Too Much Monetary Printing Leads to Frivolous Spending and Overvaluation
After last week’s letter which placed an absolute universal understanding that no matter what one’s circumstance is, money = value. With that said we weren’t surprised when we saw this article on Zhedge about Chinese oligarchs and their kids living in Canada spending $3.8m on a new Bugatti, then having the audacity to complain about the $522k in taxes. If you haven’t figured out by now just exactly what has been going on over the last decade, well then you haven’t been reading our letters. We have pointed out on numerous occasion’s the massive amounts of money laundering out of main land China across the globe and more notably in this account, to western Canada. Look we can’t blame them, can we? When your central bank continues to unleash massive amounts of credit, what else is the smart businessman supposed to do, but protect their downside and buy foreign assets right? We highlighted this chart last week but will show it again to paint the picture:
Hey we must be fair and when it comes to printing, yea nobody beats the Japanese, but hey all the central banks are guilty. What we uncovered this week out of Europe and on the TARGET2 balance of payments sheet is just outright shocking:
We thought the Maastricht Treaty came with tight capital key controls and that corresponding NCB’s or National Central Banks weren’t allowed to go above and beyond, i.e. increase leverage and risk. The ECB sets collateral standards for refinancing, but has weakened these with their ELA programs (Emergency Liquidity Assistance) allowing the associated NCBs to bear further credit risk via pooling by none other than the ECB itself. What you have now and considering the -€250B debit the ECB has itself, they desperately needed to add liquidity. In laymen’s terms, one gigantic mask is being created to hide the fact that risk and illiquidity are rising.
It is no wonder the Europeans are dumping foreign equities in massive amounts, might be sign of a deeper underlying issue but Zhedge posted this nice graphic to put this into perspective which is a chart of foreign flows into or out of U.S. stocks:
We know foreigners are dumping U.S. equities as are pension funds, mutual funds and life insurers, but as this chart will show once again the largest buyer is indeed corporations themselves…We had a discussion with an investor this week and we were talking about the banning of corporate buybacks, they couldn’t figure out why the government would do that. We said well buybacks were indeed illegal up until 1982 and for one very important reason “stock manipulation.” They were like, wow, I didn’t know that! Well now you do…but if it weren’t for the buybacks, we believe equities would probably be about half the price they are today. #Assetinflation anyone??? Corp’s bought $509B worth last year:
Another chart we spied this week was the fact excess reserves have dropped some $1.2 Trillion over the last 4 years and one thing we can say for certain, is with this much money being put to work in the economy, for it not to move overall inflation much past 2% is very troubling:
With this chart in mind…how bad is the deflation and how dependent then are asset prices upon the global central banks continued QE and expansion? Well this next chart should visualize it nicely Zhedge posted it today:
Given all this expansion in global money supply as well as in equity prices, how then if it is this good, will this next chart ever resolve itself…one can only wonder:
Well that is it folks, we hope you continue to follow us on this journey and we hope that you find our information thought provoking and unique in terms of content and perspective. We will continue to bring you material we feel is important to our investors and to our followers. Be on the lookout the rest of the week as we move into holiday shortened trading…look for some geopolitical posturing with news from U.S. China relations, the Mueller report, news on Assange, Netflix, Tesla, Gold’s down move today as someone dumped $1.5B notional this morning and Apple/Qualcomm, IBM etc…till next time, cheers! Oh, we would congratulate Tiger on his Masters win, but somehow its just not the same…Kudos to the guy that bet $85k on the 12 to 1 shot for Tiger to win…now that was timely!
Special thanks to David Belle of the Macrodesiac Newsletter for sending us a research piece cited here and used for the ECB Target2 comments within our letter:Blake, D. (2018). Target2: The silent bailout system that keeps the Euro afloat.London: City, University of London.
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