“Central bankers control the price of money and therefore indirectly influence every market in the world. Given this immense power, the ideal central banker would be humble, cautious and deferential to market signals.." – James Rickards, The Death of Money: the coming collapse of the international monetary system, 2014.
“Central bankers control the price of money and therefore indirectly influence every market in the world. Given this immense power, the ideal central banker would be humble, cautious and deferential to market signals. Instead, modern central bankers are both bold and arrogant in their efforts to bend markets to their will. Top-down central planning, dictating resource allocation and industrial output based on supposedly superior knowledge of needs and wants, is an impulse that has infected political players throughout history. It is both ironic and tragic that Western central banks have embraced central planning with gusto in the early twenty-first century, not long after the Soviet Union and Communist China abandoned it in the late twentieth. The Soviet Union and Communist China engaged in extreme central planning over the world’s two largest countries and one-third of the world’s population for more than one hundred years combined. The result was a conspicuous and dismal failure. Today’s central planners, especially the Federal Reserve, will encounter the same failure in time. The open issues are, when and at what cost to society ?”
– James Rickards, The Death of Money: the coming collapse of the international monetary system, 2014.
Edward Griffin, in his book The Creature from Jekyll Island, explains how the US Federal Reserve was conceived – an ‘origin story’ of which many longstanding financial professionals may themselves well be unaware. On a cold November night in 1910, a handful of financiers boarded a private railway car in conditions of extreme secrecy in New Jersey. The passengers included the Republican whip in the Senate and a business associate of the banker J.P. Morgan; the Assistant Secretary of the US Treasury; the president of the National City Bank of New York, the most powerful bank of the time; a senior partner of the J.P. Morgan Company; the head of J.P. Morgan’s Bankers Trust Company; and a representative of the Rothschild banking dynasty in England and France. In other words, of the six passengers, five of them were representatives of private banks
Those financiers would go on to meet in secret at a hideaway owned by J.P. Morgan and several of his business associates, where visitors would gather in the winter to hunt ducks. The name of this remote retreat: Jekyll Island.
This group met in order to tackle five pressing issues:
Perhaps most cynically of all, to address this fifth problem, the group decided to adopt the structure of a central bank and, furthermore, ditch the use of the word bank altogether, in favour of a coinage that would evoke the image of the federal government instead. Three years later, after the passing of the resultant bill in Congress on 23 December 1913, the US Federal Reserve was born.
“The Federal Reserve System,” it today proudly tells us, “is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded.”
Few could deny the latter point. Rather than maintain a narrow focus on managing the money supply, the Fed is now figuratively all over the shop, its fingerprints evident everywhere across the economy. Jim Grant, interviewed on CNBC in February 2014:
“The Fed insists on saving us from ‘everyday low prices’ – they call it deflation. I submit that in a world of technological wonder, prices ought to be weakening: it costs less to buy things because it costs less to make them. This benign tendency the Fed resists at every turn. It wants the price level (as it defines it) to rise by two percent a year, plus or minus. In so doing, it creates redundant credit that finds its way into other things. These excess dollars do mischief. On Wall Street we call this mischief a bull market and we’re generally all in favour of it.
“The Fed, in substance if not in name, is [still] engaged in a massive experiment in price control. (They don’t call it that.) But they fix the Fed Funds rate, they manipulate the yield curve… they talk up the stock market. They have their fingers and their thumbs on the scale of finance. To change the metaphor, we all live to a degree in a valuation ‘hall of mirrors’. Who knows what value is when the Fed fixes the determining interest rate at zero? So I said ‘experiment in price control’ but there is no real suspense about how price control turns out. It turns out, invariably, badly.”
Fast forward to Jim Grant in his eponymous Interest Rate Observer of February 2022:
“Raphael Bostic, president of the Federal Reserve Bank of Atlanta, widened the eyes of the readers of the Financial Times over the weekend with the declaration that he, for one, wouldn’t rule out a 50 basis-point rise in the funds rate come the March 16 meeting of the Federal Open Market Committee. We write to speculate on the return of consequential interest rates in a world that has almost forgotten what they look like and fears what they may feel like.
“By “consequential,” we mean rates discovered in the market, not confected by monetary policy (including the policy of manipulating expectations). We mean, too, rates high enough to ration credit, rather than spray it around like champagne in the winning team’s Super Bowl locker room. However, the question is not whether we want the kind of rates of which an editor can be proud, but whether the financial system, as evolved over the past dozen years, can stand them.
“For the next six weeks, QE will remain in force (albeit in run-off strength), as the funds rate holds at zero. These radical measures will persist in the incongruous face of 9% nominal wage growth, 13% M-2 growth, 11.7% fourth-quarter nominal GDP growth and a 7%-plus rate of depreciation in the purchasing power of the dollar according to the Consumer Price Index (all measured year over year). Yet the talk of marginally higher funding costs, or of a slightly less distended Federal Reserve balance sheet, was enough last month to turn Wall Street on its ear.”
From the Financial Times of January 29th 2022:
“Prices of meme stocks, cryptocurrencies, cannabis companies and blank check vehicles known as Spacs have all tumbled as the air hisses out of the assets that encapsulated [the] furious rally, leaving no doubt that the game in markets has changed. The average stock in the Russell 3000 is down 35% from its highest point in the past 12 months.. In the Nasdaq Composite, the average decline is approaching 45%.”
From Jenss O. Parsson’s Dying of Money: lessons of the great German and American inflations:
“Everyone loves an early inflation. The effects at the beginning of inflation are all good. There is steepened money expansion, rising government spending, increased government budget deficits, booming stock markets, and spectacular general prosperity, all in the midst of temporarily stable prices. Everyone benefits, and no one pays. That is the early part of the cycle. In the later inflation, on the other hand, the effects are all bad. The government may steadily increase the money inflation in order to stave off the latter effects, but the latter effects patiently wait. In the terminal inflation, there is faltering prosperity, tightness of money, falling stock markets, rising taxes, still larger government deficits, and still roaring money expansion, now accompanied by soaring prices and ineffectiveness of all traditional remedies. Everyone pays and no one benefits. That is the full cycle of every inflation.”
“Everyone pays and no one benefits..” All of these problems could have been avoided if our monetary authorities had grasped Wall Street’s rotten nettle back in 2008 and allowed the system to clear. At the time, amid a surfeit of both moral and literal bankruptcy, they failed to do so. As fiduciary asset managers, we take shelter in global ‘value’ stocks (defined, by us, as highly cash-generative listed businesses trading on undemanding multiples with little or no attendant debt); systematic trend-following funds (uncorrelated versus both stocks and bonds); and a meaningful allocation to real assets (as opposed to non-economic fiat ones) including the monetary metals, gold and silver. We humbly submit, in light of the above, that if you’re not focused on inflation protection in 2022, you’re playing the wrong game.
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: firstname.lastname@example.org.
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