Tuesday, September 8, 2020

Guest Post: @pdxsag on Episode 5 of The End Game by Grant Williams and Bill Fleckenstein

This is a new feature from our correspondent @pdxsag. He has volunteered to “sit through podcasts so we don't have to.” Although, he adds, you should still listen to them, because he is only going to review the podcasts which are excellent -- so excellent you don't want to risk missing-out on anything. The latest is Episode 5 of The End Game by Grant Williams and Bill Fleckenstein, with guest Russell Napier. PDXsag wrote up Episode 6 last month, which had Lacy Hunt as the guest. 

Episode #5 (iTunes) is the counter-point to last month's Episode 6. Lacy Hunt believes unless and until the Fed starts monetization via direct commercial lending, the disinflation cycle will remain operative, up to and ultimately including negative nominal interest rates.

Russell Napier was a fellow disinflation-ist with Lacy Hunt until the Covid crisis. He argues the PPP lending program and similar programs in other developed countries are the leading wave of monetary largess which will result in an inflation cycle among developed countries that nearly every active market participant has not experienced in their lifetime. Napier expects, and perhaps the litmus test of his prediction, a 4% consumer inflation rate by Q2 2021, likely sooner.

Like last time, below are summaries I made of various key-points. Emphasis are mine. Occasional opinions interspersed within square brackets are also mine.

3 min: Fleck asks Napier to go into his process that shifted his thinking to being an inflationist.
Napier always expected the “next recession” to lead to a change. He thought it would be MMT, but one afternoon realized bank credit guarantees are “it.” They didn't exist in February or March, but suddenly they did, and universally in all developed countries.

5 min: Williams suggests loan guarantees are a lot easier politically to get through than MMT, which is very controversial. Napier concurs. Loan guarantees are hard to argue against when they are loans to small businesses in need. And  as contingent liabilities it is easy to pretend they don't exist on the government balance sheet. There is no increase recorded in the national debt. And they can be rolled at 0% interest indefinitely. [A rolling loan gathers no loss.]

7 min: Spain, Germany, Britain all have debt guarantee programs analogous to the US PPP. As an example of loan programs just being extended, Spain's emergency lending started as a 100 day program, then one day by edict it was a 150 day program. Napier concedes if these are a one-and-done pulse then his argument fails, but so far that doesn't appear to be how any of these programs are trending.

Even the Germans[!] are in on the game. They have the fastest growing banking system in Europe.

Britain has the “Bounce Back” program. Loans are up to 50k pounds, ie. to small biz, and 23 billion was disbursed in the first 6 weeks. The loan quality of the “Bounce Back” loans was such that 50% are expected to fail. Under traditional QE none of these loans would have been made. This is a fundamental difference. QE money sits on banks' balance sheets because the credit risk is still the banks' problem. Loan guarantees remove the credit risk, so the loans happen and lead to new money getting into the real economy. The loans are 3.6% for 6 years. Everyone who could, took a loan whether they actually needed one or not. Proof is the gang-busters business boats and sports car dealerships are doing.

Bank credit growth in Japan is shooting up as well. It's everywhere you look.

10 min: Williams says pieces for inflation are everywhere, and yet no one believes inflation can happen. Napier thinks it is entirely a timing question. Pros are paid to leave the party one minute to mid-night. So they are still in the no inflation camp because they think it's still 2-3 years away.

11 min: When every country has double digit money growth it's time to pay attention. 6 months ago OECD released a money growth number that was lowest since 2009. Four months later the rate has more than doubled. [He doesn't state the exact numbers though.]

12 min: If we had a blended inflation rate that took into account asset prices instead of just consumer prices we would be measuring inflation and no one would be arguing otherwise. Napier says he can argue there's a big difference between central bank balance sheet growth and broad money supply growth and their respective effect on asset prices and consumer prices. However, no one wants to argue that point. They justify the last 10 years of CB balance sheet growth only effecting asset prices like it's a good thing [which it's not, unless you're one of the Boomers that already own all the assets you ever are going to need], and use it to act like broad money supply growth won't affect consumer prices either.

17 min: Fleck highlights the distinction Napier made between asset inflation and consumer price inflation and asks why people act like one is good and the other is bad. Napier responds it's because of the amount of debt in the system. The pros realized that asset inflation is a one-way bet in our highly geared system. Even a slight amount of asset price correction would cause the whole system to crash. So pros are able to call policy-setters' bluff by loading up on debt and knowing central banks will act.

20 min: Williams mentions the only time in the last 35-40 years where top 10% incomes have fallen more than bottom 90% was during the S&L crisis. S&L was when asset prices deflated and were allowed to deflate. And it's not talked about much anywhere. The crisis came and went and everyone remembers Charles Keating [ahem, and John McCain], but the game of inflating asset prices since then has become crucial. Napier agrees – recounts he used to see Paul Volcker once a year or so. Napier finally asked him where did it all go wrong. Volcker was adamant that it was LTCM. LTCM was the bail-out where it all went wrong. [Proud to say I've been saying this for 20 f*cking 2 years.] Since then everyone who could gear-up money has bought assets on the belief that they won't be allowed to lose money. Napier continues that there are good reasons we have inequality today – for instance, not everyone is a Steve Jobs – but there are some really bad ones. And a select class being able to gear-up debt to buy assets and get all the tax advantages of that, which equity doesn't get, and know they'll be bailed out if anything goes wrong is one of the bad ones. This isn't an argument against assets or capitalism, it's an argument against one kind of overly favored class. [ahem, more equal] Napier calls it financial engineering vs. capitalism. He laments financial engineering may well prove to be bad for capitalism. [We've all seen enough Millennials cheering on AOC to know he's right about that.]

22 min: Fleck concurs LTCM was the Fed's Rubicon.

23 min: Napier reminds us of the Time cover with Greenspan, Summers, and Rubin, “Committee to Save the World”. It wasn't just Greenspan.

24 min: Williams asks what may happen from here. The return of inflation creates a whole new set of problems, some of which from the point of view of bankers and law makers are pretty dramatic.

Napier: Correct, 1) you have to create inflation and 2) you have to keep interest rates from rising. Not just short term, but long term too. We've done this before. Read “The Deficit Myth.” Yield Curve Control was done from 1941 to 1952, which the author uses as an example of a success, without mentioning during that time the US had rationing, price controls, credit controls, and capital controls including forced purchases of government debt. There was massive inflation in the black and grey market, and of course shortages in the regular market. Next, they forced (institutional) savers to buy government bonds.

What you're really doing is wiping out savers through forced taxation. If we do that, the richest people in the world will get around it. They have the tax advisors and attorneys to get around it. What you're really doing is wiping out the middle class. They can't afford to avoid it. Societies that wipe-out their middle class pay a really high price for it. Yield Curve Control sounds so innocuous and rather technocratic and very boring, but actually it changes the nature of what a society is.

28 min: Napier comments on how they could enforce YCC – They won't force individual savers to buy government bonds. However, life insurance, pension, mutual funds are all regulated entities. Being regulated, the government can say to them, you must buy X% of government bonds. They'll call it Macro Prudential Regulation. Who is going to come out against that? You'd be mad to be against prudential regulation. It's like mom and apple pie. [And universal healthcare coverage.]

29 min: Williams: the pernicious effects of this change from deflation to inflation is going to do more harm to more people than ever before. Napier corrects that it's savers that are harmed, not all people. It moves money from savers to debtors and it strikes at a schism in society. It's a redistributive tax without legislative accountability.

31 min: Napier: Soft money regimes are a product of democracy. We shouldn't forget that. The gold standard ends as soon as women get the vote. [Based!] Now a lot of people support the gold standard, but I don't. I prefer democracy. [Sad trombone] But I would think hard currencies and democracies are incompatible.

32 min: Fleck: what do you say to the people that are in the camp that there's too much debt.

Napier: There's not too much debt, there's not enough money. [lol wut] For the last 20 years we've tried to let Central Bankers create more money and they've failed to achieve it. So finally they've found a way around that with these lending programs. There are several ways to bring down a debt to GDP ratio and inflation is the least painful, and that's why it's preferred over defaults and preferred over austerity. The post-WWII gives us the model. Policy makers point to the 1945 to 1980 period as a triumph. But to put into context for listeners, what was it like to be a saver in that time period? If you owned British gov bonds you lost 85% of your purchasing power. There are modern policy makers that believe that to be one of the greatest success stories in history.

35 min: Napier: It's a supreme irony that every one I talk to believes Central Bankers are all-powerful, just as they've lost all their power to government policy makers. Government usurped Central Bank control by dictating the commercial banks' balance sheet growth and contraction. If banks are mandated to increase lending, they will have to make the loans and that money will enter the system. Admittedly people push back and say these lending programs are temporary, and if they are temporary I will be proven wrong. But, I'm not, that's how government can overwhelm Central Banks. It's capitalism with Chinese characteristics.

38 min: Napier brings up Euro and how this model with 19 member nations doesn't bode well. There will come a time when Germany wants to stop and countries like France or Italy are still very keen on keeping the money growing, and that's where the schism comes into the Euro, which raises questions about a single currency.

39 min: Fleck asks about End Game in Japan.

Napier: Start from the premise that Central Banks will never shrink their balance sheets. Is it really debt then? It is a perpetual non-interest bearing transfer. Where I come from a perpetual non-interest bearing transfer is a gift. [lol] Even Goldman couldn't sell a perpetual non-interest bearing transfer.

Japan's broad money growth is 5.9%, a 30 year high! People may ask why didn't they do this to begin with. Because they didn't create debt they created Reserves. Historically, if you created too many reserves in the system you got massive bank loan growth and inflation, but this time around those reserves just sat there: no loan growth, no new money, ergo no inflation.

For eight years I have been saying this is how it would end. They just mandate commercial bank balance sheet growth. I didn't see them doing it through bank credit guarantees, but here we are.

We've done bank balance sheet limiting to fight inflation. Nixon did it. The revolution of the 1980's was using interest rates to regulate money growth, not government regulation. Now we've come full circle. We're using government regulation to induce inflation, not fight it.

45 min: Napier: under the new model, fire everybody and hire Brazilians. If somebody can grow capital in Brazil that person deserves respect and admiration. You should have Brazilians on the End Game program. Developed world investors have learned everything they know under 40 years of disinflation. Emerging markets have a different skill set. By way of example, the skill set you needed from 1945 to 1979 is a different skill set than you've needed from 1980 to the present. [CBS - investor genotypes in an investing ecosystem]

47 min: Fleck asks Napier to give investors of today a short-hand for what financial repression means and how it operates.

Napier: Yeah, so I have a 90 minute presentation on this, so in other words we're really going to have to really, really, really get going. 1.) Prepare for capital controls. 2.) Inflation above interest rates – the firms that are prepared for that are minuscule in market cap. If you've had a 40 year trend in inflation and the winners are all those that benefited from disinflation, when you turn that around, those are not going to be the ones suited to the new environment. 3.) Look at Japan. They've not benefited from high fixed costs in a world of disinflation, so higher inflation should benefit them now. [Very interesting that Buffett made news this week with a $5 Billion investment in Japan] 4.) Read about the 1945-1979 period 5.) Gold is the stand-out asset. I'm not a gold-bug. It's not a productive asset, but it is the stand-out asset when we are dealing with financial repression.

50 min: Williams: with the caveat you're absolutely not a gold bug, could you talk a little bit about gold.

Napier: I'll set aside the inflation bit. That's the part everybody “gets.” The other bit is the interest rates, mandating they be below inflation. In response people go for that thing that isn't a paper asset that can be interfered with. If government wants to interfere with return on equity it's easy, they can double the corporate tax rate. If government wants to interfere with return on bonds they can do that by creating inflation and forcing you to buy bonds. The only way government can interfere with returns on gold is to take it off you. That's not impossible, but it is unlikely. [CBS - Actually very likely since it already happened during the 20th Century.]

If you look at gold now it's taking off while inflation hasn't. That's a reflection of government interfering and creating a premium for that which cannot be interfered with, because if it's inflation driving it, gold is way above where it should be.

53 min: Williams: where are inflation expectations?

Napier: They are still at incredibly low levels. Indicated inflation rates are 0.5% for whole of Europe. Italy is below 0.2%. US is higher. South Africa and Brazil are higher. But they are still incredibly low. France is below where it was in 2009.

Put another way, except for Japan most of the break-even inflation rates are at levels of inflation over the next five years that none of these countries has ever achieved. [It's Stag Mark's world and we're all just livin' in it. :)] Even Germany. Germany has never achieved the level of inflation they are expected to achieve over the next 5 years. So yes, inflation expectations are higher, but they are no where near what might be considered break-out levels. It's just not happening yet. So it's interesting about gold. Whatever is moving it is not inflation.

55 min: Fleck responds: Bond markets have been anesthetized. They've been an administered market for so long no one knows what to do. Conversely gold it still a “free market” where participants think for themselves and know how to act. So they are ready to respond to inflation expectations faster than the bond markets.

58 min: Interesting take on China military action potentially driving gold too. The medium range missile treaty Trump got US out of wasn't done because of Russia. It was done because of China. So now the US needs a country in Asia to stage medium range (3000 mile) missiles.

1 hr: Williams: What do you think of all the V-shape recovery talk.

Napier: Using SARS in Hong Kong as something of a guide, it all reverted to normal within 18 months. I have this incredible faith – and dismay – [lol] in human beings' ability to revert to form. Think of what human being have been though... the Blitz, SARS, etc. But they want to go back to what they had before. And on whole the achieve it, and they achieve it far more quickly than you'd think. So that's not a V-shaped recovery, but if in 18 months if consumption relative to savings is back to what it was in January; if we have the same GDP as before and broad money growth stabilizes at 15% a year from now, 4% inflation doesn't sound so unrealistic.

1 hr 5 min: Fleck: on the subject of inflation, CPI has been bastardized in the US. So when you say 4% do you mean CPI at 4? I think we'd need inflation at 10 or 12 because it's such a bad measure.

Napier: No I think the reported number can reach 4. [record-scratch] 4 isn't so outrageous. We were close to 4 in 2007, 2011, 2000, 1996. I have a long presentation on why 4 is important.

Those were all periods of China producing and periods of massive technological breakthrough. And those were periods of money supply growth closer to 10 than 4, and even then you got to 4 on the measured number. I think it's a fairly straight-forward forecast. Where it gets difficult is what happens after that, because above 4 it can spiral out of control very quickly. That's what's significant about 4.

There's been four times in the US where it's gotten to 4 and stopped. [Um, by crashing the equity markets.] I don't think it will this time. But it's hard enough to convince people it will even get to 4.

That's an interesting part of history. I don't think there's been a fiat currency that's stopped at 4. That's an achievement of sorts. It's come at a very high price if you ask me.

Fleck: we've had two bubble bursts to achieve that.

Napier: that's what I mean by it's come at a high price. But if the market believes we can cap it at 4. And through that time period we've just added more and more debt, meaning we really have to inflate it away. Maybe that's why people think it can't go above 4 – “because it's never been above 4 in my lifetime,” – which means that you're very young. [Ok, wow! Good points.]

1 hr 8 min: Williams: Can you tell people how they can follow you more?

Napier: Well there's kind of bad news. I write at my website, but you're only allowed into my website if you're a regulated financial institution. That's just how it is under British law. The good news is that lots of people steal it and appears all over the place. Using [Bing] and the year 2020 it's amazing where it will crop up. Some day we will pursue those vagabonds, but for now you can get it if you are resourceful. [lol]

1 hr 10 min: Closing comments.

Fleck to Williams: Wow. That's gonna blow some people's minds. [Guilty] I mean, I believe everything he's said. He's articulated it better than I ever could. I thought about the point Michael Green made, that the game you're playing might not be the game that's being played. Napier said it differently, but maybe the game is changing to something you'd have to have a lot of grey hair to have seen before.

Williams: That's what this series is all about. You have to stay alert to changes in the game. They will change the rules and when they do it's going to be really fast, before anyone can react to the rules having changed, or what's the point of changing the rules? [Indeed. Lots of quotes about lying central banks and lying politicians come to mind here.]


Stagflationary Mark said...

Where it gets difficult is what happens after that, because above 4 it can spiral out of control very quickly. That's what's significant about 4.

If true, a wise man would reasonably panic at 3.9. And an even wiser man would reasonably panic at 3.8. And an even wiser man than that would panic at 3.7. I’ve often said that if one must panic, at least panic first. The last to panic almost always loses the most (when panicking to buy or panicking to sell).

So here’s a question. If 4 is so significant, when will the Fed panic? 4? 3.9? 3.8? 3.7? Or even lower?

The Fed is made up of people in power. People in power never want to lose control. Am I right? Seems to me that they won’t feel very comfortable living on the edge of spiraling out of control. Will they really wait until the last possible second to regain control or will they be among the first to panic?

Before answering, the Fed certainly understands what happened during the 1970s. They rightly panicked back then (and they should have panicked sooner than they did). This is not ancient history. How comfortable do you think they are right now as they look at the price of silver since March? As a side note, I find it interesting that the price of silver has been struggling to rise even higher over the past month. It’s looking a bit tired in the face of hyperinflation. Further, I notice that Shadowstats is still charging $175 for a subscription. You’d think that they of all people would have found a way to raise service prices in our service economy while also claiming inflation is and was running so hot for so long. A reminder that you can safely use the services of Shadowstats during a pandemic (which would surely be an advantage), not that I have.

For what it’s worth, I’m certainly comfortable continuing to buy savings bonds (both I bonds and EE bonds) knowing how uncomfortable the Fed must be. Nothing beats toilet paper and canned goods though, because in a ZIRP and NIRP world filled with much uncertainty, why not? It’s not like I’ll ever need to find a greater fool. Never planning to resell. Go figure.

And lastly, hoarding means I’m pulling future purchases forward. It does not alter the total amount of purchases. I will not actually eat more canned goods just because I currently have more. So how does this create anything but temporary inflation? What happens when I stop restocking my pantry? I ask because I’m pretty much done doing it. Hope the CEOs of packaged food companies weren’t expecting me to continue this pace. I was simply stocking up for the winter like a squirrel would, especially if squirrels were concerned about pandemics. Better safe than sorry.

Allan Folz said...

Mark, I note you never denied being Lacy Hunt's nome-du-cyber. Interesting. ;)

You bring up some good points regarding panicking and when. First the Fed is jawboning to endlessly about how they are going to let inflation run above 2%, maybe even 2.5%. That's a bit of obvious misdirection since 4% has been their Rubicon.

Another truism that comes to mind is "he who cares the least wins." So, as we approach 4% inflation, who cares the least?

I'll say it's never been actual market participants. They've been leveraged to the hilt and strangely and at peace running off the cliff like Thelma and Louise.

It's been their creditors yanking their credit whilst there's still something to yank.

This is where Napier says it's different this time. Whereas previously the Fed could signal to banks it's time to get your affairs in order, and the threat of that was enough for banks to call in their credit lines, this time around Treasury has stepped-in as the guarantor of last resort. If banks aren't fearful of taking the loss, they have no reason to yank anyone's credit line.

Now if we get a war of wills between Treasury and Fed, that would be interesting, and unprecedented. If the "uniparty" means anything, and I think it does, it means the Fed and the Treasury are on the same team.

Having said all that the one thing Hunt and Napier (and I) are in agreement in is that the Treasury-backed lending (nee credit guarantees) have been pretty small relative to the size of the economic gap. If one is expecting 4% inflation, you'd be hard-pressed to get there with what's been done so far. And from all intents and purposes, it looks like Congress is already getting cold feet on the next stimulus "pulse."

What I like, because almost no one is expecting it, are a series of shocks and stimulus pulses.

If you can use the shocks to stock-up on necessities and can ignore the pulses, particularly the FOMO of staying at the party when it's one minute to midnight, I think you'll do ok. They ain't gonna make it easy though. The name of the game for the uniparty is keeping the wage-slaves slaving.

Stagflationary Mark said...


My hypothetical lawyer advises me to neither confirm nor deny certain allegations. Enough said. ;)

Remember the days when Greenspan would talk at length without really saying much? It would seem those days are over. The new braver Fed loves to jawbone. Not really sure if it’s really any different though. Inflation is low. Clearly they would like to reset inflation expectations higher without actually having to do much. Jawbone. Jawbone. Jawbone. Good luck on that.

Interesting thoughts on he who cares least. I seem to care less than most. I don’t expect to win though, unless not losing counts as winning, which it might. I certainly have little FOMO in me, which might be a fine defense. Or not. Time will tell.

Due to the pandemic, I’ve been stocking up on board games lately (most of them solo war games, but some are for playing with my girlfriend). That is not good for our economy. Once the initial purchase is made, the entertainment value continues indefinitely, and at essentially no added cost. So, the Fed can print at essentially no cost far into the future and I shall entertain myself at essentially no cost far into the future. I find some added amusement in that, in an irresistible force meets an immovable wall sort of way.

Bicycle purchase to drive even less than I once did, girlfriend cutting my hair, board games, almost always eating at home, not going out to see movies, no flying, not staying at hotels? I sure hope my behavior is the current exception and not the future rule. Can’t have everyone doing that long-term or the wage-slave slaving dynamic will break.

Anonymous said...

Once these guys start talking about military/missile strategy, like they know what is going on, I stop reading, unfortunately, it was at the end of the article.

Anonymous said...

Lousy article, all they are doing is taking a template from the past and chucking it into the future.

There is no originally thinking here.

And as for missiles deployment, how about these 'seers" don't see that Trump took over North Korea, short range missiles are now pointed at China from NORTH KOREA!

CP said...

What this tells you is that their concern about deflation is situational, conditional. Deflation that threatens the big banks that own the Fed is bad. Deflation that squeezes the proles out of their assets and makes them renters is good.

The big banks have been recapitalized and the proles are making a bit too much money flipping paper. Maybe the Fed thinks it's time to pull the rug out from under them?


Anonymous said...

Fuck you for censoring.

Anonymous said...

What are you talking about?

Taylor Conant said...

I followed up on some Russell Napier stuff after pdxsag's post on CBS.

I came across this detailed transcript:


I read it a few nights ago and I am really lost. It's like "does not compute". I don't know if it's because of the terms he uses, or my framework isn't robust enough to adopt his way of thinking, or I don't want to accept/can't easily project what a future looks like that he mentions, but I am struggling with a few different things after reading it and I am curious if you have thoughts:

1.) Without coming to a conclusion about whether he is "right" or not, if he WAS right... what does this mean? In terms of value of things we own or could own? In terms of our life experience for the next 5-10 yrs?
2.) What does it mean for banks if CBs have lost it and politicians are in control now? Is that good or bad for someone owning a bank?
3.) He talks about "financial repression" and cites the post-WW2 period-- what does this "mean" and what does it look like?
4.) He specifically mentions the Swiss Franc and Singapore-- do we want to own currency or equities there? He specifically mentions liking Japanese equities... why?
5.) What does a world with capital controls "everywhere" look like? How is it different from the world we've grown up in?
6.) What do you think of his "irony" regarding CB potency about to invert at peak prestige?
7.) This really seems like a pivotal/transformational moment, if he's correct, a kind of environment where there will be some George Soros-style "crush the pound" moments to get filthy stinking rich-- what might they be? What kind of risk would it take to seize them?
8.) He specifically talks about people with Emerging Markets experience having the right mindset and skillset for navigating what is to come-- what will they be able to do that someone without their experience won't? How will they be looking at the opportunity landscape differently?
9.) Won't "cash be trash" in this environment? When will it be too late to do something with it?