Submitted by Taps Coogan on the 24th of March 2020 to The Sounding Line.
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Luke Gromen, founder and president of Forest for the Trees, recently spoke with MACRO Voices’ Erik Townstead about the massive expansion of Federal Reserve bailout mechanisms yesterday and what it means for markets and the economy. Mr. Gromen warns that as long as financial markets remain open yet the economy remains closed, everyone who is short on US dollars, which is just about everyone, will keep selling their financial holdings to get access to dollar liquidity. The only way to stop that doom loop is the massive Fed monetization of debt, far in excess of what they are already doing.
Some excerpts from Luke Gromen:
“In a system as highly levered as ours is, with a fractionally reserved banking system, and an infinitely levered Euro-Dollar system, you cannot have closed borders, closed stores, and open financial markets… Everyone in the world, and everyone in the US, is massively short (on) dollars and so they will use those open financial markets as their only available source of cash. And so, the financial markets will just become a one-way doom-loop trade of selling triggering margin calls, which forces more selling, wash-rinse-repeat, until we hit cash outstanding in the US economy, which is basically zero for financial markets until the Fed prints enough money… From here we are going to see small and medium sized business owners, citizens, emptying out their 401ks for the working capital for their business, to finance inventory or overhead, or just for cash to live. This is also true globally, perhaps at an even greater scale…”
“The US’s net international investment position is negative 55% of GDP, about $12 trillion. It is by far the most negative it has ever been going into a US recession. It’s not even close in terms of how negative it is now versus prior recessions. What this means in plain English is that foreigners own $12 trillion more of dollar assets then we own of their assets and this is just the natural outcome of the US running, for example, $300-$400 billion per year deficits against China for nearly 20 years. China ends up with $6 to $8 trillion in dollar denominated assets that they bought with the dollars that we sent them. Same thing with the Japanese, same thing with the Germans, and a few other creditor nations… When these nations, suffering from these very real dollar shortages, start to get squeezed, guess what they do to raise dollar cash. They start selling their $12 trillion of dollar denominated assets and they don’t stop until either the Fed prints enough or stocks go to cash or near zero, or the system collapses…”
“The longer the crisis goes on with financial markets open, the closer the Fed’s balance sheet will have to move to fully reserving all of the dollar denominated debt and all of the dollar denominated debt in the US alone is $47 trillion. All of the dollar denominated debt globally is, best I can tell, $100-$150 trillion. It’s a big number… The longer this goes on, the closer the Fed’s balance sheet will have to go to $47 trillion or $100 trillion to basically buy in all the debt. It’s not right away, but the longer this goes, that’s exactly what will have to happen… We got this announcement this week that the Fed will print $125 billion per day to buy treasuries and MBS. Look, that’s a $44 trillion annual run rate. If you look at the last four weeks, they’re buying stuff in at close to 100% of GDP (annualized)…”
“This crisis started with equity markets at 160% of GDP. We’ve sited IRS dated which notes that net capital gains plus IRA distributions were around 200% of annual personal consumption expenditure growth and personal consumption expenditure is two-thirds of GDP. What this means in plain English is that, mathematically, consumer spending can’t grow unless stocks are rising and consistently hitting new highs. So, the stock market effectively is the economy. If the Fed lets the stock market fall towards cash, the economy will fall towards cash, and the economy backs the treasury and by extension the US dollar. So the punchline is that there is essentially no US economy… without the stock market consistently setting new highs…”
“We are in the first global sovereign debt bubble in near 100 years and there are only two ways out… Every time that sovereign debt-to-GDP got to where it is in advanced markets today, and emerging markets in the 1980s and 1990s, it always plays out the same way. There is a sovereign debt crisis and one of two things happen: you either default or restructure, or you inflate it away… If stocks go towards cash, global sovereigns will likely begin being forced to basically nominally default on their sovereign debt, including the US on their treasuries… To us this means that central banks are likely going to be extraordinarily aggressive. We’ve long thought that they would eventually buy everything in sight and this morning (Monday), we’re seeing the early signs of that…”
There is much more to the interview, so I strongly encourage that you enjoy it above.
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