Category: Economy

Do Regional Federal Reserve Branches Put Banks in Their Region at Risk?

Posted on by phoffman@channelchek.com

The Fed Is Losing Tens of Billions: How Are Individual Federal Reserve Banks Doing?

The Federal Reserve System as of the end of July 2023 has accumulated operating losses of $83 billion and, with proper, generally accepted accounting principles applied, its consolidated retained earnings are negative $76 billion, and its total capital negative $40 billion. But the System is made up of 12 individual Federal Reserve Banks (FRBs). Each is a separate corporation with its own shareholders, board of directors, management and financial statements. The commercial banks that are the shareholders of the Fed actually own shares in the particular FRB of which they are a member, and receive dividends from that FRB. As the System in total puts up shockingly bad numbers, the financial situations of the individual FRBs are seldom, if ever, mentioned. In this article we explore how the individual FRBs are doing.

All 12 FRBs have net accumulated operating losses, but the individual FRB losses range from huge in New York and really big in Richmond and Chicago to almost breakeven in Atlanta. Seven FRBs have accumulated losses of more than $1 billion. The accumulated losses of each FRB as of July 26, 2023 are shown in Table 1.

Table 1: Accumulated Operating Losses of Individual Federal Reserve Banks

New York ($55.5 billion)

Richmond ($11.2 billion )

Chicago ( $6.6 billion )

San Francisco ( $2.6 billion )

Cleveland ( $2.5 billion )

Boston ( $1.6 billion )

Dallas ( $1.4 billion )

Philadelphia ($688 million)

Kansas City ($295 million )

Minneapolis ($151 million )

St. Louis ($109 million )

Atlanta ($ 13 million )

The FRBs are of very different sizes. The FRB of New York, for example, has total assets of about half of the entire Federal Reserve System. In other words, it is as big as the other 11 FRBs put together, by far first among equals. The smallest FRB, Minneapolis, has assets of less than 2% of New York. To adjust for the differences in size, Table 2 shows the accumulated losses as a percent of the total capital of each FRB, answering the question, “What percent of its capital has each FRB lost through July 2023?” There is wide variation among the FRBs. It can be seen that New York is also first, the booby prize, in this measure, while Chicago is a notable second, both having already lost more than three times their capital. Two additional FRBs have lost more than 100% of their capital, four others more than half their capital so far, and two nearly half. Two remain relatively untouched.

Table 2: Accumulated Losses as a Percent of Total Capital of Individual FRBs

New York 373%

Chicago 327%

Dallas 159%

Richmond 133%

Boston 87%

Kansas City 64%

Cleveland 56%

Minneapolis 56%

San Francisco 48%

Philadelphia 46%

St. Louis 11%

Atlanta 1%

Thanks to statutory formulas written by a Congress unable to imagine that the Federal Reserve could ever lose money, let alone lose massive amounts of money, the FRBs maintained only small amounts of retained earnings, only about 16% of their total capital. From the percentages in Table 2 compared to 16%, it may be readily observed that the losses have consumed far more than the retained earnings in all but two FRBs. The GAAP accounting principle to be applied is that operating losses are a subtraction from retained earnings. Unbelievably, the Federal Reserve claims that its losses are instead an intangible asset. But keeping books of the Federal Reserve properly, 10 of the FRBs now have negative retained earnings, so nothing left to pay out in dividends.

On orthodox principles, then, 10 of the 12 FRBs would not be paying dividends to their shareholders. But they continue to do so. Should they?

Much more striking than negative retained earnings is negative total capital. As stated above, properly accounted for, the Federal Reserve in the aggregate has negative capital of $40 billion as of July 2023. This capital deficit is growing at the rate of about $ 2 billion a week, or over $100 billion a year. The Fed urgently wants you to believe that its negative capital does not matter. Whether it does or what negative capital means to the credibility of a central bank can be debated, but the big negative number is there. It is unevenly divided among the individual FRBs, however.

With proper accounting, as is also apparent from Table 2, four of the FRBs already have negative total capital. Their negative capital in dollars shown in Table 3.

Table 3: Federal Reserve Banks with Negative Capital as of July 2023

New York ($40.7 billion)

Chicago ($ 4.6 billion )

Richmond ($ 2.8 billion )

Dallas ($514 million )

In these cases, we may even more pointedly ask: With negative capital, why are these banks paying dividends?

In six other FRBs, their already shrunken capital keeps on being depleted by continuing losses. At the current rate, they will have negative capital within a year, and in 2024 will face the same fundamental question.

What explains the notable differences among the various FRBs in the extent of their losses and the damage to their capital? The answer is the large difference in the advantage the various FRBs enjoy by issuing paper currency or dollar bills, formally called “Federal Reserve Notes.” Every dollar bill is issued by and is a liability of a particular FRB, and the FRBs differ widely in the proportion of their balance sheets funded by paper currency.

The zero-interest cost funding provided by Federal Reserve Notes reduces the need for interest-bearing funding. All FRBs are invested in billions of long-term fixed-rate bonds and mortgage securities yielding approximately 2%, while they all pay over 5% for their deposits and borrowed funds—a surefire formula for losing money. But they pay 5% on smaller amounts if they have more zero-cost paper money funding their bank. In general, more paper currency financing reduces an FRB’s operating loss, and a smaller proportion of Federal Reserve Notes in its balance sheet increases its loss. The wide range of Federal Reserve Notes as a percent of various FRBs’ total liabilities, a key factor in Atlanta’s small accumulated losses and New York’s huge ones, is shown in Table 4.

Table 4: Federal Reserve Notes Outstanding as a Percent of Total Liabilities

Atlanta 64%

St. Louis 60%

Minneapolis 58%

Dallas 51%

Kansas City 50%

Boston 45%

Philadelphia 44%

San Francisco 39%

Cleveland 38%

Chicago 26%

Richmond 23%

New York 17%

The Federal Reserve System was originally conceived not as a unitary central bank, but as 12 regional reserve banks. It has evolved a long way toward being a unitary organization since then, but there are still 12 different banks, with different balance sheets, different shareholders, different losses, and different depletion or exhaustion of their capital. Should it make a difference to a member bank shareholder which particular FRB it owns stock in? The authors of the Federal Reserve Act thought so.

About the Author

Alex J. Pollock is a Senior Fellow at the Mises Institute, and is the co-author of Surprised Again! — The Covid Crisis and the New Market Bubble (2022). Previously he served as the Principal Deputy Director of the Office of Financial Research in the U.S. Treasury Department (2019-2021), Distinguished Senior Fellow at the R Street Institute (2015-2019 and 2021), Resident Fellow at the American Enterprise Institute (2004-2015), and President and CEO, Federal Home Loan Bank of Chicago (1991-2004). He is the author of Finance and Philosophy—Why We’re Always Surprised (2018).

Will the New Buzzword Being Bandied About Regarding Inflation Be “r-star”?

Posted on by phoffman@channelchek.com

Federal Reserve Chairman’s Speech at Jackson Hole Symposium Sparks Speculation on Subject and Market Impact

There’s an economic concept that is expected to be included in Fed Chair Powell’s next speech that may soon become the new buzzword. It may be worth a minute now to be sure there is a thorough understanding. Especially if his address at the Jackson Hole Symposium begins to drive markets one way or the other. Other news outlets say Powell’s address may be a pivotal moment that could potentially reshape the stock market landscape. Last year they said the same thing, but instead his address was a yawner, ultra-safe, with no new information for the markets to use.

Scheduled for 10:05 ET Friday morning, Powell’s address, it is said, may center around the concept of the neutral rate of interest, a theoretical but influential notion that holds the potential to send ripples through financial markets.

The neutral rate of interest, also referred to as r* or r-star, represents the level of real short-term interest rates anticipated to prevail when the U.S. economy is at its peak strength and inflation remains stable. Analysts estimate this real neutral rate to be around 0.5%, calculated by deducting the Federal Reserve’s 2% inflation target from policymakers’ latest predictions for the long-term trajectory of the fed funds rate. Speculation suggests that the neutral rate might be on the rise, given the current economic performance.

Amidst an environment where the U.S. economy appears to be gathering momentum, even following a series of interest rate hikes that brought rates to a 22-year high of 5.25%-5.5%, the stakes are high for determining the correct theoretical level for the neutral rate. The economy achieved a robust growth rate of 2% in the first quarter, followed by 2.4% in the second quarter. The Atlanta Fed’s GDPNow model projects an astonishing 5.8% growth rate for real gross domestic product in the third quarter, a figure met with skepticism but indicative of the economy’s notable resilience.

Investors will be hanging on the Fed chair’s every utterance, clarity from Powell’s address to better comprehend the Fed’s perspective on this crucial neutral rate. What a higher neutral rate could mean is policymakers could find themselves compelled to implement additional hikes to fed-funds. This scenario would result in longer periods of higher borrowing costs and a delay in the timing of the first rate reduction.

Traders and investors have already adjusted their expectations to anticipate the Federal Reserve maintaining elevated interest rates for a longer period.

This year has seen significant gains in the stock market, with the Dow Jones Industrial Average (DJIA) rising by 4%, the S&P 500 (SPX) surging by 15.5%, and the Nasdaq Composite (COMP) leading the pack with a remarkable 31.1% increase. Investors and traders are cautiously optimistic about a scenario where the U.S. economy navigates a soft landing, with inflation trending downward.

In the days leading up to Powell’s speech at the Kansas City Fed’s Jackson Hole symposium, the Treasury market has already incorporated expectations of stronger-than-anticipated U.S. economic growth. Yields for 10-year and 30-year Treasury bonds reached multiyear highs, though they retraced slightly in the days following. However, market participants anticipate potential fluctuations in response to Powell’s remarks, which could trigger further yield adjustments.

The recent upswing in yields, leading to the highest closing levels since 2007 and 2011 for the 10-year and 30-year rates, respectively, has been given as the reason for the decline in U.S. stock values during August. The S&P 500 experienced a decline of over 3% during the month.

Take Away

Understanding r* or r-star in advance may prevent some scurrying at 10:10 AM ET tomorrow. While Market participants eagerly await Powell’s speech, hoping for insights that will shed light on the Federal Reserve’s outlook regarding the neutral rate and its potential impact on monetary policy and the stock market, last year his words were short, and seemed to be designed to convey nothing new.

Paul Hoffman

Managing Editor, Channelchek

No Suit, No Tie, No Problem – What Happens in Jackson Hole?

Posted on by phoffman@channelchek.com

What to Expect Out of This Year’s Jackson Hole Symposium

Since 1978, the Federal Reserve Bank of Kansas City has sponsored an annual event to discuss an important economic issue facing the U.S. and world economies. From 1982, the symposium has been hosted at the Jackson Lake Lodge at Grand Teton National Park, in Wyoming. The event brings together economists, financial market participants, academics, U.S. government representatives, and news media to discuss long-term policy issues of mutual concern. The 2023 Economic Policy Symposium. “Structural Shifts in the Global Economy,” will be held Aug. 24-26.

Those attending are selected based on each year’s topic with consideration for regional diversity, background, and industry. In a typical year, about 120 people attend.

The event features a collegiate feel with thoughtful discussion among the participants. The caliber and status of participants and the important topics being discussed draw substantial interest from the financial community in the symposium. Despite the interest in the annual event, The Jackson Hole event works best as a smaller open discussion, attendance at the event is limited.

Similarly, although the Federal Reserve District Bank receives numerous requests from media outlets worldwide, press attendance is also limited to a group that is selected to provide important transparency to the symposium, but not overwhelm or influence the proceedings. All symposium participants, including members of the press, pay a fee to attend. The fees are then used to recover event expenses.

Source: Federal Reserve, Kansas City, MO

What’s discussed?

The Kansas City Fed chooses the topic each year and asks experts to write papers on related subtopics. To date, more than 150 authors have presented papers on topics such as inflation, labor markets and international trade. All papers are available online.

Papers provided to the Bank in advance and presented at the annual economic policy symposium will be posted online at the time they are presented at the event. Other papers, such as conference comments, are posted as they become available. Additionally, transcripts of the proceedings are posted on the website as they become available, a process that generally takes a few months. Finally, the papers and transcripts are compiled into proceedings books which are both posted on the website and published in a volume that is available online or in print, free of charge.

Source: Federal Reserve, Kansas City, MO

Worldwide Representation

The goal of the Economic Policy Symposium when it began was to provide a vehicle for promoting public discussion and exchanging ideas. Throughout the event’s history in Jackson Hole, attendees from 70 countries have gathered to share their diverse perspectives and experiences.

Source: Federal Reserve, Kansas City, MO

This year’s theme will explore several significant, and potentially long-lasting, developments affecting the global economy. While the immediate disruption of the pandemic is fading, there likely will be long-lasting aftereffects for how economies are structured, both domestically and globally, as trade networks shift, and global financial flows react. Similarly, the policy response to the pandemic and its aftermath could have persistent effects as economies adjust to rapid shifts in the stance of monetary policy and a substantial increase in sovereign debt. The papers will share how these developments are likely to affect the context for growth and monetary policy in the coming decade.

The full agenda will be available at the start of the event on Thursday, Aug. 24 at 8 p.m. ET/6 p.m. MT. Federal Reserve Chair Jerome Powell’s remarks will be streamed on the Kansas City Fed’s YouTube channel, on Friday, Aug. 25 at 10:05 a.m. ET/8:05 a.m. MT. Papers and other materials will be posted on the Kansas City Fed’s website as they are presented during the event.

What Else

The markets seem to be expecting hawkish comments from the US Central Bank President on Friday at Jackson Hole. This is being priced in, as investors expect the Fed Chair may say something that spooks the bond market which naturally impacts stocks. There has been a lot of talk about how central banks globally should treat target inflation, all ears will be on that subject.

Paul Hoffman

Managing Editor, Channelchek

As BRICS Cooperation Accelerates, Is It Time for the US to Develop a BRICS Policy?

Posted on by phoffman@channelchek.com
Image: External Affairs Ministers at BRICS foreign ministers meeting, MEA Photogallery (Flickr)

An Expansion of BRICS Countries Would Increase its Negotiating Strength

When leaders of the BRICS group of large emerging economies – Brazil, Russia, India, China and South Africa – meet in Johannesburg for two days beginning on Aug. 22, 2023, foreign policymakers in Washington will no doubt be listening carefully.

The BRICS group has been challenging some key tenets of U.S. global leadership in recent years. On the diplomatic front, it has undermined the White House’s strategy on Ukraine by countering the Western use of sanctions on Russia. Economically, it has sought to chip away at U.S. dominance by weakening the dollar’s role as the world’s default currency.

And now the group is looking at expanding, with 23 formal candidates. Such a move – especially if BRICS accepts Iran, Cuba or Venezuela – would likely strengthen the group’s anti-U.S. positioning.

This article was republished with permission from The Conversation, a news site dedicated to sharing ideas from academic experts. It represents the research-based findings and thoughts of, Mihaela Papa, Senior Fellow, The Fletcher School, Tufts University, Frank O’Donnell, Adjunct Lecturer in the International Studies Program, Boston College, Zhen Han, Assistant Professor of Global Studies, Sacred Heart University.

So what can Washington expect next, and how can it respond?

Our research team at Tufts University has been working on a multiyear Rising Power Alliances project that has analyzed the evolution of BRICS and the group’s relationship with the U.S. What we have found is that the common portrayal of BRICS as a China-dominated group primarily pursuing anti-U.S. agendas is misplaced.

Rather, the BRICS countries connect around common development interests and a quest for a multipolar world order in which no single power dominates. Yet BRICS consolidation has turned the group into a potent negotiation force that now challenges Washington’s geopolitical and economic goals. Ignoring BRICS as a major policy force – something the U.S. has been prone to do in the past – is no longer an option.

Reining in the America bashing

At the dawn of BRIC cooperation in 2008 – before South Africa joined in 2010, adding an “S” – members were mindful that the group’s existence could lead to tensions with policymakers who viewed the U.S. as the world’s “indispensable nation.”

As Brazil’s former Foreign Minister Celso Amorim observed at the time, “We should promote a more democratic world order by ensuring the fullest participation of developing countries in decision-making bodies.” He saw BRIC countries “as a bridge between industrialized and developing countries for sustainable development and a more balanced international economic policy.”

While such realignments would certainly dilute U.S. power, BRIC explicitly refrained from anti-U.S. rhetoric.

After the 2009 BRIC summit, the Chinese foreign ministry clarified that BRIC cooperation should not be “directed against a third party.” Indian Foreign Secretary Shivshankar Menon had already confirmed that there would be no America bashing at BRIC and directly rejected China’s and Russia’s efforts to weaken the dollar’s dominance.

Rather, the new entity complemented existing efforts toward multipolarity – including China-Russia cooperation and the India, Brazil, South Africa trilateral dialogue. Not only was BRIC envisioned as a forum for ideas rather than ideologies, but it also planned to stay open and transparent.

BRICS alignment and tensions with the US

Today, BRICS is a formidable group – it accounts for 41% of the world’s population, 31.5% of global gross domestic product and 16% of global trade. As such, it has a lot of bargaining power if the countries act together – which they increasingly do. During the Ukraine war, Moscow’s BRICS partners have ensured Russia’s economic and diplomatic survival in the face of Western attempts to isolate Moscow. Brazil, India, China and South Africa engaged with Russia in 166 BRICS events in 2022. And some members became crucial export markets for Russia.

The group’s political development – through which it has continually added new areas of cooperation and extra “bodies” – is impressive, considering the vast differences among its members.

We designed a BRICS convergence index to measure how BRICS states converged around 47 specific policies between 2009 and 2021, ranging from economics and security to sustainable development. We found deepening convergence and cooperation across these issues and particularly around industrial development and finance.

But BRICS convergence does not necessarily lead to greater tension with the United States. Our data finds limited divergence between the joint policies of BRICS and that of the U.S. on a wide range of issues. Our research also counters the argument that BRICS is China-driven. Indeed, China has been unable to advance some key policy proposals. For example, since the 2011 BRICS summit, China has sought to establish a BRICS free trade agreement but could not get support from other states. And despite various trade coordination mechanisms in BRICS, the overall trade among BRICS remains low – only 6% of the countries’ combined trade.

However, tensions between the United States and BRICS exist, especially when BRICS turns “bloc-like” and when U.S. global interests are at stake. The turning point for this was 2015, when BRICS achieved major institutional growth under Russia’s presidency. This coincided with Moscow enhancing its pivot to China and BRICS following Western sanctions over Russia’s annexation of Crimea in 2014. Russia was eager to develop alternatives to Western-led institutional and market mechanisms it could no longer benefit from.

That said, important champions of BRICS convergence are also close strategic partners to the U.S. For example, India has played a major role in strengthening the security dimension of BRICS cooperation, championing a counter-terrorism agenda that has drawn U.S. opposition due to its vague definition of terrorist actors.

Further constraints on U.S. power may emerge from BRICS transitioning to using local currencies over the dollar and encouraging BRICS candidate countries to do the same. Meanwhile, China and Russia’s efforts to engage BRICS on outer space governance is another trend for policymakers in Washington to watch.

Toward a US BRICS Policy?

So where does a more robust – and potentially larger – BRICS leave the U.S.?

To date, U.S. policy has largely ignored BRICS as an entity. The U.S. foreign and defense policymaking apparatus is regionally oriented. In the past 20 years, it has pivoted from the Middle East to Asia and most recently to the Indo-Pacific region.

When it comes to the BRICS nations, Washington has focused on developing bilateral relations with Brazil, India and South Africa, while managing tensions with China and isolating Russia. The challenge for the Biden administration is understanding how, as a group, BRICS’ operations and institutions affect U.S. global interests.

Meanwhile, BRICS expansion raises new questions. When asked about U.S. partners such as Algeria and Egypt wanting to join BRICS, the Biden administration explained that it does not ask partners to choose between the United States and other countries.

But the international demand for joining BRICS calls for a deeper reflection on how Washington pursues foreign policy.

Designing a BRICS-focused foreign policy is an opportunity for the United States to innovate around addressing development needs. Rather than dividing countries into friendly democracies and others, a BRICS-focused policy can see the Biden administration lead on universal development issues and build development-focused, close relationships that encourage a better alignment between countries of the Global South and the United States.

It could also allow the Biden administration to deepen cooperation with India, Brazil, South Africa and some of the new BRICS candidates. Areas of focus could include issues where the BRICS countries have struggled to coordinate their policy, such as AI development and governance, energy security and global restrictions on chemical and biological weapons.

Developing a BRICS policy could help re-imagine U.S. foreign policy and ensure that the United States is well positioned in a multipolar world.

The Three Causes Crushing Crypto

Posted on by phoffman@channelchek.com

Bitcoin’s Throttleback Thursday Explained

Bitcoin and Ethereum had a bad day. After gaining a lot of upward momentum from late June after Blackrock, Fidelity, and Invesco filed to create bitcoin-related exchange traded funds (ETFs), the volatile assets have shown cryptocurrency investors that the bumpy ride is not yet over. What’s causing it this time? Fortunately, it is not fraud or wrongdoing creating the turbulence. Instead, three factors external to the business of trading, mining, or exchanging digital assets are at work.

 Background

On Thursday, August 17, and accelerating on August 18, the largest cryptocurrencies dropped precipitously. Bitcoin even broke down and fell below the psychologically important $26,000 US dollar price level before bouncing. While some are pointing to CME options expiration on the third Friday of each month, most are pointing to a Wall Street Journal article, and blaming Elon Musk, as the reason the asset class was nudged off a small cliff. There are other less highlighted, but important, catalysts that added to the flash-crash; these, along with the WSJ story, will be explained below.

Smells like Musk

What could SpaceX, the company owned and run by Elon Musk, possibly have to do with a crypto selloff? On Thursday, the crypto market had a downward spike around 5 PM ET. It was just after the Wall Street Journal revealed a change in the accounting valuation of SpaceX’s crypto assets. Reportedly, SpaceX marked down the value of its bitcoin assets by a substantial $373 million over the past two years. Additionally, the company has executed on crypto asset divestitures as well. When the reduction took place is uncertain, but cryptocurrency holdings have been reduced both in terms of the amount of coins and the value each coin is held for on the books.

Elon Musk’s reputation is that of a forward thinker, and one that embraces, if not leads, technology. He has significant influence over cryptocurrency valuations, often instigating pronounced market fluctuations brought about by Musk’s influential posts on his social media company, X. The reduction coincides with a similar crypto reduction on the books of publicly held, Musk-led, Tesla (TSLA). The electric car manufacturer had previously disclosed in its annual earnings report that it had liquidated 75% of its bitcoin reserves.

While it should not be surprising that two companies stepped away from speculation on something unrelated to their business or lowered support for the still young blockchain technology, it gave a reason for a reaction to this and other festering dynamics.

Wary of Gary

The Chairman of the Securities and Exchange Commission (SEC), Gary Gensler, is viewed as a “Whack-a Mole” to crypto stakeholders that prefer more autonomy than regulation. Every time the SEC gets knocked down as a potential regulator, it resurfaces, and crypto businesses have to deal with the agency again.  

Last month, Judge Analisa Torres made a pivotal decision in a case involving payment company Ripple Labs and the Commission. Her verdict declared that a substantial portion of sales of the token XRP did not fall under the category of securities transactions. The SEC claimed it was a security. This judgement was hailed as a triumph for the crypto sector and catalyzed an impressive 20% uptick in the exchange Coinbase’s stock in a single day.

On the same Thursday as the WSJ article, the SEC showed its face again with a strong response to the earlier ruling. Judge Torres allowed the SEC’s request for an “interlocutory” appeal on her ruling. This process will involve the SEC presenting its motion, followed by Ripple’s counterarguments. This is slated to continue until mid-September. Afterward, the Judge will determine whether the agency can effectively challenge her token classification ruling in an appellate court.

The still young asset class, its exchange methods, valuation, and usage techniques, once they are more clearly defined, will serve to add stability and reduce risk and shocks in crypto and the surrounding businesses. The longer the legal system and regulatory entities take, including Congress, the longer it will take for cryptocurrencies to find the more settled mainstream place in the markets they desire.

Rate Spate

The eighteen-month-long spate of rate hikes in the U.S. and across the globe is providing an alternative investment choice instead of what are viewed as riskier assets. Coincidentally, again on Thursday, August 17, the ten-year US Treasury Note hit a yield higher than the markets have experienced in 12 years. At 4.31%, investors can lock in a known annual return for ten years that exceeds the current and projected inflation rate.

Take Away

The volatility in the crypto asset class has been dramatic – not for the weak-stomached investor. On the same day in August, three unrelated events together helped cause the asset class to spike down. These include an article in a top business news publication indicating that one of the world’s most recognized cryptocurrency advocates has reduced bitcoin’s exposure to his companies. The SEC being granted a rematch in a landmark case that it had recently lost, where the earlier outcome gave no provision for the SEC to treat cryptocurrencies like a security. And rounding out the triad of events on crypto’s throttleback Thursday, yields are up across the curve to levels not seen in a dozen years. Investor’s seeking a place to reduce risk can now provide themselves with interest payments in excess of inflation.

But despite the ups and downs, bitcoin is up 56.7% year-to-date, 11.1% over the past 12 months, 110.5% over three years, 300% over five years, and astronomical amounts over longer periods. Related companies like bitcoin miners, crypto exchanges, and blockchain companies have also experienced growth similar to that found in few other industries over the past decade.   

Paul Hoffman

Managing Editor, Channelchek

Sources

https://finance.yahoo.com/video/bitcoin-sinks-below-28k-crypto-202201698.html

https://www.barrons.com/articles/sec-crypto-regulation-ripple-coinbase-d8143058?mod=hp_DAY_5

https://www.forbes.com/sites/siladityaray/2023/08/18/bitcoin-drops-to-lowest-level-since-june-amid-wider-crypto-sell-off/?sh=28df65ce55ff

https://app.koyfin.com/share/1d479a881a

The Other BlackRock, Citadel, Bitcoin Story

Unhyped Information to Improve Investment Success

The Ripple XRP Case Creates Many Questions

The FOMC Minutes Suggest They are Not Done Yet

Posted on by phoffman@channelchek.com
U.S. Federal Reserve Board of Governors

The Majority of Fed Policymakers are Still Concerned About Inflation

The minutes of the July 25-26 FOMC meeting were released and showed ongoing concerns about U.S. inflation are still front and center on the minds of most policymakers. During the July meeting, Federal Reserve officials were still focused on rising prices expressing that more rate hikes could be necessary unless conditions change. The July meeting had resulted in a quarter percentage point rate hike; the minutes are being looked at by market participants to get a sense of the Fed’s next steps.

While the Fed says it is data dependent, so a surprisingly weak economic report or lower-than-expected inflation statistics could change the Fed’s hawkish stance at the next meeting, if economic conditions remain unchanged or get stronger, the Fed is likely to keep applying the economic brakes by raising rates.

“With inflation still well above the Committee’s longer-run goal and the labor market remaining tight, most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy,” the meeting summary stated.

The increase in the Fed Funds rate after the last meeting brought the key interest rate to its highest level in 22 years, 5.25%-5%.

The Fed has held for more than 18 months that they are targeting a 2% inflation rate. During that time, key inflation indicators have been as high as 9%. Depending on the measure used, inflation at the last read was between 3% and 4%.

“In discussing the policy outlook, participants continued to judge that it was critical that the stance of monetary policy be sufficiently restrictive to return inflation to the Committee’s 2% objective over time,” according to the Fed’s recent release.

The Fed always risks overdoing it during a tightening policy period. So, while members agreed inflation is “unacceptably high,” there were indications “that a number of tentative signs that inflation pressures could be abating.”

As written in the release, “Almost all” the meeting participants, which includes nonvoting members, were in favor of the July rate increase. However, a couple of members opposed and suggested the Committee could skip a hike to monitor how previous hikes play out in inflation indicators. Navigating economic activity and price levels is not a precise science, and there is a lag between actions and impact.

“Participants generally noted a high degree of uncertainty regarding the cumulative effects on the economy of past monetary policy tightening,” the minutes said.

The minutes did indicate that the economy was expected to slow and unemployment likely will rise somewhat. Of note is a retraction in an earlier forecast that troubles in the banking industry could lead to a mild recession this year. A number of smaller banks found themselves challenged and even requiring government assistance in March.

The minutes indicated that the policymakers are also watching the health of the commercial real estate (CRE) market as they raise rates. Specifically cited were “risks associated with a potential sharp decline in CRE valuations that could adversely affect some banks and other financial institutions, such as insurance companies, that are heavily exposed to CRE. Several participants noted the susceptibility of some nonbank financial institutions” such as money market funds and the like.

Looking Forward

Federal Open Market Committee members emphasized the two-sided risks of easing too quickly and risking higher inflation against tightening too much and sending the economy into contraction. The most current data shows that while inflation is still 50% or more from the central bank’s 2% target, it has made marked progress since peaking above 9% in June 2022. Examples are the Consumer Price Index (CPI), ran at a 3.2% annual rate through July. The Personal Consumption Expenditures (PCE) price index core was at 4.6%.  

In their consideration of appropriate monetary policy actions at this meeting, participants concurred that economic activity had been expanding at a moderate pace. The labor market remained very tight, with robust job gains in recent months and the unemployment rate still low, but there were continuing signs that supply and demand in the labor market were coming into better balance. Participants also noted that tighter credit conditions facing households and businesses were a source of headwinds for the economy and would likely weigh on economic activity, hiring, and inflation. However, the extent of these effects remained uncertain. Although inflation had moderated since the middle of last year, it remained well above the Committee’s longer-run goal of 2%, and participants remained resolute in their commitment to bring inflation down to the Committee’s 2% objective.

Take Away

While the Fed will react to incoming data when they decide at the September 19-20 FOMC meeting, the minutes from the July meeting suggest that if there is little change in economic activity, the majority of members are apt to vote to hike rates once more.

Paul Hoffman

Managing Editor, Channelchek

Source

https://www.federalreserve.gov/monetarypolicy/fomcminutes20230726.htm

New GDP Forecast Indicates Much Higher Growth With an Inflation Uptick

Posted on by phoffman@channelchek.com

GDPNow from the Atlanta Federal Reserve Has a Surprising Forecast

If good news is bad, The Atlanta Federal Reserve’s GDPNow report is horrible – that’s how good it is. GDPNow is a model for estimating Gross Domestic Product (GDP). Created and published by the Federal Reserve Bank of Atlanta, it has been fairly accurate in recent years. An estimate of third-quarter US GDP released on August 15th forecasts that growth is increasing dramatically – inflation is also shown to inch up in the forecast.  

The Indicator

GDPNow uses recently published economic data to update a model to estimate GDP, a statistic that is reported with a significant lag to the input data.The output, or forecast, is an aggregation of other current economic indicators within the quarter. The data is entered into the mathematical model to calculate a GDP estimate at that specific point in time. There are still 45 days left in the third quarter, but up until now, this is what it calculated the growth to have been. As time passes and more reports are issued, more economic indicators are fed into the model. These reports come from the US Bureau of Labor Statistics, the US Census Bureau, the Institute for Supply Management, and the US Department of the Treasury. The accumulated data contributes to the historical accuracy of GDPNow’s calculations in relation to the GDP reports that the US Bureau of Economic Analysis (BEA) releases.

The Current Forecast

The GDPNow model’s latest estimates show the real GDP growth (seasonally adjusted annual rate) in the third quarter of 2023 is 5.0 percent on August 15, up from 4.1 percent where the estimate stood on August 8. Included in the model are recent releases from the US Census Bureau, the US Bureau of Labor Statistics, and the US Department of the Treasury’s Bureau of the Fiscal Service.

The model also provides other forecasts, from statistics, that will present themselves during the quarter and be finalized after the quarter ends. This includes third-quarter real Personal Consumption Expenditures (PCE). Remember that PCE is the Federal Reserve’s favored inflation gauge. The PCE inflation forecast, by this model, has been near accurate. It’s latest forecast is for it to rise to 4.4% annualized.

Take Away

There are a lot of mixed signals in the market recently, savings is down, consumer borrowing is up, interest rates out on the yield curve have finally moved up, and there are some fund managers that are extremely bearish, while bullishness is on the rise on the prospect of a soft or undetectable economic landing in the US.

The GDPNow snapshot of where a mathematical model shows where we may be now has no human intervention. It is created by a model without the kinds of bias that could cause a human to overweigh one factor over another. The most recent report shows tremendous growth and an uptick in inflation. In today’s financial marketplace, where the markets still sell-off on good economic news and rally on bad, it’s uncertain what this means for the markets. But it is important for investors to understand that others view this and weigh it in their own expectations.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.atlantafed.org/-/media/documents/cqer/researchcq/gdpnow/RealGDPTrackingSlides.pdf

https://www.imf.org/en/Capacity-Development/Training/ICDTC/Schedule/ST/2022/NWCST22-31#:~:text=Nowcasting%20refers%20to%20the%20practice,lag%2C%20such%20as%20real%20GDP.

https://www.atlantafed.org/economy-matters/economic-research/2022/07/14/pulling-back-the-curtain-on-gdpnow

The Week Ahead –  SEC 13-F Filings, FOMC Minutes, Housing Numbers

Posted on by phoffman@channelchek.com

The Trading Week Ahead Could See Investors Continuing to Adjust to the Flattening Yield Curve

Bill Ackman says he’s short the U.S. Treasury long bond. Michael Burry, who tends to see things before others, had been short a derivative of Treasuries two summers ago, was he involved in interest rates this most recent quarter-end? We will get a glimpse into what these two, plus Warren Buffett and a host of others, as time runs out on their 13-F filing as of the close of business on Monday.

Last week many investors went from betting on a soft-landing a few weeks ago to now thinking interest rates along the curve are too low. The impetus for the shift was the CPI and PPI reports last week had provided nothing for the Fed to stop or slow down tightening. This concerns stock market investors. Higher rates, at a minimum, are beginning to provide an attractive alternative to a stock market that has already run up above average. This is because investors can now be choosier as their cash is far more productive, even after inflation, than it has been in years. Individual companies that have great prospects, rather index ETFs where you hold the good with the bad, would seem more prudent in the current scenario.

Monday 8/14

•             13-F Day is the SEC deadline for funds that manage more than $100 million in assets, that they must divulge positions held as of the end of the previous quarter. For example, Michael Burry’s Scion Asset Management hedge fund, Warren Buffett’s Berkshire Capital Holdings, and all U.S. asset managers of size have 45 days from quarter-end to file. A very large percentage choose to file on the 45th day, August 14th is 45 days from June 30th. Investors pour through the 13_f filings of top investors looking for insights.

Tuesday 8/15

•             8:30 AM ET, The consensus for Retail Sales for July is up 0.4% after an unexpectedly poor showing in June of a gain of 0.2%. Retail sales measure the total receipts at stores that sell merchandise and related services to final consumers. Sales are by retail and food services stores.

•             8:30 AM ET, Import and Export Prices are expected to show that import prices increased 0.2% in July after falling 0.2% in June. Export prices are expected to have increased 0.1% after dropping 0.9% in June. The underlying value of this report is the measure of global inflationary trends. Import price indexes are compiled for the prices of goods that are bought in the United States but produced abroad and export price indexes are compiled for the prices of goods sold abroad but produced within the U.S.

•             4:00 AM ET, Treasury International Capital is the tracking of who holds U.S. securities, or put another way, where in the world are U.S. Stocks, U.S. Treasuries, Agencies, and Corporate Bonds. TIC has recently been watched by a wider group as it is a measure of foreign demand for our assets. The prior number (May) showed net long-term transactions abroad of U.S. securities at $25.8 billion.

Wednesday 8/16

•             7:00 AM ET, The Mortgage Bankers Association (MBA) compiles data which indicates demand for mortgages. Data from the previous week indicate a drop in their Purchasing index of 2.7%, and a decline in its Refinance index of 4.0%.

•             8:30 AM ET, Housing Starts month over month for July are expected to have increased to 1.464 million from 1.44 million in June.

•             9:15 AM ET, Industrial Production had fallen 0.5 percent for two straight months; forecasters expect a rebound of 0.3 percent in July. After falling 0.3 and 0.2 percent, manufacturing output is seen as unchanged. Capacity utilization is expected to rise to 79.1 from 78.9 percent, still below what is considered inflationary.

•             10:30 PM ET,  The Energy Information Administration (EIA) provides weekly information on petroleum inventories in the U.S., whether produced here or abroad. The inventory level impacts prices for petroleum products.

•             2:00 PM ET,  FOMC minutes are from the meeting three weeks ago, where the Fed adjusted the overnight target upward. This report has recently been market-moving as it details the issues of debate and consensus among policymakers.

Thursday 8/17

•             8:30 AM ET, Initial Jobless Claims are expected to have fallen the week ended August 12th to 240,000 following a 21,000 jump to 248,000 last week, in the absence of inflation data, the market places adds emphasis on unexpected results in the labor market.

•             10:00 AM ET, E-Commerce Retail Sales for the second quarter are scheduled for release. During the first quarter, online retail transactions had increased by 3%.

•             4:30 AM ET, the weekly report on the Fed’s Balance Sheet is now awaited each week as it provides statistics on whether the Fed is fulfilling its quantitative tightening promise on schedule. It also  could provide an early tip-off if there is a problem within the banking system. The report from the week prior showed $8.208 trillion in assets, and bank reserve credit declining $18,685 billion.

Friday 8/18

•             10:00 AM ET, The Quarterly Services Survey is not usually a large focus, but it is the only economic number printing on what may very well be a lightly traded late summer Friday. The report includes industry information; professional, scientific, and technical services; administrative & support services; and waste management (NAICS 51, 54, and 56). Last quarter, these industries experienced 2.9% growth, or 9.7% year-on-year.

What Else

A press release dated Friday, August 11th, stated that Greg Steube, a Representative from Florida’s 17th district had filed “Articles of Impeachment Against Joseph Robinette Biden, Jr., President of the United States, For High Crimes and Misdemeanors.” What this could mean for markets, if the past is an indicator, is very little. There could be days where traders are largely distracted by news stories that may come from this, but the soundness of the U.S. or the global economy is not likely to be hanging in the balance on any outcome from the proceedings.

Paul Hoffman

Managing Editor, Channelchek

Sources

Steube.house.gov

https://www.econoday.com/articles/high-points-for-economic-data-scheduled-for-august-14-week/

https://thehill.com/homenews/house/4150478-florida-republican-rep-files-articles-of-impeachment-against-biden/

Steube.house.gov

The Week Ahead –  Oil Prices, Consumer Prices, and Consumer Sentiment

Posted on by phoffman@channelchek.com

This Trading Week Markets Will See if CPI Confirms Decelerating Inflation

After last week’s employment figures came in lower than expectations, this week the potential catalyst for a shift in monetary policy is inflation measures. July Consumer Price Index (CPI) is scheduled for release on Thursday. The June report allowed for optimism that inflation was not only moving in a favorable direction but that a sustainable downward trajectory was emerging. However, the upcoming July figures might not live up to the market celebration that followed the previous CPI report. This is because rising energy costs are likely to contribute to an increase in the year-over-year all-items CPI rate. If the core CPI annual rate does not exhibit substantial progress in its declining trend, this could set the stage for another interest rate hike as early as the September 19-20 Federal Open Market Committee (FOMC) meeting.

Monday 8/7

•             3:00 AM ET, Consumer credit is expected to increase $14.1 billion in June versus a smaller-than-expected increase of $7.3 billion in May.

Tuesday 8/8

•             6:00 AM ET, The Small Business Optimism Index has been well below the historical average of 98 for 18 months in a row. July’s consensus is 91.5 versus 91.0 in June.

•             8:30 AM ET, An International Trade in Goods and Services deficit of $65.4 billion is expected in June for total goods and services trade. This would compare with a $69.0 billion deficit in May. Advance data on the goods side of June’s report showed a $4.0 billion narrowing in the deficit.

•             10:00 AM ET, Wholesale Inventories preliminary number (second estimate) is expected down 0.3 percent, unchanged from the first estimate.

Wednesday 8/9

•             10:30 AM ET,  The Energy Information Administration (EIA) provides weekly information on petroleum inventories in the US, whether produced here or abroad. The inventory level impacts prices for petroleum products.

Thursday 8/10

•             8:30 AM ET, The Consumer Price Index (CPI) is expected to rise 0.2 percent, which would match June. Annual rates, which in June were 3.0 percent overall and 4.8 percent for the core, are expected at 3.3 and 4.8 percent, respectively. Core prices in July are expected to hold steady at a modest monthly increase of 0.2 percent which would match June’s showing.

•             8:30 AM ET, Jobless Claims for the August 5 week are expected to come in at 230,000 versus 227,000 in the prior week, which was 6,000 higher than expected.

•             4:30 AM ET, The Fed’s Balance Sheet is expected to have decreased by $36.580 to $8.207 trillion. Market participants and Fed watchers look to this weekly set of numbers to determine, among other things if the Fed is on track with its stated quantitative tightening (QT) plan.

Friday 8/11

•             8:30 AM ET, Producer Prices in July are expected to have risen 0.2 percent on the month versus a 0.1 percent increase in June. The annual rate in July is seen as rising 0.7 percent versus June’s gain. July’s ex-food and ex-energy rate is seen at 0.2 percent on the month and 2.3 percent on the year versus June’s 0.1 percent on the month and 2.4 percent yearly rate.

•             10:00 AM ET, Consumer Sentiment in August, which in July jumped more than 7 points to 71.6, is expected to edge back .3 to 71.3.

What Else

Crude Oil futures rose to around $83 per barrel, hovering at the highest levels in four months. The main reason is the Saudi Arabia and Russia’s announcement that they would extend voluntary supply cuts through next month to bolster oil prices. Saudi Arabia said on Thursday it would extend its 1 million barrels per day production cut for another month, while Russia said it will also reduce its oil exports by 300,000 bpd in September. Saudi Arabia also said its production cuts could be extended beyond September or deepened, catching markets off guard.

Most industries are impacted by energy prices, we whether it is all conasumer prices, or core, crude oil trading impacts consumer prices.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.federalreserve.gov/newsevents/calendar.htm

https://us.econoday.com/byweek.asp?cust=us

Candidate DeSantis’ Very Different Economic Vision

Posted on by phoffman@channelchek.com

DeSantis Thinks the Federal Reserve, Elitists, and China, Should all Have Less Power in Our Financial Lives

Federal Reserve Chairman Jerome Powell, appointed by President Trump, then reappointed by President Biden recently got a lot of attention from Florida governor and presidential hopeful Ron DeSantis – and it wasn’t the kind of attention someone in Powell’s position would welcome. This week, in his first big speech on the economy, DeSantis separated himself from the top candidates from each political party by vowing to “rein in” the Fed.

The platform DeSantis unveiled this week helps establish his position and puts a face on his campaign that is decidedly above the culture wars of other political campaigns. It also creates a clear difference in economic issues between himself and his party’s frontrunner, also from Florida, Donald Trump.

In a campaign speech in New Hampshire, DeSantis blamed the US central bank for high inflation, and its dipping a toe into social policy. He was also very critical of the Fed considering a digital dollar that would compete with private crypto, which the candidate does not oppose.

The overall tone as he began to lay out his economic agencda, was one of looking to curb the power of large corporations, limit ties to China, and stand against powerful elites. “We need to rein in the Federal Reserve. It is not designed or supposed to be an economic central planner. It is not supposed to be indulging in social justice or social engineering,” the governor said. He continued, “It’s got one job, maintaining stable prices, and it has departed from that with what it’s done over the past many years.”

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As statements that could be taken as a shot at the current Fed chairman, DeSantis said he would not likely support another term for Powell. “I will appoint a Chair of the Federal Reserve who understands the limited role that it has and focuses on making sure that prices are stable for American businesses and consumers, said DeSantis.

What seemed to be his biggest gripe with how the Federal Reserve has been run is with monetary policy. He believes that policy was kept too easy for too long after the financial crisis and pandemic. He believes this contributed to the high inflation, which forced a rapid tightening from policy makers.

The popular governor of the third most populace state, also railed against the Fed’s steps toward creating a central bank digital currency (CBDC), saying it was trying to crush financial liberty and seize more control over financial transactions.

“Why did they want this? They want to go to a cashless society. They want to eliminate cryptocurrency and they want all the transactions to go through this central bank digital currency,” DeSantis proclaimed.

The DeSantis economic vision, as described, was consistent with his reputation as Florida’s executive which is one that stands against the abuses of government power and big business. “We cannot have policy that kowtows to the largest corporations and Wall Street at the expense of small businesses and average Amerricans.” He continued, “There is a difference between a free-market economy, which we want, and corporatism in which the rules are jiggered to be able to help incumbent companies.”

He also expressed concern over loss of economic sovereignty sharply saying, “We have to restore the economic sovereignty of this country and take back control of our economy from China. This abusive relationship between two countries, must come to an end.”

Take Away

DeSantis is on the road, both showing he has an understanding of economics and unveiling a plan that is distinct from the top two candidates, both of which have already occupied the White House. DeSantis is being watched very closely by both political parties as he is a very popular governor with a lot of admiration and a large following. Florida remains a beneficiary of the large migration of businesses and families out of other states looking for a more innovative, fiscally responsible, less constricting place to live and do business.

Paul Hoffman

Managing Editor, Channelchek

Source

https://www.wmur.com/article/desantis-economic-plan-new-hampshire/44694804

https://www.ft.com/content/40cfecfb-e597-4bba-9ca6-a0fccb187184

What Will It Take for Cryptocurrencies to Become Full-Fledged Money?

Posted on by phoffman@channelchek.com

Can a Currency Without a Country Survive?

The crypto-unit bitcoin holds out the prospect of something revolutionary: money created in the free market, money the production and use of which the state has no access to. The transactions carried out with it are anonymous; outsiders do not know who paid and who received the payment. It would be money that cannot be multiplied at will, whose quantity is finite, that knows no national borders, and that can be used unhindered worldwide. This is possible because the bitcoin is based on a special form of electronic data processing and storage: blockchain technology (a “distributed ledger technology,” DLT), which can also be described as a decentralized account book.

Think through the consequences if such a “denationalized” form of money should actually prevail in practice. The state can no longer tax its citizens as before. It lacks information on the labor and capital incomes of citizens and enterprises and their total wealth. The only option left to the state is to tax the assets in the “real world”—such as houses, land, works of art, etc. But this is costly and expensive. It could try to levy a “poll tax”: a tax in which everyone pays the same absolute tax amount—regardless of the personal circumstances of the taxpayers, such as income, wealth, ability, to achieve and so on. But would that be practicable? Could it be enforced? This is doubtful.

The state could also no longer simply borrow money. In a cryptocurrency world, who would give credit to the state? The state would have to justify the expectation that it would use the borrowed money productively to service its debt. But as we know, the state is not in a position to do this or is in a much worse position than private companies. So even if the state could obtain credit, it would have to pay a comparatively high interest rate, severely restricting its scope for credit financing.

In view of the financial disempowerment of the state by a cryptocurrency, the question arises: Could the state as we know it today still exist at all, could it still mobilize enough supporters and gather them behind it? After all, the fantasies of redistribution and enrichment that today drive many people as voters into the arms of political parties and ideologies would disappear into thin air. The state would no longer function as a redistribution machine; it basically would have little or no money to finance political promises. Cryptocurrencies therefore have the potential to herald the end of the state as we know it today.

The transition from the national fiat currencies to a cryptocurrency created in the free market has, above all, consequences for the existing fiat monetary system and the production and employment structure it has created. Suppose a cryptocurrency (C) rises in the favor of money demanders. It is increasingly in demand and therefore appreciates against the established fiat currency (F). If the prices of goods, calculated in F, remain unchanged, the holder of C records an increase in his purchasing power: one obtains more F for C and can purchase more goods, provided that the prices of goods, calculated in F, remain unchanged.

Since C has now appreciated compared to F, the prices of the goods expressed in F must also rise sooner or later—otherwise the holder of C could arbitrate by exchanging C for F and then paying the prices of the goods labeled in F. And because more and more people want to use C as money, goods prices will soon be labeled not only in F, but also in C. When money users increasingly turn away from F because they see C as the better money, the purchasing power devaluation of F continues. Because F is an unbacked currency, in extreme cases it can lose its purchasing power and become a total loss.

The decline in the purchasing power of F will have far-reaching consequences for the production and employment structure of the economy. It leads to an increase in market interest rates for loans denominated in F. Investments that have so far seemed profitable turn out to be a flop. Companies cut jobs. Debtors whose loans become due have problems obtaining follow-up loans and become insolvent. The boom provided by the fiat currencies collapses and turns into a bust. If the central banks accompany this bust with an expansion of the money supply, the exchange rate of the fiat currencies against the cryptocurrency will fall even further. The purchasing power of the sight, time, and savings deposits and bonds denominated in fiat currencies would be lost; in the event of loan defaults, creditors could only hope to be (partially) compensated by the collateral values, if any.

However, the bitcoin has not yet developed to the point where it could be a perfect substitute for the fiat currencies. For example, the performance of the bitcoin network is not yet large enough. At present, it is operating at full capacity when it processes around 360,000 payments per day. In Germany alone, however, around 75 million transfers are made in one working day! Another problem with bitcoin transactions is finality. In modern fiat cash payment systems, there is a clearly identifiable point in time at which a payment is legally and de facto completed, and from that point on the money transferred can be used immediately. However, DLT consensus techniques (such as proof of work) only allow relative finality, and this is undoubtedly detrimental to the money user (because blocks added to the blockchain can subsequently become invalid by resolving forks).

The transaction costs are also of great importance regarding whether the bitcoin can assert itself as a universally used means of payment. In the recent past, there have been some major fluctuations in this area: In mid-June 2019, a transaction cost about $4.10, in December 2017 it peaked at more than $37, but in the meantime for many months it had been only $0.07. In addition, the time taken to process a transaction had also fluctuated considerably at times, which may be disadvantageous from the point of view of bitcoin users in view of the emergence of instant payment for fiat cash payments.

Another important aspect is the question of the “intermediary.” Bitcoin is designed to enable intermediary-free transactions between participants. But do the market participants really want intermediary–free money? What if there are problems? For example, if someone made a mistake and transferred one hundred bitcoins instead of one, he cannot reverse the transaction. And nobody can help him! The fact that many hold their bitcoins in trading venues and not in their private digital wallets suggests that even in a world of cryptocurrencies there is a demand for intermediaries offering services such as storage and security of private keys.

However, as soon as intermediaries come into play, the transaction chain is no longer limited to the digital world, but reaches the real world. At the interface between the digital and the real world, a trustworthy entity is required. Just think of credit transactions. They cannot be performed unseen (trustless) and anonymously. Payment defaults can happen here, and therefore the lender wants to know who the borrower is, what credit quality he has, what collateral he provides. And if the bridge is built from the digital to the real world, the crypto-money inevitably finds itself in the crosshairs of the state. However, this bridge will ultimately be necessary, because in modern economies with a division of labor, money must have the capacity for intermediation.

It is safe to assume that technology will continue to make progress, that it will remove many remaining obstacles. However, it can also be expected that the state will make every effort to discourage a free market for money, for example, by reducing the competitiveness of alternative money media such as precious metals and crypto-units vis-à-vis fiat money through tax measures (such as turnover and capital gains taxes). As long as this is the case, it will be difficult even for money that is better in all other respects to assert itself.

Therefore, technical superiority alone will probably not be sufficient to help free market money—whether in the form of gold, silver, or crypto-units—achieve a breakthrough. In addition, and above all, it will be necessary for people to demand their right to self-determination in the choice of money or to recognize the need to make use of it. Ludwig von Mises has cited the “sound-money principle” in this context: “[T]he sound-money principle has two aspects. It is affirmative in approving the market’s choice of a commonly used medium of exchange. It is negative in obstructing the government’s propensity to meddle with the currency system.” And he continues: “It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights.”

These words make it clear that in order for a free market for money to become at all possible, quite a substantial change must take place in people’s minds. We must turn away from democratic socialism, from all socialist-collectivist false doctrines, from their state-glorifying delusion, no longer listen to socialist appeals to envy and resentment. This can only be achieved through better insight, acceptance of better ideas and logical thinking. Admittedly, this is a difficult undertaking, but it is not hopeless. Especially since there is a logical alternative to democratic socialism: the private law society with a free market for money. What this means is outlined in the final chapter of this book.

About the Author:

Dr. Thorsten Polleit is Chief Economist of Degussa and Honorary Professor at the University of Bayreuth. He also acts as an investment advisor.

[This article is adapted from Chapter 21 of The Global Currency Plot.]

The Week Ahead – Earnings, Interest Rates, and US Dollar

Posted on by phoffman@channelchek.com

This Trading Week – Earnings Reports are Likely to Set the Tone

Just over half of the companies in the S&P 500 have now reported second-quarter earnings. Of these companies, 80% have surprised on the high side with actual EPS above the average estimate – 4% have reported earnings equal to the average expectations. The reporting sectors beating estimates by the most are Information Technology at 93%, and Communication Services, which beat average estimates 92% of the time. Of sectors that beat the least often, Utilities and Financials were at the bottom of the list at 67% and 70%, respectively, surpassing average estimates. These are also above 50%, supporting strong stock markets.

The weaker US dollar has helped companies with more international exposure as these have had improved year-over-year earnings above those companies with a higher percentage of domestic revenue.

The markets are likely to focus on the earnings reports this week as economic releases will be slow. Stocks may also take its cue from interest rates that have been rising for longer duration US Treasuries.

Monday 7/31

•             9:45 AM ET, The Chicago Purchasing Managers Report is expected to improve 2 points in July to a still very weak 43.5 versus 41.5 in June, which was the tenth straight month of sub-50 contraction. Readings above 50 indicate an expanding business sector.

•             10:30 AM ET, The Dallas Fed Manufacturing Survey is expected to post a 15th straight negative score, at a consensus minus 22.5 in July versus minus 23.2 in June. The Dallas Survey gives a detailed look at Texas’ manufacturing sector, how busy it is, and where it is headed. Since manufacturing is a major sector of the economy, this report can greatly influence the markets.

Tuesday 8/1

•             9:45 AM ET, the final Purchasing Managers Index (PMI) for manufacturing for July is expected to come in at 49.0, unchanged from the mid-month flash to indicate marginal contraction (above 50 indicates expansion).

•             10:00 AM ET, Construction Spending for June is expected to rise a further 0.6 percent following May’s 0.9 percent increase that benefited from a sharp jump in residential spending.

•             10:00 AM ET, JOLTS (Job Openings and Labor Turnover Survey) still strong but slowing is the consensus for June as it is expected to ease 9.650 million from 9.824 million.

Wednesday 8/2

•             10:00 AM ET, New Home Sales are expected to slow after a much higher-than-expected 763,000 annualized rate in May. Junes are expected to have slowed to 727,000.

•             10:30 AM ET,  The Energy Information Administration (EIA) provides weekly information on petroleum inventories in the US, whether produced here or abroad. The inventory level impacts prices for petroleum products.

Thursday 8/3

•             8:30 AM ET, Jobless Claims for the week ended July 30, 2023, are expected to come in at 225,000 versus 221,000 in the prior week. Claims have been moving lower in recent weeks. This is a classic case of where what might otherwise be considered worsening news (increased jobless claims) may be taken well by the market as tight labor markets are considered additive to inflation pressures.

•             8:30 AM ET, Productivity and Costs (nonfarm) is expected to rise at a 1.3 percent annualized rate in the second quarter versus 2.1 percent contraction in the first quarter. Unit labor costs, which rose 4.2 percent in the first quarter, are expected to rise to a 2.6 percent rate in the second quarter.

•             9:45 AM ET, PMI Services. Following Tuesday’s PMI Composite Final for manufacturing, which has been contracting, the Services Purchasing Managers Index is expected to indicate no change at 52.4 as the July final.

•             10:00 AM ET, Factory Orders are expected to rise 1.7 percent in June versus May’s 0.3 percent gain. Factory Orders is a leading indicator that economists and investors watch as it has been a fairly reliable indicator of future economic activity.

•             10:00 AM ET, The Institute for Supply Management (ISM) gauge is expected to have slowed to 53 from June’s 53.9 level. An ISM reading above 50 percent indicates that the services economy is generally expanding; below 50 percent indicates that it is generally declining.

•             4:30 AM ET, The Fed’s Balance Sheet is expected to have decreased by $31.208 billion to $8.243 trillion. Market participants and Fed watchers look to this weekly set of numbers to determine, among other things if the Fed is on track with its stated quantitative tightening (QT) plan.

Friday 8/4

•             8:30 AM ET, Employment Situation is expected to show that the unemployment rate unchanged at 3.6%, with a consensus for payrolls at 200,000 versus the 209,000 reported in June.

What Else

On Thursday quarterly results will be reported on Apple (AAPL) and Amazon (AMZN). The week will be the busiest one of the earnings season. About 30% of the S&P 500 will give their financial updates during the week, including Alphabet (GOOGL), Microsoft (MSFT), Meta (META), and Robinhood (HOOD). Several big pharma companies are getting ready to report, and it’s a big week for industrial companies and big oil as well.

We’re near the halfway point for Summer 2023. Have you signed up to receive Channelchek market-related news and analysis in your inbox?  Now is a good time to make sure you don’t miss anything!

Paul Hoffman

Managing Editor, Channelchek

Learn more about NobleCon19 here

Sources

https://tradingeconomics.com/calendar

https://us.econoday.com/byweek.asp?cust=us

https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_072823.pdf

Is Good Economic News Back to Being Good for the Stock Market?

Posted on by phoffman@channelchek.com

The Surprisingly High Economic Growth Numbers Aren’t Spooking Investors

Gross Domestic Product, or GDP, is one of the best measures of U.S. economic health. The second quarter GDP report as well as the first quarter upward revision, fully support the idea that the economy is growing above expectations and that the Fed’s rate hike in July was justified. This places equity investors in the position they have become very familiar with, wondering if they should be bullish on stocks as the economy rolls on, or should they be bearish as the Fed’s reaction could cause a period of negative growth (recession). Seeing how the Dow is on a winning streak of a dozen days in a row,  even as the Fed resumed tightening, it may be that the forward-looking stock market has turned the corner and is now taking good news as good news, and bad news as bad, once again.

Source: Bureau of Economic Analysis (BEA)

GDP was much stronger than expected – economists surveyed by FactSet were expecting a 1.5% gain. This was the first data release since the July FOMC meeting; it will however be followed on Friday by two other key indicators. The U.S. economy grew at a 2.4% annual rate in the second quarter (first estimate of GDP). This is significantly better than economists’ projections and makes abundantly clear that through last quarter, the economy was far from contracting or recessionary.

Contributors to the better-than-expected growth are increases in consumer spending, nonresidential fixed investment, state and local government spending, private inventory investment, and federal government spending, according to the BEA. Non-manufacturing contributors (services) included housing and utilities, health care, financial services and insurance, and transportation services. The contribution to goods spending was led by recreational goods and vehicles as well as gasoline and other energy goods.

Other Market-Moving Releases

The GDP report was the first piece of economic data following the Federal Reserve’s meeting on Tuesday and Wednesday; this concluded with a quarter-point increase in the central bank’s target for the fed-funds rate. That now leaves the Fed’s benchmark rate at a range of 5.25% to 5.5%.

Jobs and the tight employment market, where there are currently more jobs available than workers looking for employment, should still be a big focus of monetary policymakers. On Friday July 28, the employment cost index (ECI) is expected to show that the hourly labor cost to employers in the second quarter grew at a 4.8% annual rate, and by 1.1% quarter to quarter, according to the consensus estimate by FactSet. That’s little changed from the first quarter, when compensation costs for civilian workers increased by 4.8% annually and at a 1.2% rate quarter over quarter, according to the Bureau of Labor Statistics. Labor tightness and wage inflation are both concerning for the Fed and provide evidence that a more restrictive policy is needed.

Investors should look for ECI to provide some insight into how sticky service inflation is right now. This is of high importance because, within the service sector, wages tend to be the highest input cost. If the number comes in higher than expected, that could be a worrisome sign of continued stubborn inflation, which then indicates the need for additional rate hikes.

At the same time the ECI report is released on Friday, the PCE data is released. While the market’s tendency over the months has been to hyperfocus on the “Fed’s favorite inflation measure,” PCE may take a back seat in terms of significance to ECI data.

Take Away

Inflation rates coming down while the economy grows is, if inflation declines enough, a soft economic landing. The stock market, which had been reacting negatively to strong economic news, is beginning to show signs that it expects a soft landing – while this lasts, the markets could continue their winning streak.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.barrons.com/articles/the-most-interesting-economic-news-this-week-wont-come-from-the-fed-8416e9a3?mod=hp_LEAD_1_B_1

https://www.barrons.com/articles/us-gdp-growth-report-data-8468fd3b?mod=hp_LEAD_1

https://www.fxstreet.com/analysis/pce-inflation-preview-price-pressures-set-to-fade-in-fed-favorite-figures-us-dollar-to-follow-suit-202307270646