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So this 'market' has 2 camps: the technical chaps as exemplified by JC and the macro-fundamental chaps.

A further example from JC:

This is a bull market for stocks. If you're not making money in this environment, then you should probably reevaluate your strategies. I know for a fact that I've witnessed individuals, who are clearly mentally ill, fight this historic rally pretending that there's some kind of epic credit crisis coming any day now (for over 2 years lol). Whether it's fake breadth deterioration, or the "yen carry trade", or lies about Gold sending some kind of warning, or the Fed ruining everything, or small-caps underperforming, or Trump and his Magas. It's always something. These people will make up anything in their heads, no matter how outrageous, in order to justify poor decisions. Their egos are too fragile. Good. It might be a little sad to have to watch them ruin their lives. But it's great for us who recognize their vulnerabilities and have chosen to just profit from it all instead. You see, when I hear credit crisis, I naturally look at credit spreads to see what's going on. The answer is: NOTHING. Still nothing... Credit spreads are as tight as they've been this entire bull market:

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If there is stress in the stock market, you're going to see it in credit. It's just math. The Bond market is more than twice the size of the U.S. stock market. So if there is going to be pressure on stocks, it will show up in Bonds. It has not. This week I was running around various cities in the northeast talking with smart folks about markets. It was a very successful trip. More on that soon. But on Thursday I was in New York City with Josh Brown and Michael Batnick on the number 1 podcast in Finance: The Compound & Friends. If you're interested in how we're navigating the bull market, this is an episode you're not going to want to miss:

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Josh and Michael are old friends of mine. I've had a front row seat to all their success. And they've been there rooting for me all along as well. This was a ton of fun. Lots of laughs. And we discussed some really important market developments.

What is the message of gold?

This second cold war with Russia, which Clinton stumbled into in 1999, has been growing hotter over the years. First there was NATO expansion. Then there were the U.S.CIA bases in Georgia that oversaw jihadist forays into Russia, which prompted directRussian military intervention. Recall that a U.S. official admitted: “At best Georgia would win, in which case Russia would fall apart, and at worst the spectacle of Russia crushing little Georgia would reinforce Russia’s reputation as the cruel Goliath. So Cheney was telling Misha [Saakashvili], ‘We have your back.’”

Then there was the CIA-orchestrated coup in Ukraine, an attempt to move that country from being a buffer state to being in the U.S. orbit. Then the provocation to invite Ukraine to join NATO, pushing the U.S. military right to Russia’s frontier. And now the U.S. is blurring the lines between supporting a proxy and being in direct conflict with Russia: the U.S. is not only delivering weapons but also directly assisting Ukrainians in strategic planning and missile targeting, perhaps more.

The U.S. relied on the Fed to finance previous wars. In World War I, the government altered the new Federal Reserve’s charter—which originally constrained it from financing anything other than bills with maturities at the time of discount of not more than ninety days—to allow it to finance long-term government war bonds. During WorldWar II, the Fed adopted the policy of purchasing all Treasury bills offered at a fixed rate of 3/8 percent: its holdings of government securities leapt from $2.2 billion in 1941 to$23.7 billion by the end of 1945. The Fed continued this policy during the Korean War with a cap of 2.5% for long-term bonds.Not surprisingly, all three episodes experienced soaring consumer inflation, which peaked at 20% in 1920, 20% in 1947, and 10% in 1951.

 But there was a major difference between those episodes and today: the U.S. was a solvent nation at the outbreak of these previous wars. In 1949, even after World War II and Franklin Roosevelt’s profligate spending, the Fed’s balance sheet was backed 51% by gold (down from 84% in 1941).Today at spot prices (assuming the gold on the Fed’s balance sheet is real), that figure is 8.8%.

Back to the present: Nouriel Roubini published a paper in July that estimates that Yellen’s strategy which he names “activist Treasury issuance (ATI)” “has reduced 10-year yields over the last year by roughly a quarter of a percent, providing similar stimulus as a one-point cut in the Fed Funds rate, the central bank’s primary policy tool.” This is one reason why the markets have not collapsed despite the sharp increase in interest rates. Even if ATI is cushioning the markets, the economy is beginning to sour.  The Fed’s mandate is to keep both inflation and unemployment low, but the July 31 FOMC statement added the line: “The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.” There is a word for high unemployment occurring in context of high inflation: stagflation.

If we are living through a repeat of the 1970s—and the parallels seem so perfect—we should not expect a cataclysmic collapse of the stock market despite the ridiculous valuations. Stocks would, instead, lurch higher and lower within a trading range for thenext decade, ending at roughly the same nominal price but worth 90% less.Gold, on the other hand, will reveal the carnage. It rose twenty-four fold from 1971to 1980. The way we look at it, gold went from being 12% of the Fed’s balance sheet to133% in the final dollar panic. Gold currently represents just 8.8% of the Fed’s assets, soit would need to jump 36% to $3,300/oz just to get to the 1970 low.

That outcome comes with a caveat: that the Fed either voluntarily or under the coercion of Congress, does, implement YCC. If it does not, then initially at least we move to a 1930's scenario which is actual default. In a deflation, not a dis-inflation, stocks will collapse that 90% in value. At that point, any administration in power, Trump etc. will fall and you are looking at a potential civil war in the US.

In that scenario, the reverberations around the world's financial systems, due to the interlocked network effects, will crash all markets and economies.

So JC is correct: currently credit spreads are showing a green light, stocks to move higher.

So we know exactly where that 'liquidity' has originated: from the Fed Reverse Repo after Yellen switched to financing the deficits with short term Bills and finally the TGA.

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She has kept the lid on.

The US political situation is now so dire due to partisan politics, it has to be asked whether the 'debt ceiling', usually political theatre, actually poses (this time) a systemic risk? Does the Trump administration have the numbers to pass a new debt ceiling without some support from the Democrats?

If he does not, then we start looking at actual default.

How quickly would such a default take before contagion? I'm guessing hours to days. We had a glimpse on 1 August 2024 with the Yen Carry trade at which the speed things could collapse. A US default would be many magnitudes higher and faster. Your credit spreads would go from zero to hero in minutes, maybe even seconds.

The Soviet Union inadvertently created the Eurodollar system in the 1950s when it found itself with U.S. dollars and convinced European banks to accept dollar deposits. European banks then started lending out Soviet dollars, and the fractional reserve system meant they could expand that lending well beyond the quantity of raw dollars on deposit. When the Bretton Woods gold-backed dollar standard collapsed in 1971,Kissinger convinced the petro-states to recycle their profits into dollar deposits both at U.S. and non-U.S. banks, expanding the dollar debt system. Suddenly, all the major players in the world owed each other dollars, granting the Fed control over the global economy and the U.S. Congress a method to extract seigniorage to support the costs of empire.

Putin understands very clearly the issues:

By stealing Russian assets, they will take one more step towards destroying the system that they created themselves and that for many decades ensured their prosperity, allowed them to consume more than they earn, and attracted money from all over the world through debts and liabilities. Now it is becoming clear to all countries, companies and sovereign wealth funds that their assets and reserves are far from safe, both legally and economically. 

And anyone could be the next in line for expropriation by the United States and the West, those foreign sovereign wealth funds could also be the one.There is already a growing distrust of the financial system based on Western reserve currencies. There has appeared a certain outflow of funds from securities and bonds of Western countries, as well as from some European banks, which were until fairly recently considered to be absolutely reliable to put capital in. Now gold is also being taken out from those banks. And this is the right thing to do.”

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This is why you want to own gold and own it now. Physical, not paper.

jog on

duc