Rouge Bouquet (excerpt)
- published 16 August 1918
"In a wood they call the Rouge Bouquet
There is a new-made grave today,
Build by never a spade nor pick
Yet covered with earth ten meters thick.
Dead in their youthful prime,
Never to laugh nor love again
Nor taste the Summertime.
For Death came flying through the air
And stopped his flight at the dugout stair,
Touched his prey and left them there."
- Cpl. Joyce Kilmer, Fighting 69th NY Infantry.
KIA 30 July 1918
2LT Mike Thomas. If you have followed me for a few years then you have heard of the man. 20 January 1968, Lt. Thomas rescued six wounded Marines in the vicinity of Hill 881 South at Khe Sanh by carrying them to safety on his back one by one despite having to expose himself to intense automatic weapons fire from an estimated battalion-size force and despite being wounded himself before carrying the sixth Marine.
Thomas was then killed in action when he went back in spite of his injuries to search for two more wounded Marines that he knew were out there... somewhere. I have no connection to this man, other than at one point in our lives we both laid claim to the same hallowed title. United States Marine. I learned of his story many years ago while reading an article in a magazine.
I promised the soul of Lt. Thomas at that time that for as long as I draw breath this man and his selfless heroism would not be forgotten. Lt. Thomas was posthumously awarded the Navy Cross for his actions that day. As far as I can tell, Thomas hailed from the state of Oklahoma and died serving with India Company, Third Battalion, 26th Marines, Third Marine Division. The name of 2LT Michael Howard Thomas can be found at the Vietnam Veterans Memorial in Washington, D.C., at Panel 34E, Line 92.
Three-day weekend. Not for everyone.
I remember my best friend from Infantry School who was KIA at Beirut on 23 October 1983, and all of my friends (all civilians) who were killed on the morning of 11 September 2001.
Plight of the Economic Mind
We are different, those of us who like numbers as much as words. Heck, we like numbers as much as we do people. Not more than dogs, though. Dogs and numbers. All we really need, along with a sustainable source of clean water and reliable fuel for fire. We were all that kid. When we were nine, we played Little League Baseball. We were the one that knew everyone's earned run average, everyone's right/lefty splits. All in our heads. Personally, I was good at ice and roller hockey, not "pro" good, but "neighborhood" good. Good enough to play varsity in both high school and college.
Good until I got to a level where I had to play against Canadian and Soviet kids my age. Now, those kids were too "good", and "too" fast, but I wanted to be good at baseball. Baseball had better statistics more suited to the highly organized brain. Pointless now, though the need to work regularly on the wonders of statistics and probabilities did produce a career that supported a family. That counts for something.
We are old now. We see our neighbors go about their way and wonder if they think about monetary policy or the federal budget very often, and assuming that they do not, then why not? How do these folks, ordinary folks, go about their days and not break everything they see down to some kind of equation. Guess we'll never know. That's just not how we are wired. That said, let's do some thinking this morning. I mean, let us go deep into the wonders of thought out on the fringe of existence. Are we not a band of eccentrics? How the heck should we know?
We expect that President Biden will propose a $6 trillion budget on Friday (today) for fiscal year 2022, setting the stage for an expansion /rebuilding of physical national infrastructure as well as a progressive push (not judging) into a larger government role in social infrastructure such as healthcare, education and even household services. Note that the federal fiscal year begins on Oct. 1. Trust me, I know... I have run around the woods in late September more than once shouting "Bang! Bang!" because "they" were out of blanks or had to park (more on parking below) the vehicles neatly in a yard with 10 days to go in September because "we" were out of gas... until Oct. 1. This FY 2022 budget is projected by those that support it to produce a deficit of $1.3 trillion, and by those that do not, a deficit of $1.8 trillion, all depending on how much revenue expected tax increases will produce.
The problem, as I see it, is that there has already been, due to the pandemic, a dramatic increase in money supply expansion supported through deficit spending that occurred at a time that fiscal policy had long ago left behind anything I saw as responsible. Through the first seven months of fiscal 2021 the federal government has produced a year-to-date deficit of $1.9 trillion. For fiscal 2020, the deficit ran all the way to $3.1trillion. Currently, 2021 U.S. GDP is on track to run as high as $22.6 trillion, maybe even more. The U.S. federal debt load is currently above $28.3 trillion, making the debt to GDP ratio 128%. You may see lower ratios reported that are closer to 100%. These are deceptive, as Social Security is considered "off-budget," which of course is just plain foolishness.
Total U.S. debt, which includes state, municipal, business and household debt, now stands at $86.6 trillion. Given that all economic activity is included in GDP, why then would we not include all debt in our debt to GDP ratio? If we are to be honest, debt to GDP now stands at 392%, and we long ago scurried down the rabbit hole of "make believe."
We already know that the Federal Reserve Bank adds $120 billion to its balance (to the monetary base) every month. This $120 billion is broken down into $80 billion in Treasury securities, which may or may not be necessary, but I think we can all agree is probably too large considering present macroeconomic conditions, as well as $40 billion in MBS (mortgage-backed securities) that I think any first-year economics student would immediately recognize as absurd. The pace of these asset purchases may be transitory, but the expanded money supply is most likely structural. Understand that rampant and rapid inflation may possibly be created through currency debasement but requires velocity up until the point that the public loses confidence in that currency.
Without velocity, all inflation (prior to breaking the currency) is transitory. Enlarged money supply in terms of ratio (turnover relative to the monetary base) is suppressive unless increased aggregate demand becomes structural itself. We learned on Thursday that April Core Capital Goods Orders printed up 2.3% month over month. Really incredible. We also learned through the revision of first-quarter GDP estimated economic growth that personal consumption expenditures had increased at an annualized rate of 11.3%, well above the first estimate of 10.7%. These numbers illustrate both increased household and increased business demand, both quite obviously supported through pandemic-era programs meant to provide increased liquidity. Both are probably transitory, at least until supply meets demand, probably quite expensively.
Back to the structure. I touched on this in Thursday's column. Approximately 50 participating banks placed or "parked" $485.3 billion in cash (a new all-time record) in the Fed's reverse repurchase (repo) program on Thursday according to the New York Fed. This "parking" has increased almost every single day of late. The Fed pays a rough 0% on these deposits, but this is a safe place to stash unused capital. Understand that tapering will slow the acceleration of this growing problem, but only outright money supply contraction (M2 currently stands above $20.1trillion) can begin to correct the issue.
The threat, as I see it, is that this glut of cash starts to find its way out of the banking system. While it may seem ridiculous for the nation's bankers to turn to the Fed on a nightly basis to safely stash unused reserves, and as the positive effects of the demand-side economy that the Biden administration is trying to put together do appear to be transitory unless excessive government expenditures are sustained, it would appear that in terms of velocity there is actually great potential for collapse, at least until the public realizes that fiat is just that. Money by decree.
There is no doubt in my military mind that the Treasury, as would anyone so deeply indebted, craves a controllable degree of sustainable structural inflation. Maybe the Treasury wants some of this cash to find a buyer of credit, that would in fact act to suppress interest rates at least at the short end of the curve. Think. These bankers are not going to park this dough for very long. Increased issuance of Tens, Twenties and Thirties are useless. Treasury auctions of $40 billion of 30-day paper every week. What if Treasury (this is where you pay attention, Janet) were to create a monthly issuance of $500 billion (or more) in 30-day T-Bills (in addition to the weekly issuance) open only to banks with too much cash on their hands on an "Immediate or cancel" basis, which means that if there is demand for $450 billion, that you don't have to sell $500 billion of paper. Kapeesh?
Would the banks go for some trinket-size interest over 30 days rather than 0% nightly every night? Is the idea at least worth exploring? No, don't take six months writing a paper. Try it once, in early June. See if it works. If it fails, you stop. If it works, you keep rolling over the same $500 billion so that only the initial auction increases federal borrowing, which seems imminent anyway. At least this is one way to partially provide for that ever-growing deficit while controlling what seeps out into the real economy. The alternative, if one does not manage this cash glut properly, could be a broken currency or a loss of reserve currency status far more quickly than even Stanley Druckenmiller (who seems to be the only one who understands this) has projected.
Did You Notice...
...the dramatic increase in trading volumes on Thursday? One would think this "overwhelmingly positive" as I pointed out 24 hours ago. Thursday's rally was broad away from the Nasdaq indices. Cyclical sectors took a leadership position as defensive sectors sunk to the bottom of our performance tables. Breadth was simply fantastic. Until. Until what? Until you really look at that trading volume. Is it trustworthy as an indicator of any kind of conviction?
Let's just take a look at aggregate trading volume for names listed on the New York Stock Exchange (NYSE). A whopping 49% increase over Thursday. But wait... upon close inspection, meme stock AMC Entertainment Holdings (AMC) comprised 10.8% of all aggregate NYSE trading volume, while Sarge faves Ford Motor (F) and General Electric (GE) kicked in 4.3% and 2.8% of that volume, respectively. Actually, ex-those three names, there was still a 22% increase in Big Board trading volume, so the positivity does count for something, but just keep the euphoria in check and be fully cognizant that momentum is having an outsize impact across these markets right now as compared to anything fundamental or even technical.
Thursday night was a big night for earnings. My thinking is this. I went long a smackerel of Salesforce (CRM) , an old fave, on that pre-earnings dip Thursday figuring that the dip usually happens after it reports. That one appears to have worked. Holding the 200-day simple moving average (SMA) is key. I was hoping to get a post-earnings dip in Costco (COST) in order to grab some at a discount. This discount is disappointingly shallow, however. I don't think I want to buy the name this far above the 50-day SMA. Raincheck. Ulta Beauty (ULTA) is trading considerably higher, but really accomplishes nothing technically unless that stock can trade as high as $351. Veeva Systems (VEEV) had a very strong night. The crucial level there is $275, which happens to be precisely where that stock hit pajama-trader (algorithmic) resistance. Bring on Friday.
Economics (All Times Eastern)
08:30 - Personal Income (February): Expecting -14.8% m/m, Last 21.1% m/m.
08:30 - Consumer Spending (February): Expecting 0.5% m/m, Last 4.2% m/m.
08:30 - PCE Price Index (February): Expecting 3.3% y/y, Last 2.3% y/y.
08:30 - Core PCE Price Index (February): Expecting 3.0% y/y, Last 1.8% y/y.
10:00 - Wholesale Inventories (Apr-adv): Expecting 1.2% m/m, Last 1.9% m/m.
09:45 - Chicago PMI (May): Expecting 69.7, Last 72.1.
10:00 - U of M Consumer Sentiment (May-F): Flashed 82.8.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 356.
The Fed (All Times Eastern)
No public events scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)