29 ms·

Gold is poised as, with stock market declines, US funding of deficits gets severely pressured. As a result, Fed will have to reverse course, sacrificing the dol

by PKop 9y ago

Gold is poised as, with stock market declines, US funding of deficits gets severely pressured. As a result, Fed will have to reverse course, sacrificing the dollar to maintain asset prices and ability to finance government. We'll see if dollar has a short term rise, though as a flight to safety, though I think unlike in past downturns, the dollar and US economy is in a much worse position.

AnimalMuppet 9y ago
How does the stock market declining affect US funding for deficits? Deficits are funded by bonds, which (almost always) move in the opposite direction from stocks. This also means that your second sentence doesn't follow. > ... though I think unlike in past downturns, the dollar and US economy is in a much worse position. I'm a bit undecided, but I fear that you are right on this one.
- PKop 9y ago
  I've been following the thesis of @LukeGromen, (here's a sampling)[0]. Here I think he covers it mostly in full [1]. Definitely worth a listen.. Also, here is a great 5 part podcast from December where he (and other Dollar bears) talk about the dollar decline[2]. Because of US dollar reserve status, government spending has been financed by foreign buying of treasuries, especially China. In recent years, they have rightly seen the fiscal situation of US, with massive liabilities, as being fixed only by devaluation of the dollar and therefore in real terms holding treasuries, or especially continuing to stockpile them not prudent. And he points out many examples of how they have recently been declining their purchases of treasuries and stockpiling gold (them and Russia). He argues their recent opening of a Oil futures market as their avenue to moving away from dollar, eventually (long long term) pushing Renminbi to gain reserve status but in medium term using gold / oil as their leverage away from dollar. On the stock market/taxes connection, he points out usually a yr over yr decline in tax receipts occurs in recessions. But last month, in the midst of an "everything bubble" (stocks, real estate, bonds, etc.) we saw a year over year decline of tax receipts. [3] Also that stock market is increasing % of GDP & most taxes paid by wealthy whose income increasingly based on stocks market returns implies a dependence at the margin of government spending on high equities valuations. [4] If the market continues to decline, and future months tax receipts decline, the "fed put" will get called into action, as China has stopped funding deficit (enough to match it's increase) so it has to be funded by rising rates in the private market. Libor shows this, as does the decline of the dollar. Here's a link his slide deck covering all of this [5]. See slide 26 for a chart showing that when tax receipts fall "enough", US quickly takes action to weaken the dollar. Slide 25 shows that declines in tax receipts usually correspond to recessions, but except recently.. [0] https://twitter.com/LukeGromen/status/978994115047231488 https://twitter.com/LukeGromen/status/978994115047231488 [1] https://www.theinvestorspodcast.com/episodes/luke-gromen/ https://www.theinvestorspodcast.com/episodes/luke-gromen/ [2] https://www.macrovoices.com/336-anatomy-of-the-u-s-dollar-end-game-part-1-of-5 https://www.macrovoices.com/336-anatomy-of-the-u-s-dollar-en... [3] https://twitter.com/LukeGromen/status/979079824567427073 https://twitter.com/LukeGromen/status/979079824567427073 [4] https://twitter.com/LukeGromen/status/979087795447894017 https://twitter.com/LukeGromen/status/979087795447894017 [5] https://www.dropbox.com/s/j86wfg79iyds85j/Luke%20Gromen%20Slide%20Deck%20for%20Parts%203%20and%204.pdf https://www.dropbox.com/s/j86wfg79iyds85j/Luke%20Gromen%20Sl...
- cm2187 9y ago
  Well we will get into the next recession with QE all the way in and even more sovereign indebtness than 2008.
bmpafa 9y ago
> Fed will have to reverse course, sacrificing the dollar to maintain asset prices and ability to finance government. It's not within the fed's mandate to worry about the price of the dollar or equity prices (until employment is impacted), is it?
- eternauta3k 9y ago
  Wouldn't be the first time: https://en.wikipedia.org/wiki/Greenspan_put https://en.wikipedia.org/wiki/Greenspan_put
- graedus 9y ago
  IIRC, their dual mandate is: "Price stability": sounds like no inflation or deflation to me, but in fact they pursue some non-zero amount of inflation, usually 2-3%. "Full employment": sounds like 0% unemployment to me, but in fact they target some non-zero value, around 5% I think. Targeting equity prices or other asset prices is not officially within their mandates, but given their behavior at times (e.g. suddenly dropping dovish comments when the market drops), one might start to think this is a de facto or shadow mandate. :) I think worrying about the price of the dollar is closely related to the level of inflation or uh "price stability" they are aiming for.
  - zzleeper 9y ago
    Did you knew it's actually a triple mandate? EG: https://www.frbsf.org/our-district/press/presidents-speeches/williams-speeches/2012/february/williams-federal-reserve-mandate-best-practice-monetary-policy/ https://www.frbsf.org/our-district/press/presidents-speeches... "Let me start with the Fed’s mission. It’s often said that Congress assigned the Federal Reserve a dual mandate: maximum employment and stable prices. But, that’s not quite accurate. In fact, the Fed has a triple mandate..." Also: https://www.richmondfed.org/-/media/richmondfedorg/publications/research/economic_brief/2017/pdf/eb_17-06.pdf https://www.richmondfed.org/-/media/richmondfedorg/publicati...
    - mjevans 9y ago
      Instead of baiting with quotes please reply with something substansive and discussion furthering /in your message/.
fspeech 9y ago
Fed only controls overnight rate. QE happened because overnight rate hit the floor and is now being unwound. If investors are not willing to fund the Treasuries there is not much the Fed can do. But that is not the case, certainly not now.
- cm2187 9y ago
  No the Fed has been manipulating long term rates too (operation twist).

by PKop 9y ago

AnimalMuppet 9y ago

How does the stock market declining affect US funding for deficits? Deficits are funded by bonds, which (almost always) move in the opposite direction from stocks. This also means that your second sentence doesn't follow. > ... though I think unlike in past downturns, the dollar and US economy is in a much worse position. I'm a bit undecided, but I fear that you are right on this one.

PKop 9y ago
I've been following the thesis of @LukeGromen, (here's a sampling)[0]. Here I think he covers it mostly in full [1]. Definitely worth a listen.. Also, here is a great 5 part podcast from December where he (and other Dollar bears) talk about the dollar decline[2]. Because of US dollar reserve status, government spending has been financed by foreign buying of treasuries, especially China. In recent years, they have rightly seen the fiscal situation of US, with massive liabilities, as being fixed only by devaluation of the dollar and therefore in real terms holding treasuries, or especially continuing to stockpile them not prudent. And he points out many examples of how they have recently been declining their purchases of treasuries and stockpiling gold (them and Russia). He argues their recent opening of a Oil futures market as their avenue to moving away from dollar, eventually (long long term) pushing Renminbi to gain reserve status but in medium term using gold / oil as their leverage away from dollar. On the stock market/taxes connection, he points out usually a yr over yr decline in tax receipts occurs in recessions. But last month, in the midst of an "everything bubble" (stocks, real estate, bonds, etc.) we saw a year over year decline of tax receipts. [3] Also that stock market is increasing % of GDP & most taxes paid by wealthy whose income increasingly based on stocks market returns implies a dependence at the margin of government spending on high equities valuations. [4] If the market continues to decline, and future months tax receipts decline, the "fed put" will get called into action, as China has stopped funding deficit (enough to match it's increase) so it has to be funded by rising rates in the private market. Libor shows this, as does the decline of the dollar. Here's a link his slide deck covering all of this [5]. See slide 26 for a chart showing that when tax receipts fall "enough", US quickly takes action to weaken the dollar. Slide 25 shows that declines in tax receipts usually correspond to recessions, but except recently.. [0] https://twitter.com/LukeGromen/status/978994115047231488 https://twitter.com/LukeGromen/status/978994115047231488 [1] https://www.theinvestorspodcast.com/episodes/luke-gromen/ https://www.theinvestorspodcast.com/episodes/luke-gromen/ [2] https://www.macrovoices.com/336-anatomy-of-the-u-s-dollar-end-game-part-1-of-5 https://www.macrovoices.com/336-anatomy-of-the-u-s-dollar-en... [3] https://twitter.com/LukeGromen/status/979079824567427073 https://twitter.com/LukeGromen/status/979079824567427073 [4] https://twitter.com/LukeGromen/status/979087795447894017 https://twitter.com/LukeGromen/status/979087795447894017 [5] https://www.dropbox.com/s/j86wfg79iyds85j/Luke%20Gromen%20Slide%20Deck%20for%20Parts%203%20and%204.pdf https://www.dropbox.com/s/j86wfg79iyds85j/Luke%20Gromen%20Sl...
cm2187 9y ago
Well we will get into the next recession with QE all the way in and even more sovereign indebtness than 2008.

bmpafa 9y ago

> Fed will have to reverse course, sacrificing the dollar to maintain asset prices and ability to finance government. It's not within the fed's mandate to worry about the price of the dollar or equity prices (until employment is impacted), is it?

eternauta3k 9y ago
Wouldn't be the first time: https://en.wikipedia.org/wiki/Greenspan_put https://en.wikipedia.org/wiki/Greenspan_put
graedus 9y ago
IIRC, their dual mandate is: "Price stability": sounds like no inflation or deflation to me, but in fact they pursue some non-zero amount of inflation, usually 2-3%. "Full employment": sounds like 0% unemployment to me, but in fact they target some non-zero value, around 5% I think. Targeting equity prices or other asset prices is not officially within their mandates, but given their behavior at times (e.g. suddenly dropping dovish comments when the market drops), one might start to think this is a de facto or shadow mandate. :) I think worrying about the price of the dollar is closely related to the level of inflation or uh "price stability" they are aiming for.
- zzleeper 9y ago
  Did you knew it's actually a triple mandate? EG: https://www.frbsf.org/our-district/press/presidents-speeches/williams-speeches/2012/february/williams-federal-reserve-mandate-best-practice-monetary-policy/ https://www.frbsf.org/our-district/press/presidents-speeches... "Let me start with the Fed’s mission. It’s often said that Congress assigned the Federal Reserve a dual mandate: maximum employment and stable prices. But, that’s not quite accurate. In fact, the Fed has a triple mandate..." Also: https://www.richmondfed.org/-/media/richmondfedorg/publications/research/economic_brief/2017/pdf/eb_17-06.pdf https://www.richmondfed.org/-/media/richmondfedorg/publicati...
  - mjevans 9y ago
    Instead of baiting with quotes please reply with something substansive and discussion furthering /in your message/.

fspeech 9y ago

Fed only controls overnight rate. QE happened because overnight rate hit the floor and is now being unwound. If investors are not willing to fund the Treasuries there is not much the Fed can do. But that is not the case, certainly not now.

cm2187 9y ago
No the Fed has been manipulating long term rates too (operation twist).