send me this Wall Street Journal story, How Fast are Prices Skyrocketing in Venezuela?   See Exhibit A: the Egg. Tragically, prices in the country I came to know and love are doubling every two weeks.

With any luck, Powell has the sense to grasp the dangers of markets making monetary policy to the extent they eventually levy price controls of their own. Thankfully, the Fed has remained mum on the markets rediscovering volatility. Let’s hope that remains the case.

In the meantime, I invite you to partake of this week’s tribute to the current generation of traders who’ve withstood the destruction of price discovery at the hands of overly-intrusive central banking policy. Please enjoy, The Unbearable Lightness of Trading.

On behalf of the plight of the Venezuelans, wishing you well,




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RED GOLD, Yellen, China, currency, yuan, dollar, economy, Danielle DiMartino Booth

RED GOLD: Does China Aim to Dethrone the Dollar?

Is it finally ‘go time’ in the bond market? For the moment, the answer is a strong maybe. The yield on the 10-year Treasury has burst through its 2017 highs and is behaving as if it could hit the 3% threshold, elusive since the taper tantrum of 2013.

If you’re looking for hard guidance in today’s Federal Open Market Committee statement, I’d suggest you tamp your enthusiasm. Janet Yellen has orchestrated the slowest tightening cycle in history, defying even the ‘measured’ pace at which Alan Greenspan tightened which culminated in the housing bubble bursting. The last thing Yellen wants to do at her last FOMC meeting is stir any pot.

As far as the markets are concerned, Yellen has been a smashing success. The stock market has tacked on a neat 70% gain while at 2.70%, the yield on the 10-year Treasury has barely budged. We’re talking about a move upwards of three whole basis points (bps), or hundredths of a percentage point.

But then, neither the present nor the past dictate the stuff of legacies. That, as we wise souls know, is the purview of the future. Right or wrong, the good deeds of yesterday and today can be wiped away in the wink of an eye. That’s the nature of stability. If it lingers too long, it tends to give way to its polar opposite, instability, in what Wall Street recognizes as a ‘Minsky Moment.’ There won’t even be a way to feign surprise when that moment hits given the record low levels we’ve witnessed on every measure of complacency that exists.

For more on Yellen’s legacy, please link to my latest Bloomberg column: It’s Too Early to Judge Janet Yellen.

Did I mention the strong ‘maybe’ in answer to whether the rise in yields was sustainable? The idea that the economy has gained so much momentum it can withstand four rate hikes this year certainly gives one the warm fuzzies. But it’s hard to conjure a scenario that suggests 3% GDP growth will persist into the second half of this year, especially in a rising rate environment.

As one subscriber wrote, “The current projections for four hikes seem preposterous. Given the debt at all levels of the economy, I doubt the economy can stand those interest rates.” I couldn’t have said it any better myself.

The one jury that still remains out is the yield curve. As dramatic as the move in bond yields has been, relative to the ludicrous low rate world we call home, the difference between the yields on 2-year and 10-year Treasury remains south of 60 bps. And forget about a 3% yield on the 10-year. Can we first pierce that level on the 30-year which at last check was 2.97%?

We are not alone in watching the Fed and bond yields for clues about what the future holds. With the yuan at its strongest level against the dollar since August 2015, you can bet the Chinese are glued to their monitors as well. President Xi Jingping pulled a ton of demand forward last year to pull off a glorious 19th Party Congress. Now he’s got to deal with the aftermath as domestic growth slows, interest rates rise and exports are stressed by the strong yuan.

And yet, rumors of the dollar’s imminent death continue to circulate. Maybe the cryptocurrency contingency is right. Maybe the dollar is headed the way of British Pound Sterling. Maybe the Chinese even have designs on being the dollar’s successor. Or do they? For more on this, please enjoy this week’s newsletter:  RED GOLD: Does China Aim to Dethrone the Dollar?

Wherever you may be, wishing you well,


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SOCCER MONSTERS — The Lamborghini in the Carpool Lane

Writing on a weekly basis requires no small amount of inspiration from all corners of this life that I walk. This week’s newsletter, a stark take on the very real economic implications of both demographics and inequality, two subjects I marry for the first time, was inspired by two different events that took place this past weekend and one from long ago.

At dinner on Saturday night, I found myself captivated by a dear friend’s recounting of a run-in he’d had with a client. To keep things appropriately anonymous, let’s just say my friend has been in the business of catering to the wealthiest of the wealthy for many years. And to be clear, he has done so with supreme aplomb and integrity, much to his clients’ approval.

But something has changed over the past few years, he shared. It would seem his clients have lost their capacity for restraint, their etiquette moorings. Some, not all, of course, of the uber-wealthy have decided that their wealth empowers them to occupy a different sphere, to breathe rarified air, and to mock, well, the rest of us, including those who cater to their every whim, including my friend in his professional capacity. Profanity is discharged as any other weapon and petulance has become the norm.

How sad that it’s come to this. Those were the last words that crossed my mind as I laid my head on my pillow late Saturday night.

But then, tomorrow is another day. At least that’s what I’d hoped.

On Sunday, I indulged myself the best way I know how, by tucking into Peggy Noonan’s weekend column. Her writing is as good as it gets. The unflinching light she casts on subjects we must read about leaves me in awe week and week out. And then there was America Needs More Gentlemen. With a sad rush, I was transported back to Saturday night.

Noonan writes of what we’ve all begun to wake to in this era of social media that’s not only helped rob our youth of their innocence, which we carry on about endlessly, but our men of their decorum and self-control. Read the column if you have not already and partake of Noonan’s observations which will make you long for what’s been lost along the way. But be graced here by the best of what we can be.

As Noonan wrote splendidly, “A gentleman is good to women because he has his own dignity and sees theirs. He takes opportunities to show them respect. He is not pushy, manipulative, belittling. He stands with them not because they are weak but because they deserve friendship.” Even better, she notes that there are plenty of definitions of gentlemen to be found on the internet. So plenty of young men out there want to know, which is a great place to begin to find our way back.

The long-ago episode, those who have read Fed Up will know, was a lunch, a celebratory birthday lunch with the man I once advised, Richard Fisher. At the time, riots were burning in Athens’ streets. As the coffee was being cleared, I asked Richard what his greatest fears were for our country’s future. His answer has been with me ever since — that those riots so far away would take place one day on our own streets, that social unrest was coming home to roost if something didn’t give.

Entitled and crude, a vile combination if there ever was one. And yet, in so many ways, on so many levels, that’s what it’s come to as the divide between the have’s and have not’s widens and our nation’s Boomers age in a graceless age. We will recover our collective dignity if we know what’s best for our country. Our economy and more importantly, our very souls depend on it.

With that, I will leave you with this week’s installment, SOCCER MONSTERS: The Lamborghini in the Carpool Lane.

With hopes that you hold the door open or have it held open for you, and wishing you well,


PS. The following Bloomberg column made me laugh as I hadn’t in years, at least on the subject of central banking. A Twitter follower was kind enough to send it to me and I can’t help myself. I simply must pay the joviality forward. So please enjoy, Your Psychiatrist Will See You Now, Mr. Central Banker.

It will act as a lovely offset to this week’s sobering newsletter.



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THE GREAT RECOVERY — Unambiguous Clarity Over the Horizon

Are you a grasshopper or a weed hopper? A subscriber recently chided me for succumbing to that which I deride the very most, the dreaded groupthink. So ubiquitous is the consensus on the economic outlook for 2018, I’d been swept away on a wave of conforming concordance. What followed was, “You surprise me weed hopper.”

In the spirit of discovery, I must admit to being a bit mystified. I was familiar with ancient Asian teachings that raise the grasshopper to esteemed status. To wit, grasshoppers “overcome obstacles, jump into successful ventures and are forward thinkers. A grasshopper’s nature is stable, vibrant, content, intuitive, patient, peaceful, creative, insightful, connected, courageous, resourceful, and much more.”

A weed hopper, on the other hand, references one who is new to the scene to the art of smoking weed or a small aircraft which uses tricycle landing gear and a tubular-frame fuselage. True confessions, the scent of marijuana is all that’s needed to induce a wave of nausea for this one. And I’m a bad flier.

But maybe that was the point. Perhaps I needed to be reminded of the importance of nuance. Had I just accepted “weed hopper” as a synonym for “grasshopper,” wouldn’t that have proven the point that I’d stopped discerning and begun to take others’ thoughts as my own?

And then there’s the very source of groupthink, the Federal Reserve, though we can hope the times, they are a changing. For the here and now, a veteran and voter on this year’s Federal Open Market Committee continues to voice concerns over worryingly low inflation. That’s what happens when you suffer from the worst form of myopia that keeps you focused on a failed inflation gauge. What this unnamed Fed official should have said was what a fellow grasshopper, Dr. Gates, pointed out in reaction to this inside-the-box thinking:   “What the Fed should be concerned about is tightening the economy into a recession because the cost to buy what we must (non-discretionary) is rising at an appreciably faster pace than the cost to splurge on what we covet (discretionary).”

Price pressures for necessities are running too hot, not too cold. That applies to companies and households alike, by the way. Pick your poison – a margin squeeze or further strain on household budgets.

In the meantime, rampant commodity inflation continues to pressure yields upwards. As if the bloodletting needed reinforcements, this week’s bond market rout has intensified care of the two largest foreign holders of Treasuries. The Bank of Japan appears to be, denials notwithstanding, tapering its quantitative easing (mechanics matter). And China is making rumblings about the reduced attractiveness of holding our sovereign bonds with the added punctuation point that the risk of a trade war gives them more license to pull back.

And so, the two-year/ten-year Treasury spread gaps out by 10 basis points and there’s Bill Gross and his bond market peers of the world who angst (talk their books) about the end to the glorious bond market mega-run that’s been around for most of our careers.

Are you surprised the stock market is taking all of this in stride? If you answered in the affirmative, all I can say is, “You surprise me weed hopper.” In the meantime, in the real economy, it’s full steam ahead, something the Fed will follow, come what may. For more on the economy’s prospects this year and beyond, please enjoy this week’s installment The Great Recovery: Unambiguous Clarity Over the Horizon.

With hopes you are a grasshopper, and wishing you well,


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AGAINST ALL ODDS — An Open Letter to a Strong Leader

Dear friends,

Welcome to the year of the crosscurrent. Expect for the ride to start out and stay bumpy, especially after landing.

For the time being, happy days are still very much here. Average what the Atlanta Fed and New York Fed are forecasting for economic growth in the just-ended fourth quarter and we’re talking about full year growth of 2.7 percent. But it gets better. There’s an increasing chance we’ll have 12 months of GDP growth at a 3-percent rate by the time the books close on the first quarter. Any upside from here will make Republicans giddy with excitement.

Back on Wall Street, the markets have sniffed out the economy’s seeming resilience. Stocks continue to reach for records celebrating the manufacturing renaissance as much of the country continues to rebuild from the Year of the Natural Disaster and the dollar remains weak, a beautiful combination if there ever was one.

In the event the holidays distracted you, the Chicago Purchasing Manufacturing Index hit the highest level since March 2011. In fact, the whole of the Midwest factory sector was booming headed into the new year boding well for the economy as a whole…with one notable exception care of my compadre Dr. Gates. Manufacturing in the Hoosier State, it would seem, has fallen into negative territory. That bears watching as Indiana is a bell weather for the U.S. as a whole.

Speaking of signposts, households have grown increasingly comfortable with leverage to maintain their living standards, which of course economists cheer. That’s worked for 24 straight months as credit card spending growth has outrun that of income growth. But home prices continue to catapult upwards at more than twice the rate of income growth and rents refuse to provide the respite so many households desperately need.

Did someone mention cross currents?

Into this fray steps the Federal Reserve and a whole new cast of characters, most of whom are unknowns to us or should be (still maintaining that Powell is no Yellen clone). What will they ponder when they convene the last two days of this month? Perhaps they will angst over the smoking hot prices paid component in the just released ISM report. The 69-handle resulted from 17 out of 18 industries reporting higher prices. Couple that with a 69.4-read on new orders and you can bet your bottom line there are more supply chain disruptions to come.

Will PPI rather than CPI alone sway the new crew to err to the side of caution, committing to more rate hikes than the market has priced in? For those inclined to keep a running tally, it only takes two rate hikes to completely offset the tax law’s boost to 2018 GDP.

And then there’s the elephant in the room, the fact that 2018 is the year of tapered shrinkage. With a hat tip to Nicholas Glinsman who did some quick back-of-the-envelope math, from this day forth (actually yesterday forth), European Central Bank (ECB) purchases are hereby halved. Looking back to the last three months of 2017, combined ECB and Fed reinvestment summed to $60 billion. Starting in January, that rate collapses to $15 billion. By the end of the first quarter, we’re talking $5 billion, which is still positive.

But by September, the dueling duo central banks will be yanking $40 billion a quarter from a financial system we’ve been assured will nary blink an eye. 2017 = $2 trillion in global QE. 2018 = $1 trillion. No sweat?

In the meantime, the tax man commeth, and that’s a good thing for several states that could use a bit of good news on the revenue front. The question is, will a bold leader, one with foresight and vision, emerge with the wisdom to make use of the tax windfall no one is talking about? For more on this, please enjoy the new year’s first installment, AGAINST ALL ODDS: An Open Leader to a Strong Leader.

With hopes you steer clear of the storms and wishing you well,


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THE JOB MOB The Societal Impact of the Next Downturn, Danielle DiMartino Booth

The Job Mob – The Societal Impact of the Next Downturn

Before there was the mob, there was the gabelloti. It would seem that these Sicilian estate managers, employed by the church or feudal lord, were not above corruption.

As the nobility’s penchant for the provocative Palermo night life circa 1700 grew and proper pied-a-terres secured, more responsibilities were handed over to the gabelloti, who were charged with the overseeing of the day-to-day operation of the fiefdoms. A primary task for the gabelloti was ensuring the necessary number of hired hands were satisfactorily shepherding, farming and foresting the lands with which they’d been entrusted.

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Danielle DiMartino Booth, Money Strong LLC, Bitcoin, Blockchain

CRYPTIC CURRENCY — From Blockchain to Daisy Chain and Beyond

W. A. Saltford was a dexterous dandy ahead of his time. In 1898, Vassar College commissioned the Poughkeepsie florist to carry out a cherished charge as the first designated outsider to weave and wield the seminal symbol of Commencement Day, the Daisy Chain.

For the procurement of requisite raw materials, Saltford relied on who else but the “Daisies,” those senior-class designated and specially selected sophomores who scoured Dutchess County for thousands of the long-stemmed flowers. In Vassar’s early days, every graduate merited her share, or to be precise, a 100-pound length of shoulder-draped Daisy Chain. As graduating classes grew, scarce daisy supplies and bench-pressing limitations required Saltford innovate. Regal laurel leaves, he discovered, lightened the load and filled the gaps nicely, much to the Daisies’ delight and relief. Today, the chain is fixed at 150 feet. The alternative, given society’s love affair with liberal arts would be a chain of over 600 feet and some very sore sophomores.

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ATLAS STUMBLES Inequality and Macroeconomics at a Crossroads, DiMartino Booth, Federal Reserve, Money Strong

Atlas Stumbles — Inequality and Macroeconomics at a Crossroads

“If you don’t know, the thing to do is not to get scared, but to learn.” 

“Man’s mind is his basic tool of survival. Life is given to him, survival is not.” 

“I like to deal with somebody who has no illusions about getting favors.”

Red-blooded Americans read these lines and, if in polite company, resist the urge to beat their chests. These mantras say all that need be said of the virtues of honesty, integrity, productivity, grit, independence, pride and liberty itself. Accurately attribute the quotes to Ayn Rand’s Atlas Shrugged, however, and some pause for a moment of reticence, gently reminded of the need to be politically correct.

The need to be ‘PC’ was not even in accepted vernacular back in 1957, when Rand’s book was being vilified by critics. The tome was labeled a testament to hatred and cruelty, a soulless slaying of the welfare state. As fate would have it, a rich rebuttal in the form of a letter to the editor of the New York Times would make history: “‘Atlas Shrugged is a celebration of life and happiness. Justice is unrelenting. Creative individuals and undeviating purpose and rationality achieve joy and fulfillment. Parasites who persistently avoid either purpose or reason perish as they should.”

That the vehement defense was penned by one Alan Greenspan might go down as one of the most malevolent mockeries writ from an era in central banking heralded by the Rand acolyte himself. It rings as impolite in its bluntness, but it was Greenspan who most bastardized Rand’s basic premise, that innovators and producers build model economies.

Every tragedy has a beginning. At the outset of this particular saga was the moral hazard born of Greenspan’s fascination with the stock market. He was literally in awe of those Rand would have characterized as perfect producers, Wall Street’s Masters of the Universe who consumed what they killed. It’s one thing to admire, but quite another to allow yourself to be intimidated when you are tasked with regulating the world in which the Masters reside.

And yet, in the weeks and months that followed the crash of 1987, the newly minted Federal Reserve Chairman directed the New York Fed to leak to bond trading desks the Fed’s plans to inject liquidity into the system. By sanctioning the front running of the Fed, Greenspan had effectively invited the Wall Street’s foxes into the hen house to feast on preordained profits.

Stop and think for a moment about the regime change this heralded, the alteration thrust upon the principle of risk-taking, of markets’ duty-bound and noble tradition of price discovery. Greenspan flipped the very law of nature on its head for those who had been schooled to live and die off the consequences of their trades, come what may. To be shielded from the ramifications of their actions denunciated everything Wall Street did and should represent.

And yet, here we are, 30 years later. Thanks to the bounteous harvest of moral hazard sown by Greenspan’s original sin, far too many of Wall Street’s innovative producers have devolved into the looters Rand so decried in her tribute to capitalism. Rather than create anything of lasting value, today’s Wall Street leeches what it can from the bottomless, fetid supply of the moral hazard manufactured by central bankers.

If only it just ended there it would be bad enough. But politicians long ago opted to tie their fates and fortunes to the same poisoned central bank dealer. As far as they’re concerned, the monies that keep them in office need be fungible and nothing else.

And so, the Stygian tale turns, sustained by trillions upon trillions of dollars of debilitating debt taken on along the way. The central banks print money. The investment banks pocket fees. The tab swells. Add it all up and global credit sums to $220 trillion today, up from $150 trillion at the onset of the financial crisis. Narrow your focus to the four largest developed markets, those most active on the money-printing stage, and you find that $34 trillion of debt has amassed since then. Call the chart below simple if you will, but sometimes one line says more than enough.

Sum of Central Bank Balance Sheets and
Cumulative Budget Deficits for the United States,
Eurozone, the United Kingdom and Japan ($Trillions)


In the words of the Deutsche Bank analysts who created the graph: “Another way of looking at this is the extra amount of stimulus over and above living within our means (no money printed, no deficits) seen since the Great Financial Crisis. In the end, $34 trillion of stimulus and Quantitative Easing has delivered very low growth, subdued inflation and sky-high asset prices around the globe. This is unprecedented territory and how can anyone estimate what the fallout will be when we normalize again?”

In all actuality, the very same Deutsche analysts answered their own question in the same report that produced that daunting chart above, of debt built to nowhere, akin to that pork-financed bridge, also to nowhere, so pilloried in the media years ago. The fallout will be anger — unprecedented, immeasurable levels of unrequited anger among the masses that know all too well that the economy’s designated producers have become looters, robbing them of a passageway out of the hell on earth they’ve come to know as subsistence care of entrepreneurship and innovation succumbing to slow, sad deaths.

Populism itself is coming home to roost and it will present itself as the macroeconomic challenge of the ages.

No doubt, ‘populism’ is a subjective force, all but impossible to quantify. Thankfully, that didn’t stop the Deutsche analysts from giving it a go. To wit, they weighed populist votes and population size in seven large countries over the last century, specifically those of France, Italy, Spain, the United Kingdom, Japan, Germany and the presidential elections within the United States. Qualifiers included parties that espouse communism, nationalist policies tied to immigration and militarism and leaders with dominating, charismatic personalities rather than well-defined policy positions. In Europe, anti-NATO and Euro-skeptic tendencies were also captured while in the United States, anti-corporate progressives that defied the establishment made the cut.

It’s noteworthy that these general themes, in one form or another, have withstood the test of time, answering the question as to whether we can’t all just get along. (Apparently not.)

Discount what you will. Net out what you like. No matter how you slice it, prior to the last decade, populism is off the charts. No period in modern history compares to what we’re witnessing today save the epoch set off by the stock market crash of 1929 that culminated with World War II, with, by the way, the Great Depression sandwiched in between.

Populism Index Against the Backdrop of
Developed Market Financial Crises

Populism index

Hats off to the team at Deutsche for resisting hyperbole in the face of the immutable message delivered in the graph: “While the consequence of the recent rise in populism hasn’t yet destabilized financial markets, the level of uncertainty will surely remain high while such parties remain realistic power brokers in major national elections. (Populism’s) rise surely increases the risk to the current world order and could set off a financial crisis at some point soon.”

It’s that last point that finally brings this week’s subtitle into context. The gravity of populism’s root cause, inequality, is no longer purely political tinder. It’s all about the economy.

The good news is the beginnings of an epiphany is dawning on the have’s. Mega hedge fund magnate Ray Dalio in particular, a man whose net worth crests $17 billion, has voiced concern. In a recent interview, Dalio said that he thought inequality was the most daunting challenge on the horizon, one on par with the period from 1935-1940.

“If you carve out that lower 40 percent, not only has there been no income growth, but death rates are rising because of opiate use, suicide and because they’re losing jobs,” Dalio said. “This is the biggest issue of our time – the biggest economic issue, the biggest political issue and the biggest social issue.”

Dalio is right. And though he’s gone as far as saying the Fed is poised to commit a policy error akin to 1937, he’s not vociferous enough in his criticism of Fed policy for engineering the fine mess in which the country finds itself.

Thankfully, I’m not alone in my indictment of the Fed. In the words of an economist worthy of the deepest respect, Judy Shelton, Janet Yellen’s concern for the plight of the forgotten masses is, “rich.” I recently caught up with Shelton and she had this to say, in a clear rebuttal of the fawning accolades being showered on Yellen as her time at the Fed comes to a blessed end: “While it’s nice that Janet Yellen cares about the issue, I think she should have been more forthcoming in acknowledging the Fed’s own role.”

Shelton’s eloquence shines through in Beware a Magnanimous Fed, an opinion piece she wrote three years ago in reaction to the following naïve statement made by Yellen:  “Although we work through financial markets, our goal is to help Main Street, not Wall Street.” Shelton’s reply follows.

“The problem with Yellen’s public display of benevolent concern over income and wealth inequality is that it implies she means to do something about it. This is worrisome because she views the Fed as a force for good rather than as a distorting government interloper into private-sector credit markets whose clumsy efforts skew financial rewards to savvy corporate strategists and sophisticated investors.

If Yellen wants to restore the free-market values rooted in our nation’s history, she needs to pay heed to the telling correlation between wealth inequality — at its highest level in the past 100 years, higher than for much of American history before then — and the creation of the Federal Reserve in 1913. It’s unbecoming to preach the virtues of equality of opportunity when Americans see only too well who most benefits from monetary favoritism and who is most punished by the inequality of access to vital financial capital.”

It’s doubtful Ayn Rand herself could have said it better. Shelton’s refutation of Yellen’s premise is all the more prescient given the results of the presidential election. The masses may not be able to identify zero interest rate policy and quantitative easing as culprits by name. But their actions speak volumes to their shared revelation that the enemy has been identified and it is indeed within.

As for any aspirations to attain the American Dream, they’ve long since been crushed by repeated iterations of subprime debt illusions ending in tears. Call the two dichotomous headlines from the November 15th issue of the Wall Street Journal Exhibits A & B: Household Debt Hits a New High and More Americans Feel Like a Million Dollars.

If you haven’t yet got the picture, it might be time for a courtesy call to your friendly neighborhood ophthalmologist. As for what lies ahead, populism appears to be taking a nasty turn for the worse. And though the problem is clearly as close to home as it can be, our shared national dilemma is anything but local.

Look no further than my paternal family’s homeland. Radical no longer suffices for the long-repressed Italians seeking relief at the polls. The far right, it would appear, is now rearing its hateful, ugly head. Be on the lookout for more of these headlines as oppression spreads in the way only nasty infestations can.

On a more practical level, it strikes me as untoward to bandy about investment ideas while pondering such heavy prospects. If you’ll indulge me some grace, it’s safe to say defense contractors will have no challenge keeping the lights on in the years to come.

In the end, our collective deliverance can only come from strong leadership that refuses to balk at the grave challenges that lie ahead. To call one last time on Rand’s sagacity, “Evil is impotent and has no power but that which we let it extort from us.”