The charts above show the extremes of higher prices and lower sales that are being experienced in the US car market. Growth and inflation are likely to accelerate in Q4 2021, but this remains driven by extremes in easy policy, which this week were reinforced in the US and UK.
1. The Quad 2 reflation case in Q4 2021 remains on track with rising probability.
Here is a breakdown of the current economic signals:
2. The biggest stimulus ever from central banks continues.
The Fed started to taper its QE asset purchases this week. However, interest rate rises may still be 6 months away according to the Fed chairman, and the BOE and ECB also kept interest rates unchanged at record low real interest rates. Will ongoing stimulus help the supply chain?
3. So reflation, ongoing record stimulus, and trending inflation. Is it time to consider the “Waypoints On The Road To Currency Destruction”?
“Monetary policy makers are aware that a wider consumer panic over rising prices must be avoided. They understand that continuing reports of product shortages will risk encouraging consumer stockpiling, driving consumer prices even higher. They will fear that interest rates would have to be increased significantly to bring price inflation back under control. But growth in the major economies appears to be stalling, which in the Keynesian playbook calls for lower interest rates and monetary stimulation instead. This leads us to—
Waypoint 1. Commentary in the main-stream media has yet to address this dilemma. It is to be expected at any time.”
The only way in which monetary policy planners can attempt to control rising bond yields and to stop equities sliding into a bear market is to increase the pace of currency creation, particularly through enhanced QE. But for now, the Fed’s stated intention is to taper QE, not increase it. This leads us to —
Waypoint 2. No anticipation of this dilemma in the media or independent commentary has yet been detected. Look out for it.
The Fed will have a straightforward choice: resist market pressures for higher interest rates to save financial markets, stave off insolvencies by over-leveraged borrowers and minimise government funding costs; or protect the dollar by raising the funds rate sufficiently to take all expectation of higher rates out of the market and ignore the financial carnage. This will be next —
Waypoint 3. No anticipation of this dilemma in the media or independent commentary has yet been detected.
There is a specific danger developing from consumer demand leading to a general stockpiling goods. When the process goes beyond a certain point the consequences of consumers disposing of their currency and credit in favour of goods become apparent. Currency no longer works as the objective value in a transaction, this role being switched to goods, because people begin to buy goods just to get rid of currency.
When that process starts in earnest, the fate of the currency is sealed. A hundred years ago this was called the crack-up boom, the final abandonment of currency.
Waypoint 4. No anticipation of the final nails in the fiat currency coffin is currently anticipated. When it is, the fate of the currency will have already been sealed.
4. What is the key timing signal for buying gold?
Not what you might think if you look at the track record. Once interest rates actually rise. Then the outlook for the rate of change of growth changes.
5. The astonishing procyclical distortion of Buybacks, which have broken all records over the last year.
“Not A Return Of Capital
Share buybacks only return money to those individuals who sell their stock. Such is an open market transaction. If Apple (AAPL) buys back some of their outstanding stock, the only people who receive any capital are those who sold their shares.
So, who primarily sells their shares?
As noted, it’s the insiders, of course, as changes in compensation structures since the turn of the century have become heavily dependent on stock-based compensation. Insiders regularly liquidate shares “granted” to them as part of their overall compensation structure. Such allows them to convert grants into actual wealth. As the Financial Times previously penned:
“Corporate executives give several reasons for stock buybacks but none of them has close to the explanatory power of this simple truth: Stock-based instruments make up the majority of their pay and in the short-term buybacks drive up stock prices.”
A recent report on a study by the Securities & Exchange Commission found the same:
SEC research found that many corporate executives sell significant amounts of their own shares after their companies announce stock buybacks, Yahoo Finance reports.
What is clear is that the misuse and abuse of share buybacks to manipulate earnings and reward insiders has become problematic. As John Authers recently pointed out:
“For much of the last decade, companies buying their own shares have accounted for all net purchases. The total amount of stock bought back by companies since the 2008 crisis even exceeds the Federal Reserve’s spending on buying bonds over the same period as part of quantitative easing. Both pushed up asset prices.”
In other words, between the Federal Reserve injecting a massive amount of liquidity into the financial markets, and corporations buying back their shares, there have been effectively no other real buyers in the market.
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