This is why AdvancingTime has pounded away at the idea that where and what we buy has a major impact on the future of both communities and countries. I just finished watching “Thoughtful Money (with Adam Taggart) Good news!” The Zero Hedge team put this special Thoughtful Money’s debate on the fate of the US dollar on the YouTube channel. This was a deep-dive discussion of over three hours.  

This important video did nothing to change my mind about where the world is going. In short, I liked Brent Johnson’s line, “certainty is death.” He claims he is not certain about anything. The footnote under the discussion title makes it clear that Investing in stocks, bonds, exchange-traded funds, mutual funds, and money market funds involves risk of loss. Loss of principal is possible. Also, some high-risk investments may use leverage, which will accentuate gains & losses. Foreign investing involves special risks, including a greater volatility and political, economic, and currency risks and differences in accounting methods. In short, it underlines Johnson’s uncertainty.

An excellent example of “hidden plumbing” is the Japanese carry trade. An article by Bloomberg reporter Masaki Kondo that appeared on Zerohedge on February 1st titled, “Aozora Delivers Grim Reminder Of Japan Carry-Trade Risk” details some of these issues. It details how Japanese investors as a whole have boosted their overseas investment since the BOJ expanded monetary easing in 2013. This includes Japanese banks. This puts them at risk if the cost of borrowing in yen should rise. He point out this could trigger an unwinding of Japan’s massive carry trade.

While many people have focused on the losses US banks have incurred on long-term US bonds and American Banks’ exposure to commercial real estate, little attention has been paid to Japan’s exposure to these items. Not only could Japanese banks take a hit on both these investments but Japan’s exposure to the downturn and losses in China is another area for concern. Yes, it is possible that China’s economic problems will spill over and negatively impact Japan. Still, this is an area many financial gurus claim is an opportunity for Japan to expand into and exploit, in short, they claim economic chaos in China is a plus. 

We should be aware that clogs in the system could create liquidity issues and even a change in the velocity at which money moves through the financial system could cause problems. The “slowing in the velocity of money” is rooted in where it is being placed. The speed at which money flows through the economy in some ways is tied to the speculation about the future of inflation. 

Behind the scenes, a lot of things are occurring that we don’t recognize as important until they are unveiled as being so. Trade deficits, reshoring of manufacturing, changes in how taxes are accessed, man made and natural disasters, and more all flow into this mix. This translates into “nobody really knows what the future holds.” The so-called, often self-proclaimed experts, included.

Another thing we should be worried about is “financial one-offs” These are one-time events that may prove unable to propel the financial system forward over the long haul. In a world void of financially nutritious content, an individual has to really go out of their way to become educated in the way to avoid ending up as financial road kill. The less you know may increase your feeling all is well but does little to ensure your financial future.

Adding to the recent confusion of why the markets are moving up is whether liquidity is, or is not being added to the financial system. It appears bank lending is contracting but other things are happening behind the scenes in swap rates and yield curves. While some of us point to the Fed saying it is tightening and reducing its balance sheet some economists point to a back channel inflow of liquidity juicing the system.

A case can be made that recent market action remains more about liquidity than interest rates. A lack of liquidity can be poisonous. When you need money, whether the amount is small or large, not being able to get it can lead to a life-changing or grave outcome.  Interestingly, as noted above, the liquidity issue remains unresolved. Central banks are well aware that contagion from one area can spill over into other sectors of the economy and markets. This is why China continues to inject liquidity into its market. How much of that money is getting out of China is an issue.

So, here we sit, new market highs at a time when many economy watchers are voicing concerns the economy is rapidly slowing and the Fed is already behind the curve in dropping rates. The counterargument being floated is that all is well and we are in the midst of a soft landing or no landing. The latter is the optimistic view that we have entered a Goldilocks moment and the markets are set to go ever higher.

Those taking the stand a quick reversal of Fed policy and looking at rapidly falling rates may be failing to consider trees don’t grow to the sky. It could be argued a major pullback is necessary to avoid a much more severe problem or bigger disaster in the future. Inflation is a key component in assessing where things go from here.  Again, I point to The Hard Asset Inflation / Paper Asset Deflation Theory

Much of the current market danger stems from the fact the fluid financial and economic situation is highly leveraged. If something breaks, the amount of money needed to backstop and halt a collapse of the system will be far larger than anything we have seen in the past. Remember a massive drop in asset prices and the value of bonds directly impacts pension funds and many other aspects of our financial structure.

A great deal of what we call growth has been, or is now financially engineered by companies buying back their own shares and other companies rather than growing organically. This risk is constantly being downplayed as more and more of the concentration of wealth pushes takes place, into just a few companies. A case and point often raised is the huge market capitalization of what is known as the “magnificent seven.”

As usual or maybe even more than usual, we should continue to factor in the idea things could be shaken by another pandemic, massive war including the use of nuclear weapons. The whole idea that stocks climb a wall of worry and fall like a stone underlines the fact that markets are non-linear and do not move in a straight line. People tend to slip into a generally optimistic feeling of complacency and discount this reality.

Lower inflation figures strongly into the euphoria we see in the market. Much of this has been driven by lower gasoline prices which are likely to prove temporary and the idea the costs of “shelter” or keeping a roof over your head will soon decline. These notions brush aside several important facts such as the rising cost of labor and other factors feeding into housing. These include insurance, soaring maintenance costs, and rising taxes. All of these are expected to move higher in the future.

A bond fella recently recently made the case that yields would drop as inflation falls. Several pundits have speculated the Fed must “know something, or be spooked” to have changed course. Pulling on this thread could lead us back to the notion China’s economy is in free-fall and it is the main reason rates will be falling everywhere. This has resulted in the notion we will see super strong demand for bonds during a recession even if the supply is huge.

Still, buying long-term bonds to hold is far different than buying them to hold. Long term we have to look at the future of fiat money and inflation from currency debasement. I’m not convinced it is wise for investors to lock themselves into any fiat currency long-term as things could change rapidly.

Consider the possibility that the Fed is yielding to pressure rather than making a policy change based on choice. By prematurely declaring inflation as no longer an issue it takes pressure off government bonds and banks. When we look back at how this plays out it is likely the importance of liquidity and the money supply will prove far more important than minor changes in interest rates.

In a recent video delving into inflation in commodities, Daniel Lacalle claimed there are only three ways to halt inflation and inflation is fueled by monetary conditions. Lacalle says the only way to stop inflation is raise interest rates, reduce the amount of money in the system, or to create an aggregate demand reduction of credit.

The public sector, or to qualify, governments are busy thwarting all these factors. As long as governments and central banks continue to overspend and print money the inflation beast will remain a ferocious creature.

Sadly, US senator Bernie Sanders on Tuesday agreed, due to fairly intense pressure from the White House, to withdraw the so-called ‘Yemen War Powers’ resolution from a vote in the Senate. The crucial bill would have restricted US military involvement in war-torn Yemen and reasserted Congress’ war-making authority. As a footnote, the word was put out that President Joe Biden would most likely veto the bill passed if it passed. White House officials said the bill “could complicate the effort to back Ukraine in its war against Russia.”

Recently, in a phone call, Ukrainian President Volodymyr Zelensky “thanked” President Joe Biden for the “unprecedented defense and financial assistance that the U.S. provides to Ukraine.” that of course did not stop him from asking for billions more. So far the total that has been either proposed, pledged, or enacted exceeds a mind-boggling $100 billion. With every billion dollars representing roughly three dollars for every man woman and child in America, this means it has already cost each of us around 300 dollars. When you consider how many people, such as children and those barely getting by don’t share in this burden, the amount placed upon each taxpayer soars. Much of this money has been doled out with little oversight.

It is important to remember that under Biden’s tutelage this “conflict” has become not so much about defending Ukraine but ending Putin and Russia. It is not about the people of Ukraine but much more. The Ukrainian people and much of Europe have become mere pawns in a game. Unfortunately for the Biden camp, for all the money being poured into this “theater” it would be naive to think Putin will not achieve his goals or come out of this conflict the victor.

Even as this is being written, Ukraine is bracing for yet more Russian attacks on its energy infrastructure. Ukraine has accused Moscow of intentionally unleashing additional suffering on the population headed into Christmas. Its Prime Minister Denys Shmyhal said, “Russian terrorists will do everything to leave Ukrainians without electricity for the New Year.” Currently, around 80% of the Kiev area appears to be without electricity for the second day in a row.

The only thing growing as fast as the cost of Biden’s proxy war is the ego of Ukraine’s President Zelensky. This has become more apparent by the day as the attention-seeking comedian media star turned politician pushes his way onto the center of the world stage. Zelensky is constantly appearing at major public events to make appeals for aid. These include the Grammys and Cannes Film Festival. This is when he’s not busy addressing the G7, the European Parliament, or an UN-sponsored event.

Pro-war advocates even arranged for Zelensky to give a 30-minute long speech before Congress, foreign leaders seldom get this opportunity. During the speech, he was frequently interrupted by spontaneous standing rounds of applause from US lawmakers as he vowed: “absolute victory“ over Russia. With events like this taking place, it is little wonder Time magazine recently named Zelensky and The Spirit Of Ukraine as person of the year.

There are, however, signs global audiences are tired of hearing Ukraine’s President Zelensky ask for more money. His message is steeped in propaganda. This could be the chief reason the formal request for Zelensky to talk about “world peace” before the kickoff to the World Cup final, was recently denied.

The Biden administration along with Ukrainian officials have been shocking the world with claims of how well things are going on the battlefield.” This has gone to the point where NBC News reports that the White House now calculates that the Ukrainian armed forces are capable of retaking the Crimean Peninsula. Administration officials are using this as a reason Congress still needs to fund Ukraine.

Those promoting and encouraging such an offensive move ignore the danger it may cross Moscow’s “red lines” and increase the possibility of nuclear weapons being used.

Still, with many Americans distracted by the holidays, few are paying attention to just how much money we are spending supporting Ukraine. The visual aid above helps clarify the distinction between what has been proposed and enacted. The additional “proposed” billions that are shown in the above chart have at this point been approved with the recent passage of the National Defense Authorization Act for Fiscal Year 2023. Approving the current request would bring the total amount approved to $104 billion in less than a year.

To the chagrin of many Americans, the war in Ukraine continues to grind on. The ramifications of the Biden proxy war extend far past spending. It includes using presidential draw-down authority to pull hundreds of millions in weapons and anti-air missile systems from American stockpiles. Biden’s newly announced pledge to send Patriot missiles to Ukraine means we may be short weapons if a problem comes up somewhere else.

This is why NATO Secretary-General Jens Stoltenberg commenting on the state of Russia-West relations said “Even if the fighting ends, we will not return to some kind of normal, friendly, relationship with Russia. Trust has been destroyed.” He claimed that NATO sought to build positive relations with Russia immediately after the Cold War – despite the fact it expanded to Russia’s doorstep soon after the collapse of the Soviet Union.

For now, the idea this conflict will rapidly end has been placed on the back burner. This could be because many people are benefiting from the spending. To the warmongers, this is because we have not done enough. Those of us advocating the antiwar position view this as an unnecessary proxy war and that we have no business there. This extends to the position we should do everything we can to bring hostilities to an end.

Some of us take the position that this was all set in motion by the U.S. choreographed coup in Kiev eight years ago under the Obama Administration. It would be hard to overstate the significance those events played in creating the situation currently before us. Former US Secretary of State Henry Kissinger is one of those calling for urgently finding a path of negotiated settlement to the war in Ukraine. He warns the entire world is in danger as nuclear-armed superpowers inch closer to a disastrous confrontation.

A huge factor in keeping truthful information about what is happening is held hostage by propaganda. The situation on the ground in Ukraine may be far different than we in America are being led to believe. Recently the Russians have altered their strategy in reaction to reality but not because they are in dire straits. An argument can be made that Russia’s pullback from some Ukrainian territory was strategic and that by pulling back they have sucked the Ukrainian troops into a meat grinder where they have suffered massive casualties.

Michael Vlahos and Douglas Magcregor got together recently in the library of the Army-Navy Club, Washington, D.C., to reflect on the war in Ukraine.

It appears Putin has been to the front to confirm that Russian troops are prepared for a winter offensive. This is the type of warfare in which Russia excels. When it comes to fighting on the ground in cold weather, it has been said that Russia invented winter. It certainly does not look like a pleasant winter for the people of Ukraine, and for that, they can thank Biden.

Article cross-posted from Bruce’s Blog.

The greatest threat posed by Liz Cheney may be that she could split the Republican Party and hand the Democrats the next Presidential election. Consider the Ross Perot scenario, years ago he pulled enough votes away from George Bush Senior to hand the election to Bill Clinton. This role as a spoiler still exists and if Trump does run, never Trumpers and Democrats would fund her campaign simply to torpedo the Don.

The polls were correct that neocon Rep. Liz Cheney (R-WY) would lose her congressional seat in the primaries. Her poorly-received crusade against former President Donald Trump proved to be her Waterloo. To say Cheney sparked a conservative backlash in her district where 70% of Wyoming voters chose Trump in 2020 is an understatement. Her participation as vice chair of the January 6th committee, and her stand that there’s never been a greater threat to our republic than Donald Trump didn’t do Liz any favors.

One of the biggest dangers faced by Republicans is the party will be split by those old-school Republicans that still wish to control its future. So here is Cheney, she is still viewed by many as a “Never Trumper – warmongering – commie hater” extension of her father. Their refusal to concede power and willingness to cut off their nose to spite their face continues to exist. That of course does not imply the Democrats are in great shape going into future elections.

The Democratic Party also has its demons, not only has it failed to govern since returning to power but they have moved way farther to the left than many Americans. Their abuse of the political system coupled with poor leadership at the top has left many voters underwhelmed. After my bad call on Biden’s chance of becoming President, while not a fan, I will not say Liz Cheney has no political future but I will say her next role may be that of a spoiler.

Article cross-posted from Bruce’s blog.

If I’m correct and the huge drop in many commodity prices is related to liquidity beginning to dry up this could be the canary in the coalmine. This could also signal other markets will soon become less stable or downright wild. It is very possible, “we ain’t seen nothing yet.” I have observed that up until now other markets appear relatively solid but much of that could be supply-demand related. Liquidity issues bring a whole new aspect into the mix. 

Those looking for a future where deflation occurs will try to latch on to commodity price weakness as proof demand destruction has already put an end to inflation. The truth is some asset prices will fall and others will continue higher. A rebound in commodity prices will not mean liquidity has suddenly returned to the market it will only mean the current washout in prices has run its course. A temporary fall in prices is not necessarily an indication inflation is dead but more proof an investor can lose money even when they are right, it also highlights how leverage can increase an investor’s risk.

Sadly, banks have a way of failing us when we need them most and that is a big part of why liquidity is generally the first casualty in a financial crisis. A huge part of the problem is rooted in the economic tool known as leverage. The same massive gains leverage brings, also showers us with huge losses that rapidly paralyze both individuals and financial institutions. When volatility hits the markets any person or group with less than stellar credit is likely to find they are unable to borrow new money.

Liquidity has a way of deteriorating and evaporating slowly, then suddenly. Then liquidity falls even those with good credit may be forced to watch as existing credit lines are cut. The bottom-line is banks do not like to loan money to those that need it but prefer to line the pockets of those who dwell in their inner circle. Many of the credit lines that existed prior to 2008 have gone the way of the dinosaurs with banks claiming new government regulations are to blame for the way they do business today.

Much of the risk investors carry is hidden away in that pesky small print that exists in all the paperwork we sign when dealing with these institutions. This is especially clear not only in commodities and stocks but in the commercial real estate market. As markets continue to bump around with no clear trend do not be surprised if those using margin money get sucked into overleveraging their position and pay a dear price for doing so. To be clear, when liquidity vanishes, those that are leveraged are the first to feel the pain. Be careful out there, and remember capital preservation is job one! 

Article by Bruce Wilds cross-posted from his blog.