Drowning in Cash — The Plumbing of US Financial Markets

Here’s an idea. Why don’t we put everyone in government (including public health officials) in a two-week lockdown? It would stop (or at least slow) the spread of idiocy. And it would put an end to the endless directives, orders, and mandates that are quickly becoming a regular thing in what used to be a free society.

I’ll come back to that in a moment. But first, a few more questions. How much stress can a system take before it breaks? How much can you take? Is there a breaking point? Or will we manage to muddle through without a dramatic crisis?

There are lots of questions to begin a new week and a new month. The last few days of July were a doozy. They revealed there are some serious problems in the plumbing of US financial markets. Take a look at the chart below:

Federal Reserve of New York

Source: Federal Reserve Bank of New York

[Click to open in a new window]

It’s a sign of the times that you have to pay attention to the inner workings of the financial markets to figure out what’s driving stock prices higher. More than US$1 trillion in cash was deposited overnight with the Federal Reserve by money market funds (and others) late last week. The cash gets a puny yield (0.5%). But that’s better than nothing.

It’s the first time the reverse repo market hit US$1 trillion. But it won’t be the last. The reverse repo market is a weird one. I’ve written about it before in The Bonner-Denning Letter. The bottom line is that there are huge excess cash reserves in the financial system with no good (or safe) place to go.

If these bank reserves ever made it out of the financial system and into the real economy (via lending), you’d have an inflationary monster on your hands. As it is, they remained quarantined behind the walls of the financial system. The main result is very low yields in the fixed income world and negative real rates in the bond market.

HOODWINKED! Why Australia’s ‘miracle’ economy is a farce

It’s the world we live in, full of financial repression. As I’ve explained before, heavily indebted governments use financial repression as a way of defaulting on debt without really defaulting on it. By keeping official interest rates below the rate of inflation, they methodically reduce the cost (in real terms) of paying down the debt they’ve accumulated.

You wonder why they even bother with the pretence anymore. For example, over here in the US, the great debt ceiling debate is back. Congress suspended the statutorily imposed debt ceiling two years ago. It was one of the few things Donald Trump and Speaker of the House Nancy Pelosi could agree on. Borrow. Spend. Repeat as necessary.

The usual partisan theatrics have already begun. If the US doesn’t raise the debt ceiling again, the Treasury Department won’t be able to sell more bills, notes, and bonds to fund the government. Certain parts of the government — usually those the public enjoys, like museums and national parks — are shut down. Then, the Republicans fold; raise the ceiling, and the business-as-usual resumes.

Do you see a pattern here? The public — in Australia and the US — are routinely punished for public policy failures. Worse than that, the public is often blamed for public policy failures. This is especially the case in Australia. Grandstanding state premiers routinely scold citizens for selfishly wanting to exercise (or defend) their civil liberties.

In France, the citizens are taking to the streets to protest vaccine passports. Why? Because once you conceded that the government, through an app on your phone, has the power to give or withhold permission for things like eating, drinking, sports, or even going outside, you’ve lost. They’ll use that power and expand on it.

Today it’s the pandemic. But tomorrow, you might be denied travelling permission because you already drive too much. Or because you’re contributing to the climate crisis by eating too much red meat. Or because you’ve been drinking too much wine with dinner. Behaviour modification by technology — or a social credit score — knows very few bounds once you embrace the totalitarian possibilities.

Maybe this is why central bankers are so determined to keep financial markets from crashing with Quantitative Easing. Rising stock prices create the appearance of growing wealth. Take away the ‘wealth effect’, and the middle class would realise how badly it’s being screwed — both financially and politically.

What can you do? In the latest issue of The Bonner-Denning Letter, we looked at both financially and practically. Financially, it’s an asset allocation question. When governments and central banks are headed full pelt toward money printing, you want assets that protect your wealth from what we believe will be the inevitable inflation.

Land. Land. And more land. That’s one answer. Find companies that own it and earn royalty income from it. In the report, I detail how Chinese firms have been buying up land in Australia and New Zealand since 2008. It’s happening in the US, too, although not to the same scale.

Practically, it may be time to start growing your own food. You can do it as a hobby. It’s not complicated to determine what kind of plants, fruits, and vegetables you can easily grow at home. And with global supply chains having been exposed as more fragile than we thought, a little redundancy in your own personal food supply chain isn’t a bad idea. More on that next week.


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Dan Denning,
Editor, The Rum Rebellion

PS: The Rum Rebellion is a fantastic place to start your investment journey. We talk about the big trends driving the Australian Economy. Learn all about it here.

Dan Denning is the co-author of The Bonner-Denning Letter.

Dan was a founder of Port Phillip Publishing back in 2005, which quickly became the leading publisher of its kind for independent financial research and insights. In 2014 he left to head up Southbank Investment Research in the UK. Dan is also the author of the 2005 book, The Bull Hunter. Today, he’s based in his home state of Colorado. Each Monday in The Rum Rebellion you’ll get Dan’s unique contrarian thinking to provide insights you won’t find anywhere else.

Dan Denning’s belief in free markets, sound money, personal liberty, and small government have underpinned everything he’s done during his 23 years in the financial publishing industry.

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