IN-DEPTH: TRANSCRIPTION - UnderTheLens - JUNE - 05-22-24 - Election Economics by the Unelected, Indentured Triumvirate
SLIDE DECK
TRANSCRIPTION
SLIDE 2
Thank you for joining me. I'm Gord Long.
A REMINDER BEFORE WE BEGIN: DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are COMMENTARY for educational and discussions purposes ONLY.
Always consult a professional financial advisor before making any investment decisions.
SLIDE 3 - COVER
In the April issue of the LONGWave video I discussed the misinformation and hype unfolding in this election year and how the hype can be a dangerous cocktail for investors not doing their homework!
Since then a lot has obviously unfolded and therefore I wanted to revisit the election but from a slightly different view.
I want to show how economic reporting is being high- jacked to match the “happy face” election year narrative that is being foisted on us. This is not in any way indented to criticize the current administration but how both parties, when incumbents, operate behind the scenes. A process that gets worse with each Presidential election when ever larger amounts of money flow.
SLIDE 4 - AGENDA
As such I want to discuss the areas outlined here.
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The traditional promises of “election goodies” have already begun to be rolled out by both parties.
Maybe as an electorate during this election year we should be asking whether we can actually afford what is being promised. However, that is irrelevant because of course we don’t and will as usual only focus on what is promised is going to make our lives better.
However, as investors and not voters we need to look at the election differently.
We can be assured that the promises are seldom delivered and it is what they avoid talking about that is important. That includes unpopular subjects such as tax increases, festering unaddressed problems and any realty that might unnerve the electorate and manifest into unpopular support
This however is what investors need to be focused on and what it means to the economy and markets during the run-up to the election. Irrelevant of who wins what is key is what is awaiting us after the “hoop-la” is over?
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It is a given, both historically and with every promise made, that we can expect spending to be boosted.
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The unique problem during this election year is we have already been spending at a level never seen before. Increases of $1T in the last 90 days are truly unprecedented!
We have already been spending as though we have a “War Time” Economy during “Peace Time”!
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This chart is highly likely to surge higher once again – especially since the debt ceiling cap was intentionally removed until after the election. Election year spending surges are so expected that both US parties agreed to defer any agreement on possibly limiting the growth of government debt until after the election. May the best man win and worry about the consequences only if you win.
How does that sort of thinking work out for you in running your household? Party now - worry about the damage and cost later.
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With the money even already flowing real retail sales are now slowing as consumers are being reported on earnings conference calls that they appear to be “tapped out”.
Wal-Mart recently reported that though the low end is horribly stretched their revenues are being helped by higher end customers becoming new clients.
New and expanded taxation is with little doubt coming after the election, but how will a tapped out consumer handle higher taxation? Fiscal spending and the expansion of the Money Supply also precede higher inflation? Inflation levels we have yet to get fully under control.
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The Bull Market era of falling interest rates has come to an end. The increase in interest rates to combat inflation has delivered the greatest four year loss in over 100 years.
This can’t possibly be the right time for more fiscal spending! Lowering rates is not what you do when you are about increase spending, have elevated inflation, full employment and extremely low levels of Unemployment and Jobless claims!!
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However, if you want to get elected you need to get rates down, inflation down and yet tout a strong economy.
Somehow the government must deliver the rising green line shown here!
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Let’s just for a moment except that magically the government does achieve this, maybe then the real investment question is what does 2025 and beyond look like?
For those that follow technical analysis of markets this is a classic high probability pattern of what we should expect.
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The technical analysis actually reflects the reality of the current economic direction.
We are already in the midst of the 3rd great bond bear market!
This chart shows YIELDS versus bond PRICES which we were previously showing.
We are likely near an intermediate top in interest rates - with everyone screaming for cuts before something breaks – including both parties of course!
There is little double to a lot of serious analysts that the rate cuts won’t be sustained much beyond the election and late 2025.
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What we are doing in this run-up to the election is only going to make things much worse during the election hang-over.
The evidence is quite overwhelming if you care to actually look.
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But let’s not confuse reality with what must be done to win an election. The spin must be believable enough to be used as fodder for campaign messaging.
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There are strong indications that the US economy is already slowing though corporate profits are strong and we have full employment.
If an election is to be won that narrative must change.
Very soon we need to see:
- Unemployment hit and push through 4.0%
- Jobless Claims to begin aggressively rising
- Inflation appearing to be weakening again
- and GDP projections beginning to weaken.
We at MATASII we see all these unfolding over the next 90 days.
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The political narrative and spin will become about actions urgently needed to address a slowing economy and associated layoffs. We need immediate …
- Fed Rate cuts
- Fiscal Deficit Spending
The Spending rationale can expected to be centered on the current reliable standby excuses:
- Green Sustainability Programs,
- The War on Climate Change,
- Foreign Security Threats
- Supporting “New Americans” as a result of Mass Immigration
- Urgent Student Loan Forgiveness
- Commercial Real Estate and Banking Financial Instability
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Unfortunately, the reality is that Inflation isn’t falling and indications are it will be rising especially considering fiscal spending will be inflationary and we are putting in-place major Chinese Tariffs which are inflationary to imported goods.
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Couple this with already extremely loose financial conditions and your election platform is exposed!!
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The Fed can’t control Service Inflation, Energy or Food inflation issues which grow by the day!
What is to be done if an election must be won at any cost??
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NEVER FEAR! The incumbent party establishment is well along on the fix.
A “fix” which will hinge on the success of a Triumvirate of three powerful controlling bureaucrats.
A Triumvirate of unelected, indentured bureaucrats pulling the required strings at just the right time and in just the right coordinated fashion.
Who are the Triumvirate and how are they controlling the fix?
Let’s explore each of the three and what they are doing.
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First there is Janet Yellen, the Secretary of the Treasury and former Federal Reserve Chair.
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I have written extensively in my weekly newsletters and prior videos how Yellen is working over-time behind the scenes.
She has been creating unprecedented Stealth Liquidity to keep the economy humming along in an attempt to delay an inevitable economic slowdown to buy the Fed time in its Inflation fight and Quantitative Tightening efforts.
She has done this through what I label here as two stages.
First Yellen used the facility of short term T-Bill offerings to reduce the Reverse Repo Fed holdings from $2.7T to less than $4ooB thereby injecting $2.3 Trillion DIRECTLY into the economy. We have never seen this much money injected so quickly by the Treasury before (short of during War Time that is).
More recently in Stage II (shown at the bottom) she has capitalized on the “arb” of the Bank Term Funding Program (BTFP) by the major money center banks to fund large leverage hedge fund buying of US Treasury long duration debt coupons. This additionally positioned leveraged Hedge Funds to fully capitalize on a Fed Rate Pivot and keep The Treasury Auctions full of buyers for ever expanding issuances during the election run-up.
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But Yellen has done even more than that to set the election strategy in motion and guarantee the hoped for outcome
Yellen's recent Quarterly Refunding Announcement (QRA) suddenly highlighted limited further growth in auction size (suggesting that fiscal spending would be brought under control). Of course now that she has topped up the TGA to nearly $1T she has plenty of money to pump liquidity into the financial markets between now and the election.
Yellen's QRA additionally focused allocation supply on short term T-Bills versus long term coupons. Less coupon supply helps alleviate demand pressures which would force prices down and yields up if foreign buying continued, as expected to be a potential strain at Treasury auctions.
THE GLOBAL TREASURY MARKET AUCTION PARTICIPANTS WATCH THE QRA CLOSELY FOR THE SIGNALS
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To put Yellen’s signal in perspective we need to look at the 10Y US Treasury Chart shown here.
- The 4 Orange Bubbles marks each quarter where Yellen announced her QRA.
- Starting on the left when she announced it, yields immediately went straight up.
- In the second bubble as the market started anticipating her move it went straight down after her release.
- Again, we see the same behavior with the third bubble.
- When she was Chair of the Federal Reserve and had no control over the QRA she no doubt show how influential its release was in setting expectations and sentiment. Now as Treasury Secretary she is using it even more effectively to achieve her government funding needs.
- Since the latest announcement shown by the fourth bubble on the right (with black notes inside) the bond market immediately dropped anticipatively.
- Everyone has been surprised by the degree the bond market fell on the latest CPI, except of course those that have followed Yellen’s signals.
- It was a particular vital message to the Stage 2 Highly Leveraged Hedge Funds equipped financially to buy longer dated coupons due to the BTFP ”arb” knowing they were safe with little loss risk. Falling Yields would mean pure profit to the rising prices of their Treasury buys
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On a longer 10Y Treasury view you can see how nicely all this fits with achieving much lower interest rates on debt, new mortgages, refi and relief to troubled banking assets.
Of course Yellen was not leaving anything to chance.
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- Yellen additionally announced a brand new Treasury Buyback Program as part of the recent QRA that allows her to buyback Treasuries in the open market, thereby impacting price & yields based on Treasury created demand where needed. In similar fashion this is how Japan used Yield Curve Control (YCC) to manipulate Treasury Yields anywhere on the curve. Think of this as the Treasuries version of Quantitative Easing for better “tuning” adjustments and signals.
- I wrote extensively about Yellen’s recent urgent trip to China. There Yellen attempted to pressure China who had previously been the second largest holder of US debt, (having reduced their Treasury holding from ~1.3T to ~$750B), to assist in halting further selling. She likely gave some sort of incentives to China in her recent hasty trip to Beijing. We speculate it involved the deferring of Trade Tariffs on China until after the election. They may be announced publicly before the election to gain political points but no actual implementation is likely to result until after the election, thereby helping China indirectly with its short term problems
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Being an important member of the Triumvirate, Yellen has additionally and very importantly taken action regarding the important Supplemental Leverage Ratio or SLR.
- Yellen is expected to have changes finalized in the Basel III SLR before August. This would effectively incent banks to increase Treasury holdings which they have been limited by as the Banks have reduced being market makers carrying inventory. This will have a major result in ensuring increasing election year goodies can be paid for through increasing Treasury debt supply.
- .... these are only those initiatives we are currently aware of remembering that Yellen's Stealth Liquidity Stage II is still operational but needing only Yellen to ensure that rates would be heading lower (prices up) so that the leverage loan hedge fund operators would not be exposed to "holding the bag" on the their purchases by Yields rising.
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This is where the second member of the Triumvirate comes in, Fed Chairman Jerome Powell.
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- As if right on cue at the recent FOMC meeting Chairman Powell was extremely clear and pointed in reassuring that he did not see rates heading higher - only currently potentially "higher for longer". It seemed too many a somewhat strange need to say this but was exactly the additional assurance the leverage hedge funds needed to hear and bond yields fell almost immediately.
- Jerome Powell has delivered what an election year requires. The narrative that Yields are going down.
- This is translated by the broad electorate that everything must be fine, inflation must have been beaten and their lives will return to normal when they formerly could afford food, energy, services and the goods that delivered the America dream. Bidenomics would therefore be touted as having worked.
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- Very importantly in the controlled narrative is that Powell has been clear that, though he does not see rates going higher, he sees rates going down if the strong Employment numbers were to start weakening.
- Then PRESTO as if right on cue - the April Labor Report they suddenly start to weaken slightly!
- We have long advocated it was much weaker than the Labor Secretary's Bureau of Labor Statistics or BEA was reporting. It was time for the BLS to be more in line with fellow Biden Cabinet member Janet Yellen & Powell's needs.
- This is where the third member of the Triumvirate comes in – Julie Su - An unelected bureaucrat and unconfirmed Biden appointment - to do some of the heavy lifting!
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It is only since former Labor Secretary Marty Walsh’s abruptly and surprisingly resignation tha the BEA has come under heavy criticism from the financial analyst community for the sudden suspicious data coming out of the department.
Long used Private Data, which has traditionally supported the BEA statistics, simply no longer, neither matches nor supports BEA reporting. The divergences have become larger and more consistent. It has become such a major issue with professionals that it is amazing more organized outcry is not being raised for an independent audit process being implemented.
Issues with scoring budget proposals became such a similar political game years ago that an independent, non-partisan process was forced to be implemented. Many analysts no doubt wonder whether we at such a point with the BEA?
I have documented endless cases over the last two years in my weekly newsletters.
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For example this week I laid out the serious problem occurring in small business which employs 85% of the US work force. Small business is not hiring, reporting they see no hiring needs ….
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… as their bankruptcies explode.
Yet the Labor report until this month’s shows historic low unemployment and jobless claims levels. Even the latest Labor Report still asserts that the Unemployment level is only 3.9%. It makes no sense?
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Month after month we see broad based layoffs being reported, retail chains shutting down and smaller high tech companies failing – yet the Labor numbers say everything is better than fine – it is as good as it gets!
Examine this list of the percentages of the total percentage of company workforces that are being cut – yet the BEA just pumps out this nonsense and the election campaign runs with it and other such distortions as needed.
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We have reported continuously the 3-6 SIGMA reporting anomalies over the last year.
The one observation that has consistently stood out to us is how the Job Reports from major Democratic states (specifically CA, NY, PA, IL & MI) are off the scale on either end, depending on the data required to support the current Bidenomics narrative.
I show here the extremes both ways that these states exhibit but consistently fit the required government narrative at the time.
The biggest culprit is California where interestingly Julie Su was the California bureaucrat previously in charge of this source reporting. It is this sort of coincidences that make everyone suspicious and confidence is lost!
If we are right then over the next 90 days expect the Labor employment and jobless claims to abruptly change their tone! If we are wrong we will graciously apologize for our false conclusions.
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The worry of a slowing economy will no doubt open up the flood gates of Keynesian driven fiscal stimulus into an already over stimulated economy. It may be the same as placing electric cardio shocks pads on an already dead patient - but it is coming!
It isn’t really about resuscitating a slowing economy but rather driving government debt.
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Don’t forget, it currently takes:
- $1 .50 of Government Deficit Spending for every Dollar of Economic growth. It takes …
- $2.50 of Government Debt Growth for Every Dollar of Economic Growth
The only way to hold GDP up going into an election is to pump credit and debt growth
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As investors our real concern is the problems coming after the election.
Janie Dimon the well respected Chairman of JP Morgan Chase has recently been brutally honest in his concerns that Inflation in his view is still a major problem and as a consequence is preparing contingency plans for his bank for the possibilities of 6-8% interest rates.
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His fear as he states it is the potentially deadly ravages of Stagflation which we have been warning for some time now is dead ahead!!
This year’s election year Economics may be a death knell signaling the emergence of onslaught of what we have been calling the Beta Drought Decade.
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As I always remind you in these videos, remember politicians and Central Banks will print the money to solve any and all problems, until such time as no one will take the money or it is of no value.
That day is still in the future so take advantage of the opportunities as they currently exist.
Investing is always easier when you know with relative certainty how the powers to be will react. Your chances of success go up dramatically.
The powers to be are now effectively trapped by policies of fiat currencies, unsound money, political polarization and global policy paralysis.
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I would like take a moment as a reminder
DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are for educational and discussions purposes ONLY.
As negative as these comments often are, there has seldom been a better time for investing. However, it requires careful analysis and not following what have traditionally been the true and tried approaches.
Do your reading and make sure you have a knowledgeable and well informed financial advisor.
So until we talk again, may 2024 turn out to be an outstanding investment year for you and your family?
I sincerely thank you for listening!
