Its a Wonderful Central Bank Life
A Yearly lesson plus technical charts NQ hits supports
This is an extraction from a piece we wrote a few years back and have adapted as our yearly monetary lesson. Every year it seems Magnelibra Econemotions 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 during times of monetary stress.
Now therein lies the caveat “during times” well it seems every month and especially every quarter we are seeing more and more liquidity needs. (Covid just this last years excuse, insert Omicron) What this tells an astute investor that is privy to market mechanics is that without 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, would expose the true fallacy of our system. The fallacy is simple, that the markets can function without central banks providing daily funding,(cough, cough) or in more simple terms, “rigging” the system.
Well not that a fractional reserve system isn’t rigged already, because by inherent design, it can only be rigged else the system fails miserably. Which brings me to sharing a little classic movie that I’ve grown up watching, “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 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!
Alright onto a few technical and fundamental matters, first up we saw this chart from Zhedge and Goldman:
Basically what this tells us and any main stream player should know that is seasonality favors January in regards to Passive flows into equities and as this chart points out January posits more fresh powder than all other months combined! Will this lead to a decent start to 2022? Most likely, but it won’t be without bumps and bruises.
All this talk of cash on the sidelines, yeah yeah, we get it, but the reality is, the higher the markets go, the longer the timeline gets, the more risk averse investors will become, so Cash in our opinion will continue to rise, just to act as a hedge to overall market risk and BofA posted this chart showing that the Covid cash hoard, never really fell back down and rightfully so given our analysis:
Alright to the technical’s for all those that missed our 1PM call today when we posted the Nasdaq support level hit at 15483, well a nice 250 point pop ensued:
As for the SP500 well buyers stepped in at Sept 3rd levels at 4546, that is our line in the sand and was promptly closed above and for now Bulls in control:
What seems strange to us is that the Nikkei has gone nowhere all year static clung to our upward sloping upper trend channel line, all that stimulus and the Nikkei gettin no love:
As far as index arb preferences, we are in favor of the Nasdaq here vs the SP500 as the spread chart seems to be rolling over:
Tesla filled the $900 gap and should hold for now, but $843 longer term would prove an excellent back and fill load the cart level:
We wanted to touch on Silver as well as it seems stuck near $22 with the bulls/bears battling but we do feel this is a key location for bulls to make the stand:
Finally we wanted to touch on the US Govt 5s30 curve where its bounced nicely off 2019-2020 trend box support:
Sorry this chart is telling us the taper will be nothing more than the prestep to pseudo hikes, maybe we don’t even get any hikes at all…time will tell first we need to cut the printing presses then see where the dust settles…till next time
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