Welcome to our annual tradition here for Magnelibra Trading & Research. Today’s episode #67 is entitled “Its a Wonderful Central Bank Life 2024 Edition”
Quick Disclaimer: The following podcast is for educational purposes only. This is not a solicitation to buy or sell commodity futures or options. The risk of trading securities, futures and options can be substantial and may not be appropriate for all listeners.
This tradition is now in its 6th consecutive year and one which we often look forward too. 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 the third year in a row its been extraction time. In regards to the US central bank, the Federal Reserve, they have cut the Fed balance sheet from a high of $9T to the present value of $6.95T. This is a 22.7% reduction, but let’s put this into context. In January of 2020 the FOMC asset base was $4.2T, so in 5 years the growth is +$2.75T or 65.5%!
In fact when we look at M2 it should be very clear as to what has driven the massive expansion in equity and real estate prices as M2 since 2020 has exploded from $15.3T to a high of $22.05T +44.1% on the highs:
The FOMC has combated this monetary inflation with persistent higher rates, moving Fed Funds 0.08% to 5.33% (effective rate 5.25/5.50 range high):
Now the Regime Change has settled in and the FOMC has cut the rate down from 5.33% to the current 4.25%. This level is still high given the average rate over the last 10 years as shown in this chart:
We believe the FOMC will get the Fed Funds down to 3% next year and try to normalize the yield curve without causing too much damage to the levered economy. However the FOMC can only control so much and what it has done given its current high rate environment is that its pushed the US dollar stronger and this is not an optimal outcome for the majority of emerging markets out there, nor China, Japan or India. So we believe 2025 will see some major currency shocks which tend to lead into high volatility and correction activity in the equity markets.
In 2023 Powell gave the markets a very abrupt yet obvious signal that they were done raising rates stating,
“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 2023 did mark the end of the rate hikes and 2024 ushered in the beginning of the rate cuts with the last 25bp cut coming just last week. Powell did sound hawkish in his remarks and the dot plots did show a higher trajectory for base case Fed Funds moving forward. However we do not believe for one second that the higher rates will stick around if we see volatility spike and equity markets start to correct.
We know that the bottom 90% do not particularly participate in this equity wealth game. In fact we know that 95% of all assets are owned by just the top 10%!
When we hear those on media that continue to tell us the economy is great because markets are making new highs, well that simply is not true. Today’s markets nominal price is a reflection of the decades of asset price inflation pitched and delivered via the FOMC 10% annualized growth in their assets. This growth is the kindling for all monetary levered derivative games that are used to continue squashing volatility and buy high generating alpha equities, speculative real estate etc. The equity markets and housing markets are a product of financial engineering and are NOT IN ANY WAY SHAPE OR FORM a measurement of economic success.
They are a measurement of financial alchemy, but hey do not take this the wrong way, a very small subset of our economy is doing very very well, the other 80% well, not so much. The other 80 to 90% for that matter are confined to the walls of inflationary monetarist devaluation. Why? Because they are income constrained both by debasement of their wages via actual inflation of the things that matter and by a political machine despite their party affiliation, does nothing to change this mechanism. Here is the only illustration you need to confirm that the data does indeed show a real 3% inflation rate and the fact that the Federal Reserve has expanded its balance sheet by an annualized rate of 10.24% over the last 26 years:
This graphic alone tells you why asset prices are up 3x in this time frame, this graphic alone solidifies the exact inflation rate and how time destroys your actual realized wages!
So with that said, and considering after nearly 3 years of inverted yield curves, we are embarking on the reversal of this trend. With the Dec. 18th cut and the US Govt 10Y trading at 4.53%, the FF/10Y curve spread is now positive by 20bp! What you guys should notice is the highlighted boxes from the last few times this has happened, maybe something stands out:
We expect 2025 to be full of uncertainty, we do not think given the historical precedent of prior re-steepening, yield curve dis-inversions that the equity markets will exhibit the same strength as it did this year, but you will have to reassess your own risk probabilities.
We know The Powell printing press has been effectively closed for business for the last two years. However we also know the US govt has been the key transfer mechanism to the masses by its huge fiscal deficits and this year was no different as the US this year thus far posting a massive $1.83T deficit:
We can’t fathom to understand why people cannot realize that this is a massive subsidy on the backs of all future tax payers. The US Govt is not supposed to be the labor hiring leader, its not suppose to be the sole revenue generator for the private sector, effectively robbing Peter to pay privatized Paul…this is not how this was supposed to work. BTW it shouldn’t be a secret that 4 out of the top 10 wealthiest counties in the United States, based on median household income and poverty rate are located in VIRGINIA! I guess we can say that Bipartisanship does exist in DC, when it comes to compensation and nepotism.
What is in store for 2025 with the FRB done raising rates cutting rates now?
Will we see a little bit more volatility and a little less one way freight train higher in risk assets?
Will we see equity prices correct as the US yield curve normalizes?
Will we see a major foreign currency collapse on the back of a much stronger US Dollar?
Will D.O.G.E return the the US to a more fiscally responsible government spending regime?
If D.O.G.E is successful what are the ramifications of massive reductions in government labor and companies solely dependent upon US govt over spending?
Will there be some unknown unknown, geopolitical risk, ORB, UAP, Drone, Alien Invasion risk?
Will the cryptocurrency bubble be pricked and the one way up move give way to panic selling?
One thing is certain, nothing is certain! There are so many variables to quantify that a prudent investor must consistently reevaluate their goals, risk tolerances and then have the courage to successful enact decisions that can mitigate long term risk. A quick note to the last point, Bitcoin is presently trading under our $97k weekly reversal level, with Saylor out their trying to find new buyers for BTC, we can’t help but think the euphoria has stalled a bit, so we will watch this level closely, but for now, the sellers are clearly in control:
One thing does stand out to us however, and that is the current fiat fractional reserve system one that relies on continued balance sheet expansion by global central banks for asset price increases, has now been effectively exposed by the digital decentralized community. It has even convinced Wall Street to join in on the once self proclaimed “Novelty.” It has even infiltrated Donald Trump the incoming president to the point where he has openly stated it may be worthwhile looking into a Bitcoin reserve.
Well we doubt the administration will take that risk, being their beholden nature to the FOMC and their product, fiat US Dollars!
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. Just ask China who is being forced to sell their US Treasuries to keep the facade of a bustling economy going.
Alright before we get into the Its a Wonderful Central Bank Life story, we are going to go through our data trackers:
lets take a look first at the MEGA8s Tracker. For those new to our publications this is our tracker designed to follow the concentrated alpha crowd in the top mega cap equites. We have recently noticed a bit of reshuffling and we know the HF crowd buys individual high performers and sells the indexes to hedge a strategy that is very successful. Our goal with this is to try and spot the large investor exhaustion in single names and subsequent rebalancing. It is interesting to note we have seen good Nvidia selling and Apple buying, why Apple? Well I am sure we will here the why within the next few quarters…Anyway we also put forth a prospective hedge for each week to capture some volatility while giving up some upside. This is all an educational tutorial to get you to think outside the box to learn that there are ways to capture extra return than the static buy and hold methodology, which in today’s world let’s just call it for what it is, lazy…Yea maybe you don’t have the time to watch, but nothing is worth more to your time than maximizing your value of your wage.
Here is the MEGA8s data, last weeks hedge was fully realized and for this week, we will look to put on the 523C in the QQQ for $3 or better:
Ok let’s move over to the MicroStrategy Tracker where we track the stock accompanied by a 10% OTM (out of the money weekly option). The goal here is to track this new popular vol strip mining strategy where the hope is Volatility remains elevated to offset the massive asymmetrical tail risk offered by this equity. We know MSTR is all in on Bitcoin but they are acquiring by pitching off to the equity holders a 2.3x premium. Our goal is to see if and when volatility falls, will the stock price follow suit…Interestingly enough we have seen MSTR fall from a high of $543 to trading $343 today, a whopping $200 price drop or 36.8%. Here is the data and for now this data is posting a 4.31% return for the month so far:
Ok we will finish the trackers with the Settlement page and the Magnelibra CTA markets sentiments:
When we look at the rolling 5 and 30day trading changes, on the weekly front the Bitcoin is the big % loser dropping -6.7% on the week with Nat Gas the big % winner +11.1% and as far as the 30 day changes, Nat Gas the winner there +8.9% and the Russel2k -7.1%:
The only change to the Magnelibra CTA markets sentiment is in FX where the Suisse Franc moved from a Short to Neutral:
Our new GABP program begins on January 1, for those interested in an alternative strategy incorporating our proprietary data and models, please make an inquiry to our introducing broker Nell Sloane at Capital Trading Group for more information. We have revised our models to incorporate the inefficiencies found over the last few years both within our own strategy and the market place itself. We believe we have found the right path for our Long/Short cross sector allocation futures and options strategy.
OK now on to the big show and as the title of our post led onto, its this years addition 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 500 plus (50% growth rate in just one year, truly amazing!) 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 a few novels 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!
DISCLAIMER: For educational purposes only. This is not a solicitation to buy or sell commodity futures or options. The risk of trading securities, futures and options can be substantial and is not for everyone. Such investments may not be appropriate for the recipient. The valuation of futures and options may fluctuate, and, as a result, clients may lose more than their original investment. Nothing contained in this message may be construed as an express or an implied promise, guarantee or implication by, of or from Magnelibra Capital Advisors. Magnelibra the Commodity Trading Advisory and its proprietary long/short commodities, futures and options managed accounts may hold long and or short positions in the various futures and markets that Magnelibra covers. We will never claim that you will profit or that losses can or will be limited in any manner whatsoever. Past performance is not necessarily indicative of future results. Although care has been taken to assure the accuracy, completeness and reliability of the information contained herein, we make no warranty, express or implied, or assume any legal liability or responsibility for the accuracy, completeness, reliability or usefulness of any information, product, service or process disclosed. If you are interested in opening an individual managed futures and options account to compliment your overall investment portfolio you can visit our website at https://magnelibra.com for more information. We are implementing a new trading program launching at the start of the new year, which will include access to Bitcoin futures and options. Please contact or make inquires directly to our introducing broker Capital Trading Group, please contact Nell Sloane at nsloane@capitaltradinggroup.com
All Rights Reserved Magnelibra Capital Advisors LLC 2024
Share this post