Welcome to another edition of the Magnelibra Markets Podcast. Today’s title is “Its a Wonderful Central Bank Life 2023 Edition.”
We hope these podcasts are bringing a little different element to our newsletter and our goal is to bring you a fresh perspective each and everyday. We have a lot to get into today so let’s get right to it!
This is an extraction and update from a piece we wrote many years back and have now adapted it as our yearly monetary lesson.
Every year it seems Magnelibra is proven correct in its ongoing thesis that the only important news driving the markets or shall we say that the “only game that matters” is how much liquidity central banks are adding or in this year’s case, SUBTRACTING and for all of 2023 its been extraction time and a time for “Regime Change!”
We know that Powell gave the markets a very abrupt yet obvious signal that they are done a few weeks ago, but here is what we wrote last year,
“Over the last two decades we have seen massive central bank monetary printing and manipulation plus the Trillions in post covid balance sheet expansion, plus trillions in direct stimulus payments has allowed real inflation to finally rear its ugly head. We want to make this very clear, we do not expect inflation to last, in fact we expect a cratering of pricing and subsequent narrowing of margins into 2023 as the global economies struggle with rate hikes, waning demand and a consumer that prefers savings over spending.
Well we know all of the post covid savings has now been depleted and almost completely exhausted as the most recent SF Fed report had this graphic:
Yes we know the stock market is up 20% in regards to the SP500 and 50% in regards to the Nasdaq, but lets be honest, the bottom 90% do not particularly participate in this game. In fact we know that 95% of all assets are owned by just the top 10%!
What this tells an astute investor that is privy to market mechanics is that all the liquidity and access to overnight balance sheet funding, all the games being played via short term financing, all the interest rate arbitrage, asset based financed arbitrage, has EFFECTIVELY BEEN ELIMINATED, wiped out for the levered player (not the cash cows of course) as the yield curve is inverted at the US Govt 10Y/FFunds level by some -150bp. The Powell printing press has been effectively closed for business for the last two years. This however doesn’t negate the fact that there are $3.7T in excess deposits and that is a lot of cannon fodder for ramping up markets and absorbing a few adverse events. So we shouldn’t be surprised despite the FRB balance sheet going from $9T to $7.7T because its that massive post covid $5T balance sheet expansion that is still supporting everything!
Now look at what is in store for 2024 with the FRB done raising rates, perhaps this picture is not too far off again:
In a fractional reserve system one that relies on continued balance sheet expansion by global central banks for asset prices to continue their ascent, well the coming years will look much different than the prior ones, given the veracity and hawkishness out of the Federal Reserve. Their higher rate regime will give way to massive rate cuts ushering in the next rounds of deflation, bankruptcies, negative non farm payroll prints, its only a matter of time.
Yes but Magnelibra, the equities are up 50% in some cases!
Yea they are and they have been the recipient of massive concentrations of wealth, a flight to safety to the giant tech MEGA caps. As bonds were sold down and no longer the safe haven they once were, this lit the green light to concentrate money even tighter to the cash heavy tech giants.
When it comes to our modern day Fractional Reserve Banking, it is a trust game and it seems given our overall debt levels, the only thing we can trust is that QE will have to return or else it seems the system falters under its massive debt pile and there just isn’t enough dollars to go around to pay back such debt.
Alright before we get into the Its a Wonderful Central Bank Life story, lets take a look at settlements for today as equities and currencies rebounded nicely, bonds a bit lower and energy and metals mixed. The Nasdaq almost gaining back what it lost yesterday:
As far as the Magnelibra Futures Model Tracker no changes today:
The MEGA8s bounced and as noted earlier in today’s post the 12/29 expiry 408 QQQ Call is the hedge for this grouping now:
One chart we wanted to get out here was the DAX, its posting an inside week, we have to keep an eye on this for potential reversal next week:
OK I will now share my thoughts on the iconic and holiday favorite, “It’s a Wonderful Life” the Frank Capra, Jimmy Stewart classic.
As a kid it was mandatory yearly viewing with my mom. Now as a kid you just take things for face value, but as I grew up, the meaning of the movie became evidently clear. You live your whole life trying to do the right thing and then in one instance and sometimes not even upon the heels of your own volition, things can take a drastic and often accelerating turn for the worse.
Please indulge me a bit as I go through one of the most important scenes of the movie. As far as a brief background to the scene, we have poor virtuous George Bailey played by the iconic Jimmy Stewart, he owned a small-town savings and loan. George’s Bailey Building and Loan had its credit called in by its lending bank and was forced to make good on full payment. However, this depleted the banks cash (think reserves) and word hit the street that their doors were going to close (think panic).
Fast forward in the scene where depositors begin cramming into the savings and loan demanding their money. Well, this is where George comes in and calms the fears and explains in the simplest terms, the true nature of fractional reserve lending. As the depositors lined up and as George grabbed his chin, desperately trying to solve this problem, Frank Capra tosses in some fire engines whizzing by outside blaring their horns and all the people rush to the window to have a look, as if they were going to see something. Looking back now I know Capra’s intent here was to merely install in the viewer the feeling of chaos, fear and alarm, that the house is about to burn down, sheer classic move.
Anyway George took to the counter and explained to a disgruntled depositor who asked if George could guarantee the money, George said, “Your thinking of this place all wrong, as if I had the money back in a safe, the money’s not here, well your money’s in Joe’s house, that’s right next to yours and in the Kennedy house and Mrs. Maclin’s house and a hundred others. Your lending them the money to build and their gonna pay it back the best they can, what are you going to do foreclose on them?”
What George Bailey just explained right there is the entire crux of our central banking, fiat fractional reserve lending system and what happens next is the most obvious and unnerving outcome from a system designed like this.
A gentleman named Randall walks in and says, “hey Tom, Tom did you get your money? Tom says No, the man says, well I did, old man Potter is willing to pay 50 cents on the dollar for every share you got, cash.”
When George asks Tom to stick to the original agreement of waiting 60 days (think term repo) Tom says “Ok Randall.”
Then a concerned woman asks if he is going to Potter and Tom responds with the typical (think panic equity seller or retail investor) “Better to get half than nothing!”
Then George, leaps over the counter, slams the door shut and tells Tom and Randall the truth about what is truly happening here, ”Tom, Randall, wait, now listen to me, I beg of you not to do this thing, if Potter gets a hold of the Bailey Building and Loan, there will never be another decent house built in this town. He’s already got charge of the bank, the bus lines, the department stores and now he is after us (Think Google, Media Giants, Amazon, Walmart), why? Because it’s very simple we are (think mom and pops) cutting in on his business, that’s why, because he wants to keep you (commoners) living in his slums, and paying the kind of rent he decides (Elites).”
Now George really breaks down the God’s honest truth by asking another patron, “here Ed, you know, remember last year when things weren’t going so well and you couldn’t make your payments, well you didn’t lose your house did yah, you think Potter would have let you keep it? Can’t you understand what’s happening here, don’t you see what’s happening here? Potter isn’t selling, Potter is BUYING and why because were panicky and he’s not that’s why, he’s picking up some BARGAINS.”(think market downturns and bottoms and who comes in to save the day, think Buffett, Soros with government guarantees of course)
Ok, I won’t ruin the rest and I truly hope you watch this movie, link to the scene IAWL Bank Run Scene for many of life’s great lessons exist within its classic confines.
I truly appreciate my parents given me this gift even if as I hit adolescence, I most likely complained about watching it every year. I have continued this tradition with my own children in hope’s that one day it means as much to them as it has to me.
The movie is so much more than just a holiday classic it is an investment in life, despair, courage, faith and it is something I will cherish for all my days.
I appreciate it more and more, especially as I have matured and become educated upon the very constructs that define our systems. The control mechanisms that shape our deterministic values by which so many truly believe they have freedom of choice. As Edward Bernays famously said, "it is they who pull the wires which control the public mind."
When you break things down today, do we really have much of a choice or are the narratives so shaped and so perfectly gift wrapped that we only have a mere figment of choice? Propaganda and subliminal, targeted ads, 24hr inundation of media, makes it obvious that the only choice we truly have is whether to turn things on or off as everything is truly binary at this point, just 0s and 1s. Sometimes just for sanity purposes its best to just turn things off, refresh and recharge the batteries and focus ones thoughts. No better time then the end of a year to reflect, refocus and set the tone for the coming year!
I will end this with a little graphic I found on twitter I have no idea who built this model, who first posted but it definitely caught my patterned base mind and it all looked to have a mathematical consistency to the sheer randomness. You decide for yourself, but its certainly something to ponder:
It’s like perfect synchronous method with equal wavelengths and frequency and the simplicity is what makes it so captivating…Anyway we wish you and your family a very Merry Christmas and Happy New Year, may peace and prosperity always find you and may you remain in good spirits and healthy throughout the New Year.
Please think about joining the ranks that subscribe to our work and become a part of the 350 plus that now understand the market chaos from a fresh and different perspective. A perspective you won’t get anywhere else. Your support is greatly appreciated. We write about the equivalent of one book a year on this site and the volumes we speak should transcend a lot further than these pages. You should be able to implement a lot of this into your own investing game plan not just in trading, but in all manners of your life. We are in this together, we are all connected, so stay positive and know your atoms do have an effect on everyone else around you, so STAY CALM, share, like and subscribe today!
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