The Fed's No Win Situation

something called the

kuay Kaya Kay come it's the

Star Fleet

mythical name of a star sheet star Fleet

vessel which is um fundamentally

compromised and Captain Kirk is faced

with a dilemma it's a no win scenario

there are no Solutions and the punch

lines the FED is now in the exact same

position that's what I believe so people

might think I'm all over the place that

may be true um interest rates are they

too high or too low for the US what I

think we can say is that they're too

high for the rest of the world yeah

right um and that's a fundamental shift

and we all know we call it sometimes the

dollar standard um but really it's using

the collateral us treasuries uh to

create um dollars in the offshore in the

offshore market and presently indeed for

forever you've been able to borrow in

yen

um and put it into US assets so low

interest rate high interest rate so you

borrow it nothing and you invested five

5 and a half% in US cash and the recent

investor expectation is you're getting

20% per anom gains from the stock market

FX Risk

now the complication previously was that

the Japanese currency was rising and so

you had sure you had a a free carry but

you had to repay yeah the FX risk the FX

FX risk which has been stood on its head

Japanese yen is devoured by an

astonishing 40% in the last 18 months

coinciding with the demise of the

Chinese property sector okay and so now

you can borrow at zero invest at 5 and a

half with no risk and repay your Yen

liability for less and less and what

that's creating is a Cascade of risk

Capital coming in and inflating and

taking us risk asset prices higher and

higher why wouldn't you why would you so

but higher and higher asset prices bring

a fragility because trees don't grow to

the sky and if you start from

overvaluation when you get the

inevitable mean reversion it could

compromise the entire Global Financial

monetary system yeah yeah okay so there

there no win scenarios what does the FED

do okay and what I was trying to write

today is well the FED could cut could

have a synchronized rate cut with other

global central banks and say We're In It

Together mhm uh and you would be

subjugating the demands of the US

economy um and I I'm I'm the

first uh to admit hands up the George I

got it wrong um the fiscal policy is of

such a magnitude um and it's baked in

you haven't even spent I don't think

half of what's committed and the TGA

right now is at 700 billion yeah but

No Win Scenario

growth is baked in until 2027

okay and for the FED to cut rat it would

have to subjugate they would have to say

yeah we know our economy is strong and

it's not warranted but we need it for

Japan we need it for China my god do we

need it for Europe that's a no- win

scenario because that's what Benjamin

strong did the New York fed chairman did

in 1927 who CED the whiskey he cut rats

to help the British stering and what

happened the stock market you know grew

like a like you know uh ivy on a wall

yeah so then he becomes Arthur Burns so

you got to look at so pal if he does

that could be considered Arthur Burns he

drops rates to save the world but people

think that he should be focusing on the

domestic inflation rate so if he does

that and inflation does take off again

as a result of that then he goes down in

history as Arthur Burns which is the

opposite obviously of what he wants from

a standpoint of his legacy but don't

Fed History

forget Greenspan so the FED has form it

it did this in 1998 199 1998 we had the

Asian tiger crisis the crisis of

sovereign Nations like Thailand in Asia

um and and something breaks when when

Sovereign currencies start to have huge

volatility something breaks back then it

was ltcm and did the FED drop fed

dropped US economy in third quarter 1998

was booming the FED current interest

rates and we all know what happened

that's that I wonder what what was the

CPI back you remember CPI was I don't

know it it it would Pro it could have

been around these levels 1989 that's

what I was thinking but it was asset

price it was the asset price in play so

that feels like a knowing if the FED

Cuts in unison with other central banks

you get a NASDAQ

1989 prices will be 40 50% higher in the

year okay so that doesn't feel good um

the the the alternative is is do

nothing um but the world crumbles and

takes the us down with

there you go it's a no win scenario yeah

that's the K kiai that's Captain Kirk

pain himself we're going to lose the

Star sheet the Starfleet Enterprise V

but George you you look today at the the

GDP statistics you got something to say

there well it's a head scratcher it

Stagflation

really is because you see real GDP going

down I forgot what the expectations were

but it came in 1.6 or something like

that uh but the real uh part of the

report that has the market shocked is

the fact that the the core pce that I

believe they uh outlin the quarterly PC

that they outlined in the report in that

GDP report went up just some crazy

amount and it really caught the market

offside so now it's all stag flation

stag flation Stag flation and the real

head scratcher for me is having stag

flation when the the metrics the money

metrics called M1 M2 but it's

specifically what I look at in M1 are

checking deposits time deposit or excuse

me uh demand deposits so I think that's

the currency units that are out there

chasing goods and services I don't see

how that can be crashing well at the

same time we have let's just say another

wave of inflation I'm not saying we

don't I'm just trying to connect the

dots right now because people always

refer back to the 1970s and that's fine

I get it from the standpoint of the

inflation going in waves and whatnot but

that money supply was was going up in a

straight line due to the banks extending

credit back in the 1970s and now Bank

credit's flat if not declining while M1

is really really going down and M2 is

gone down the first time since the Great

Depression so I don't know how you get I

just don't know how to reconcile that

Sovereign dollar creation

okay so my attempt at the reconciliation

would be that you're measuring The

Sovereign dollar creation so we create

dollars the money supply in America with

the extansion of new loans by the

private banking sector that's what M1 M2

most of it yeah and and and they're

they're measuring Bank deposits but Bank

deposits are a liability and Banks

therefore when they have Bank when they

have liabilities they seek to create

assets and that's loans and that's the

money creation but of course what that

narrative forgets is that there's even

more money being created offshore by

Financial entities going to their

counterparties and pledging their us

treasuries and then dollars are created

so but those are outside the domestic

economy so I'm trying to figure out

within the United States domestic

economy you got x amount of dollars and

Y amount of goods right and then you've

got outside of the United States you got

a whole another world of dollars so we

we have this huge mushrooming of

speculative Capital offshore and then

with the yield differential it gets

drawn to us asset prices and so the euro

dollar creation claims asset price

inflation then back to your conundrum

the lack of loan expansion

money supply if those dollar if those

dollars were coming into the United

States to buy us assets I would assume

that they would show up in a US Bank but

but they're not um well because there's

a buyer and as a seller you know and so

it it Nets out as neutral but it it

footprint is felt in higher asset prices

Asset inflation

so I think I I don't think you will see

1970s price inflation for the factors

that you you're seeing you're feeling

but the principal danger is asset

inflation because the mark as the market

claims higher and higher um you know the

the profound draw down in NZ beginning

in March 2000 it created what was one of

the deepest recessions in the US um so

when you get an inevitable mean

reversion in asset prices you're going

to have a big recession I would not

choose to be J P today yeah yeah yeah

another thing I didn't talk about there

that

could kind of better connect the dots

would be velocity because you know

theoretically if you do have the money

supply going down you have CPI going up

if velocity is going up to a greater

degree and you see a decline in money

supply then that could explain some of

the the uh I don't know what you want to

call it the the ramp up in inflation I

just don't know how it's going to be

sustained I guess that's the take away

so the no win scenarios for the fats um

what are the scenarios for us um

presently and indeed with those

scenarios the central tendency is this

nons Sovereign dollar

creation to continue to whip higher and

higher us risk asset prices so the

central tendency is you have to be

invested it's a question of how much you

invest yeah but I and so I my allocation

would be small and small and I've spoken

before so here I am I'm in St bars um my

princip asset is a beautiful house here

it's a commercial property which I rent

out let's say it has a hypothetical

Risk portfolio

value of $10 million and let's say I

have $5 million of debt hypothetically

so my net worth is 5 million what I

would always Advocate is as a risk

portfolio you know buying stocks and

shares what's my maximum allocation and

it would be 10% of the five so my

allocation would be 500,000 right yeah

and then within that I I've been

advocating like a 100,000 in tech stocks

between 100 and 200,000 in Bitcoin and

recently with the breakout and I think a

break breakout inspired by the yen

devaluation in Gold but go the the

yellow metal and not these Preposterous

connect those dots because the Japanese

are like holy how am I the Yen's tanking

and I want to buy something so I'm going

to buy gold is that the argument there

or the Chinese Buy because they're

worried about the real estate market or

why why is everyone going into gold why

would you choose that the the only

important factor for me in terms of

who's buying is if I'm buying I don't I

I don't I I I don't care who's buying

but why do you think the price will go

up because again can I say it again

Gold

we've had a 40% devaluation in the Yen

we've got 50 years of data this is not

supposed to happen this is saying that

the plumbing of the international

monetary system is is under profound

attack and due risk and something's

going to break risk

off risk off gold gold is a risk I'm I'm

I'm speculating I'm taking risk that the

gold price is going to go higher this

notion that is risk off RI uh gold is

not an agent of chaos gold is the

Alchemy of chaos okay and when you get

to a point where everything is

overvalued smart intelligent aggressive

investors say you know what this system

sucks okay and the biggest you know

finger to the market is to buy the

dumbest asset you gold has it gives you

no participation in the risk Enterprise

it has no carry but when the world

becomes chaotic and the system is out of

control it's like you give it to the Man

and that's that's what I'm doing I'm not

saying you know what I'm giving it to

the man okay now I get your investment

pieces and then finally I you know I you

can buy there are some ETFs like JP

Morgan and others um and you can buy an

ETF and participate in the Yen weakness

this thing

is it's detaching

itself um it's

156 I know I'm crazy but I'm hearing 200

at the voices in my head you can capture

that in some in lowcost 39 basis points

expense ratio funds out there so I would

have that so there's things to be done

um yes it sounds apocalyptic but we're

close to the 100 year anniversary of

when we brought down the gold

standard and I'm thinking to myself is

it every 100 years you get a Currency

Reset um and a Currency Reset um the

portense of that is uncontrolled asset

price inflation which ultimately breeds

this fragility and things break and then

everyone has sit down and say we need a

new system yeah yeah which is exactly

goes back to your original

hypothesis that you included in that

thread of the FED painting themselves

into a corner or they just damned if you

do damned if you don't the no win

scenario yeah and on that bomb

shelf the sun is shining fantastic here

in St far we tried to get to the Pontoon

but the the sound quality was really

poor yeah yeah but we'll do it again

soon