road QTR’s Fringe Finance
Last night I had the pleasure of speaking with Wall Street’s Jason Burack for Main Street to offer my updated thoughts on the Federal Reserve, the economy and the state of the world in general.
The first thing we talked about was current Fed policy, which I told Jason I thought was a case of too late. I argued that the Fed, as it always does, is overstepping its mark and doing so at the wrong time.
This, as I’ve written several times, is why I think the market will have a serious crash at some point in the next few months. I reiterated to him my stance that the economy and the stock market have not yet really digested 3% interest rates and when they do, there will be hell to pay.
“They’re so nervous about inflation that they’ve said, ‘Fuck it, let’s go to 4%.’ to say.
“I think we’re going to have a serious moment of real panic, probably an order of magnitude greater than what they just had in England.” I said “They’re going to try to push this thing and get us 4% by the end of the year. The consequences are going to be devastating. It’s going to be a wild ride.”
I also spoke with Jason about why I think equity markets are easily down 30% to 40% from here, assuming the Fed stays the course. If the Fed decides to pivot, that would be a different story, but for now, with the Fed staying the course, I think it’s inevitable that our markets will hit a brick wall, relatively soon.
I laid out my most recent game theory on the Fed’s current options, including whether or not it will pivot, and how it will react to the Bank of England’s resumption of quantitative easing, in my article I wrote this Wednesday Week: Did The Global Return To QE Just Begin?
One of the things we talked about is that I i don’t have it written is the problem US pension funds could face.
The Bank of England’s intervention this week was the result of pension funds potentially having a “Lehman moment”. Reports indicated that overseas pension plans were selling bonds in a rush to try to meet margin calls, a scenario that I true we are not far from here in the USA:
Pension advisers said pension plans were selling gilts to meet emergency collateral calls or reduce exposure.
“There are schemes running out of cash at the moment,” said one pensions consultant before the BoE’s intervention.
From the FT, here’s what spooked the BoE directly:
“At some point this morning I was worried it was the beginning of the end,” said a senior London-based banker, adding that at one point on Wednesday morning there were no buyers of UK gold from long date “It wasn’t a Lehman moment. But it came close.”
I told Jason yesterday that I don’t think the US is far away. All I’ve been reading over the last five years is how the pension funds here (1) can’t hit their targets despite the market tearing up and (2) were leveraging, managed by their CIOs, obviously unqualified, to try to deploy the global world. the worst carry trade and the play to catch up/generate more return.
“I think what they did in Chicago was once they didn’t meet their targets — first of all, several funds have surrendered their CIOs — then they issued a bond or something ridiculous to try to do this carry trade on they’ll go. pay 50bp on the bond and try to generate an extra 100bp of return. Kind of like that, basically borrowing money to try to invest it,” I told Jason. “You have nonsense like this throughout [pension fund] system.”
“If we can’t meet our obligations to the pension funds when the market is going up, what are we going to do now? I assure you that right now there are pension funds that are already in big, big, big trouble and we haven’t seen the news yet.” i continued “We don’t know to what extent yet.”
The fact that these funds have not been able to post the returns they needed to during the most euphoric bull market in history is very concerning. When conditions worsen for poor managers like these, as they do now, the capital destruction could be devastating.
From there, we continued to talk about how government policy has allowed for terrible monetary policy and how it could play a role in the upcoming election.
We also discussed the state of Covid lockdowns, the Canadian government finally waiving its much-coveted travel restrictions and the state of politics globally.
“I think we will see similar conservative populist movements around the world [like the one we just saw in Italy],” I told Jason.
I made the argument to Jason that the politician powder (not the polls) had been reversed: in essence, the party that used to be liberal has now become fascist, and the party that used to be conservative has now become liberal.
I spoke with him about how the disintegration of America’s cities, combined with the economic destruction and authoritarian blockades proposed by the current administration, will be difficult for voters to ignore during the upcoming midterm elections. I also explained to him that I was not surprised by the results of Italy’s last election and predicted that many other countries around the world would soon begin to follow suit.
My full interview with Jason lasted just over an hour and you can listen to it here: