Month: May 2020

Authored by Chris Hamilton via Econimica blog,

The US Constitution is the spectacular framework upon which our nation is built.  The framers even built in a means to right the terrible wrongs that were beyond their capabilities at the time…the amendment has been utilized 27 times in all (most recently in 1992), righting freedoms of religion, equality of all races and sex, among others.  But not included anywhere in the Constitution was the Federal Reserve, allowing it the power to guide interest rates ever lower or infinitely purchase assets.  The implications of the Federal Reserve policies have been to undermine the Congress’ primary function, that of compromise in an attempt to balance spending versus taxation.  The Federal Reserve policies have removed market based discipline, (market based interest payments), encouraging Congress to raise seemingly infinite federal debt.  Thus Congress’ role as an institution for compromise is broken.  This de-facto Constitutional amendment has spurred ideas of infinite spending like MMT.  Flawed as the framers were, this insertion of a de facto, unelected, quasi private/federal branch of government was explicitly never intended because of the cancer it represented.

The Impacts of Declining Interest Rates on Debt

For four decades, the Fed has reduced the cost of undertaking deficit spending (via its direct intervention in the supply of Treasury debt), taking short term rates to zero.  Not surprisingly, Congress has seen the nearly “free money” and spent with reckless abandon without runaway interest payments.  What I will detail is that with each Federal Reserve dictated and implemented interest rate cut, the Congress took the “free-er money” and spent ever more…regardless the lack of economic return (as measured by GDP).  Debt (particularly unproductive debt) has progressively grown disproportionately faster than the economy (the tax base from which to repay and/or service the debt). 

Speaking of the disproportionate debt…below, the quarterly change (on a year over year basis) of GDP, federal debt, and the Federal Reserve balance sheet from 1970 through 2019.  The “market” discipline of higher interest costs (dependent on free market purchases of US Treasury debt) constrained the growth of debt until 2000.  But the near zero rates in the wake of ’00 and then the zero rates since ’08 have encouraged spending far beyond the proportionate economy or tax base to repay that debt.

But when the same chart is extended to show 2020, the current blow-out of federal debt and the Federal Reserve asset purchases versus unprecedented collapse in GDP dwarfs everything that came before.

To measure the “proportionate” growth of the economy versus the growth of the debt to spur the economy, rather than using debt to GDP, below I show GDP minus the federal debt.  Using this gauge portrays an ugly reality since 2007…the US economy is falling fast and only ever greater debt and ever greater interest rate manipulation is able to mask the truth (and avoid the hard, painful, but necessary decisions to right the ship).

Some will suggest the chart above is unfair as I’m showing an annual (GDP) versus a cumulative (federal debt).  So, the chart below shows the quarterly change in GDP, on a year over year basis, versus the same change in federal debt.  This is essentially the “growth” that was achieved after backing out the debt incurred as part of that growth.  I wonder if Trump will sign this chart as he did a recent stock market surge?  There is nothing “MAGA” about this.

And not to make this political, (as neither party represents much of anybody in America…except well funded special interests), but the trend of lower interest rates has allowed for significantly higher incursions of debt, with rising growth in the Federal Reserve balance sheet, sadly culminating in continually decelerating GDP growth.

A Look Into The Fed’s Balance Sheet…And Gauging Impacts

Prior to 2008, the Federal Reserve holdings of Treasury debt was uneventful and predictable.  The Fed primarily held T-bills (up to 1 year in duration) and Notes (2 to 10 years in duration), with a small and stable assortment of long bonds (10+ years in duration).  But in early 2008, the Fed initiated what has been a wild and seemingly chaotic ride, buying certain durations while dumping others in an attempt to directly establish rates across the curve (no “free-market” appreciated here).  And this doesn’t include the MBS and assorted “other” assets.

Prior to QE1, the Fed sold off two thirds of it’s holdings of Bills and shorter duration Notes and trimmed the balance sheet.  From there, the Fed undertook a total selloff of bills and used the proceeds to load up on Notes and Bonds.  But prior to the completion of QE3, the Fed began a massive sell-off of longer duration Bonds through the end of QT…but prior to Corona-virus, the Fed pivoted to begin purchasing nearly all durations…and then with C-virus the Fed accelerated what was already underway…a wholesale monetization of all new debt being created by the Treasury.

First, Fed holdings of Bills versus the 3 month Treasury rate.  About 24% of Treasury debt outstanding are bills and the Fed now owns about 22% of the outstanding bills.  Prior to the ’08 GFC, the Fed sold highly liquid short duration and bought longer duration…but not this time.  This time the Fed is loading up on Bills all while many complain of a lack of liquidity.

Why would the Fed need to purchase $900 billion in bills during a liquidity crisis?  Is the Fed attempting to create a liquidity crisis…or is there just too much supply and too few buyers at an elevated market set rate the Fed is unwilling to accept?  Unfortunately, I don’t know but near the sudden and abrupt end to QT, the three month rate reached 2.4%…and since then but beginning well before Corona-virus, the Fed went to work.

Fed held Notes of one to five years versus the three year Treasury rate.  Again, during QT, rates spiked until the reversal of QT to QE, well before Corona-virus.  Notes (1 to 10 years in duration) make up 60% of outstanding Treasury debt and the Fed now owns 23% of total outstanding Notes.

Fed held 5 to 10 year Treasuries.  The 10 year rate is so critical as it is the foundational basis for the 30 year fixed rate mortgage, upon which all bank costs / fees are added.

Fed held Bonds.  Bonds make up about 15% of outstanding Treasury debt but the Fed owns 37% of outstanding Bonds, a significantly larger portion than it does other durations.

So What?

The point of these charts is to illuminate the length the Federal Reserve is willing to go.  As Chairman Powell recently stated on 60 Minutes, “there is no limit” to what the Fed can do…and “there’s a lot more we can do to support the economy, and we’re committed to doing everything we can as long as we need to”.  But remember, this is an in an effort to avoid a “free-market” pricing of US Treasury debt, that would almost surely cause large portions of federal taxation to be utilized just to pay the interest on the debt…leaving Congress with nothing but difficult compromises between taxation (likely significantly higher) and spending (likely significantly lower).  That would be bring a whole lot of third rail issues into immediate focus, not exactly the platform that gets many sitting Congressman or Presidents re-elected.

I have written repeatedly on the impacts of the Federal Reserve interest rate and balance sheet activities on the economy, raising asset prices absent higher wages to offset the fast rising rent/ insurance/ daycare/ education/ etc. etc.  This is resulting in an inequitable burden on young adults and they are responding by focusing on scraping together an income…at the expense of marriage and/or children.  Using births as the ultimate indicator of confidence, check the rises in births/fertility into 1990, 2000, and 2007.  Since 2007, young adults are showing unequivocally this isn’t working for them.

But looking at the Census estimates for births from 2000, 2008, 2012, 2014, and 2017…the Census has continually misunderstood the surging costs of the Fed’s policies negatively impacting family formation.  Instead, Census models (like Fed models), continually predict a sharp and sustained upturn.

While debt and asset valuations (held by a small minority) are surging, the footprint of America’s future has never surged and despite the US population of nearly 320 million persons, the births (complete with those of all immigrants) has never really surpassed that 1957 peak…and is now tumbling while interest rate policy, federal debt, and Federal Reserve purchasing are being substituted for the lack of actual growth (2020 #’s are year-end guestimates).

This fourth branch of governments policy is just blowing larger bubbles (record household financial assets as a percentage of disposable personal income), rewarding the asset holders (primarily elderly, wealthy, institutions, corporations) and punishing the vast majority for their lack of assets (2020 #’s are current through today except HH assets through Q4, 2019).

Perhaps its about time for a discussion of who the Fed is, who they serve, and either amend the Constitution to include them…or follow the Constitution and discard them?

Residents of Minneapolis, Minnesota woke up to an apocalyptic scene of burnt out buildings, broken glass and smoke on Saturday morning, after protests raged across America in response to the death of George Floyd, a black man with underlying health conditions who died after a white Minneapolis police officer pressed his knee into the 46-year-old’s neck.

pic.twitter.com/gKT2o4Y9P6

— NBC News (@NBCNews) May 30, 2020

pic.twitter.com/VfK1zt8pTE

— NBC News (@NBCNews) May 30, 2020

Over 2,500 state and local police along with National Guard troops attempted to enforce an 8 p.m. curfew, a force larger than those deployed during the 1960s race riots.

Fired police officer Derek Chauvin was charged with third-degree murder and manslaughter in Floyd’s death on Friday, according to the Washington Post.

On Saturday, Minnesota Gov. Tim Walz (D) said that he was “fully” mobilizing the state’s National Guard for the first time in state history, saying that it was “nothing short of a blessing” that a bystander has yet to be killed in the riots.

“I can fully understand the rage,” said Walz in a press conference. “But this is not grieving. … This is not about George’s death. … This is about creating chaos.“

Submitted by Joseph Carson, former chief economist of Alliance Bernstein

Macro measures of equity market valuations offer investors a fundamental assessment of the risk-reward ratio in investing at various points in the cycle. Macro equity valuation measures highlight “richness” and “cheapness” in the broad equity market.

History shows that investors who time their entry into the broad equity market at depressed levels of macro valuations far outperform investing strategies that remain fully invested. Current macro valuations indicate a very poor risk-reward ratio for investing in the equity market and the potential for an extended period of anemic returns .

Macro Equity Valuations

For this analysis, the macro measure used is the domestic market capitalization to Nominal Gross Domestic Product.

Equity market price returns for the S&P 500 index were calculated based on peak-to-peak and trough to peak in the macro measure for the past 20 years. Quarterly levels of the S&P 500 index were used to match the quarterly peak and trough periods in the macro valuation index.

For investors who remained invested from the macro valuation peak in 2000 to the peak in 2007, the annual rate of return for the S&P 500 was less than 1%, far below the long-run price return average of 7%. Yet, for investors who timed their entry at the trough point in the macro measure of valuation (i.e., Q3 2002) and exited at the peak in 2007 the annual rate of return was a stunning 13%.

The variance in equity price returns was much wider in the cycle that ended in Q4 2019. From peak macro equity valuations in 2007 to 2019 the annual return for investors in the S&P 500 index was 7.7%, barely above the long-run average. However, investors who timed their entry at trough valuation level (i.e., Q1 2009) the average annual return was 13%, nearly double the long-run average of equity price returns.

The wide variance in equity price returns highlights the benefit of timing investment decisions based on broad equity valuation metrics. But the variance in price returns also highlights that equity price returns are not uniform from cycle to cycle and elevated macro valuations in one cycle can lead to anemic returns in the next cycle.

That brings to mind a comment made by Professor Jeremy Siegel, Professor of Finance at the Wharton School and author of “Stocks for the Long Run”, made at an investment event I attended in late 1999. At that event, Mr. Siegel stated that if the S&P 500 went sideways for the next decade, the average annual return for the 20 years ending in 2009 would equal the historic average (i.e., 7%) but all of the gains would have been made in the first 10 years, from 1989 to 1999.

Mr. Siegel was essentially saying it is wrong to extrapolate past equity price performance since equity price returns revert to their long-term mean over time. At the end of 1999, Mr. Siegel was highlighting the poor risk-reward of investing given elevated macro valuations. His warning proved to be correct, as the S&P 500 index equity price returns were negative from 1999 to 2009.

I recently contacted Professor Siegel and asked about his outlook for the equity outlook. I reminded him of his concerns in 1999, the large gains in the last decade, and that macro equity valuations at the end of 2019 were above that of 1999. Professor Siegel commented, “2009 was the most undervalued market in our lifetime”.

That’s is true, but I was asking about excessive equity valuations at the end of 2019. Nonetheless, Professor Seigel’s assessment of the equity market outlook in 1999 could be used to assess the risk-reward of today’s investment outlook since there are a lot of similarities between the two periods. To be sure, if S&P 500 index went sideways for the next decade the average annual return for the 20 year period ending in 2029 would equal the historic average, but all the gains would have been made in the first 10 years, 2009 to 2019.

History sometimes repeats itself in the world of finance. Investor optimism about equities nowadays appears to be over-looking a poor risk-reward ratio, and a long history of price gains reverting to their long-term mean over time.

Will the next decade repeat the negative returns of 1999 to 2009? Based on history alone the odds are high it will (see “Why Credit Suisse Sees 0% Returns Over The Next Decade“) . But fundamental factors will also weigh on future returns, as a number of factors point towards slower growth and profits.

For example, the debt-bridge to recovery engineered by the Federal Reserve and US Treasury is structurally flawed as it merely shifts business failures from the recession to the recovery phase and weakens the next business investment cycle. Elevated debt levels in the public and private sector will shift more income towards debt servicing and less towards new spending. Finally, the government’s role in the management of the economy and finance will dramatically increase, resulting in greater oversight, new regulations, and higher taxes for business and high-wage earners.

The US Secret Service faced off against a large group of protesters outside the White House Friday night in what Fox News correspondent Leland Vittert said was an “unprecedented” scene.

“I have never seen this in now six years in D.C. I don’t know the last time that it’s happened, but the Secret Service is now in riot gear,” said Vittert, standing several hundred yards away as approximately 100 protesters advanced on the White House. “They have exercised incredible strength with the epithets thrown at them,” he added.

A Secret Service member was reportedly injured:

Secret Service apparently injured @ WH pic.twitter.com/BUR1w08q4D

— Sean Langille (@SeanLangille) May 30, 2020

Right now at the White House: Tensions between protestors and secret service continue @fox5dc pic.twitter.com/DcR5WohFJh

— Shirin Rajaee (@ShirinRajaee) May 30, 2020

Protesters in major cities across the country are demonstrating after 46-year-old George Floyd died in the custody of Minneapolis police on Monday. Floyd, a black man, died after white Minneapolis police officer Derek Chauvin restrained him by placing his knee on his neck for nearly nine minutes.

As of 2 a.m. Saturday morning, the protesters were still active in the area. –Washington Examiner

Tear gas at the White House pic.twitter.com/4iTHBdMOvU

— Timothy Burke (@bubbaprog) May 30, 2020

On Saturday morning, President Trump responded to the scene in several lengthy tweets in which he says that the crowd was “professionally organized,” but “nobody came close to breaching the fence,” adding that the Secret Service was waiting for them with attack dogs and the “most ominous weapons, I have ever seen” if anyone were to breach the fence.

“Great job last night at the White House by the U.S. @SecretService. They were not only totally professional, but very cool. I was inside, watched every move, and couldn’t have felt more safe. They let the “protesters” scream & rant as much as they wanted, but whenever someone got too frisky or out of line, they would quickly come down on them, hard – didn’t know what hit them. The front line was replaced with fresh agents, like magic. Big crowd, professionally organized, but nobody came close to breaching the fence. If they had they would have been greeted with the most vicious dogs, and most ominous weapons, I have ever seen. That’s when people would have been really badly hurt, at least. Many Secret Service agents just waiting for action. “We put the young ones on the front line, sir, they love it, and good practice.” As you saw last night, they were very cool & very professional. Never let it get out of hand. Thank you! On the bad side, the D.C. Mayor, @MurielBowser , who is always looking for money & help, wouldn’t let the D.C. Police get involved. “Not their job.” Nice!”

….got too frisky or out of line, they would quickly come down on them, hard – didn’t know what hit them. The front line was replaced with fresh agents, like magic. Big crowd, professionally organized, but nobody came close to breaching the fence. If they had they would….

— Donald J. Trump (@realDonaldTrump) May 30, 2020

….good practice.” As you saw last night, they were very cool & very professional. Never let it get out of hand. Thank you! On the bad side, the D.C. Mayor, @MurielBowser, who is always looking for money & help, wouldn’t let the D.C. Police get involved. “Not their job.” Nice!

— Donald J. Trump (@realDonaldTrump) May 30, 2020

Authored by Paul Joseph Watson via Summit News,

The UN Human Rights Chief has demanded that authorities in the United States take “serious action” to stop the police killings of unarmed African-Americans following the death of George Floyd.

46-year-old Floyd died on May 25th after Minneapolis police officer Derek Chauvin knelt on Floyd’s neck for at least seven minutes, an incident that was caught on camera and caused outrage.

Numerous stores, businesses and even an affordable housing block in Minneapolis were looted and burned to the ground by rioters last night in response to the killing.

The United Nations’ Michelle Bachelet issued a statement today calling for immediate action.

“The US authorities must take serious action to stop such killings, and to ensure justice is done when they do occur,” Bachelet said.

“Procedures must change, prevention systems must be put in place, and above all police officers who resort to excessive use of force should be charged and convicted for the crimes committed.”

Bachelet’s demand won’t find much currency amongst many on the right, who will see it as a globalist body trying to interfere in the internal affairs of the United States.

But her words will be welcomed by many on the left who assert that black people are being indiscriminately targeted by white police officers.

However, as Candace Owens pointed out, the stats don’t back up that claim.

Percentage of people killed by police officers annually:

Whites: 55%
Blacks: 27%
Hispanic: 19%

Can anyone provide me the name of even ONE hispanic or white person that was killed by a police officer this year?

BULLSHIT ELECTION NARRATIVE https://t.co/AlJ1yFDooJ

— Candace Owens (@RealCandaceO) May 26, 2020

*  *  *

My voice is being silenced by free speech-hating Silicon Valley behemoths who want me disappeared forever. It is CRUCIAL that you support me. Please sign up for the free newsletter here. Donate to me on SubscribeStar here. Support my sponsor – Turbo Force – a supercharged boost of clean energy without the comedown.

Update (1200ET): Perhaps confirming his reasoning for maintaining his Twitter feed (to counter the ‘fake news’ media), President Trump has tweeted in response to the blame-scaping occurring below:

It’s ANTIFA and the Radical Left. Don’t lay the blame on others!

— Donald J. Trump (@realDonaldTrump) May 30, 2020

*  *  *

There is a delicate tightrope of a path to tread here as politicians, officials, media are forced to admit that these “protests” are now “riots” and while the death of George Flynn at the hands of an over-zealous cop to say the least was egregious, the rioting, looting, and shooting across the nation last night is hard for even the most ardent member of the ‘Resistance’ to defend.

So, what they need is a narrative-shifting bump, to get back to the “it’s racism and it’s Trump’s fault” narrative that Biden began yesterday.

And cue this morning’s Minneapolis, St.Pauls, Minnesote officials press conference this morning to set up the pretense…

First, Minnesota Governor Tim Walz summed-up the current chaos erupting nationwide perfectly:

“These are outsiders… This is absolutely no longer about George Floyd or addressing inequities anymore. This is an organized attack designed to destabilize civil society.”

Minnesota Gov. Tim Walz: “Let’s be very clear. The situation in Minneapolis is no longer in any way about the murder of George Floyd. It is about attacking civil society, instilling fear and disrupting our great cities.” https://t.co/a9S9a49kht pic.twitter.com/ZnTEXcmeeu

— CNN (@CNN) May 30, 2020

Then Minneapolis Mayor Jacob Frey confirmed that the people who are coming to Minneapolis to protest are not residents and are “coming in largely from outside the city.”

Minneapolis Mayor Jacob Frey: “This is about violence, and we need to make sure that it stops. We’re in the middle of a pandemic right now. We have two crises that are sandwiched on top of one another.” https://t.co/E7wxiopvRT pic.twitter.com/RVQ4lTZoYj

— CNN (@CNN) May 30, 2020

“Our Minneapolis residents are scared and rightfully so. We’ve seen longterm institutional businesses overridden. We’ve seen community institutions set on fire. And I want to be very, very clear. The people that are doing this are not Minneapolis residents,” he said at a news briefing on Saturday. He said the protests earlier this week that were mostly peaceful and were largely attended by those who lived in the city, but “the dynamic has changed.”

“Gradually that shift was made and we saw more and more people coming from outside of the city. We saw more and more people looking to cause violence in our communities, and I have to say, it is not acceptable,” Frey said. “This is no longer about verbal expression. This is about violence and we need to make sure that it stops,” he added. St. Paul Mayor Melvin Carter said everyone who was arrested in his city last night was from outside the state. “What we are seeing right now is a group of people who are not from here,” he said.

And then finally, Minneapolis Department of Public Safety Commissioner John Harrington once again confirmed that narrative:

“…I’m not seeing peaceful demonstrations. And I am not seeing, frankly, any empathy or any heart for Mr. Floyd”

“We have assembled the largest civil policing authority in the history of Minnesota,” Minneapolis Department of Public Safety Commissioner John Harrington says.

“…I’m not seeing peaceful demonstrations. And I am not seeing, frankly, any empathy or any heart for Mr. Floyd” pic.twitter.com/4rdPw9twKP

— CNN (@CNN) May 30, 2020

And added that last night we saw a change in the temperament and the approach:

“…they are what I call rioters…they are not demonstrating for a case, they are not protesting injustice, they were simply bent on destruction.”

So the question is – who are “they”? These rioters that suddenly appeared out of nowhere to instill anarchy in the peace-loving people of Minneapolis (and 35 other cities around the nation)? Harrington appears to have an answer – it’s a white supremacist terror cell…

“…as we have made arrests, we have done contract-tracing similar to our covid response… who are they associated with? what platforms are they advocating for? …and we have seen things like white supremacy… part of an organized criminal organization and we are looking at whether this is an organized cell of terror.“

Minnesota public safety commissioner says white nationalists are organizing and coming to the state for violence and destruction. In other words, white supremacists are following Trump’s lead. pic.twitter.com/VkzipiOQYJ

— Biden_Brigade (@biden_brigade) May 30, 2020

Which also backed up what the Minnesota AG said: “Yes there are infiltrators…They are white & probably white supremacists…”

👀
Framing the narrative…
“Yes there are infiltrators.
They are white & probably white supremacists….”
Says the democrat AG photographed promoting ANTIFA…..

THESE PEOPLE ARE SICK@realDonaldTrump #QAnon pic.twitter.com/mOLkj44XJm

— 🇺🇸🇺🇸 Miguelifornia ⭐⭐⭐ (@michaelbeatty3) May 30, 2020

So, there it is folks. Despite scenes of 1000s of black folks looting stores and firebombing police precincts, this is white supremacists’ fault… probably using Facebook to brainwash otherwise-peaceful Americans who just wanted to go about their day (and definitely not antifa! Don’t you dare suggest that, because that would be racist… just asking an awkward question though – how likely is it that a group of young white nationalists would burn a precinct to the ground?).

Summary:

• India extends lockdown for 4th time
• India reports record jump in new cases
• Global cases pass 6 million
• Russia reports highest daily case tally in a week as lockdown eases
• CDC admits antibody tests extremely unreliable
• Brazil now has fifth-highest death toll, pushing aside Spain, with ~28k deaths
• UK PM BoJo to start easing lockdown measures Monday
• US economic data paints a mixed picture of recovery

* * *

With Americans fixated on the civil unrest spreading to dozens of cities around the country following the latest officer-involved killing of an unarmed black man, the CDC has released some alarming conclusions about the antibody tests that are being rolled out by states as part of sprawling surveillance efforts to try and stop a second wave of COVID-19.

As the global coronavirus case count passes 6 million, Indian PM Narendra Modi announced on Saturday that he would once again be extending a restrictive lockdown that has helped keep the number of confirmed cases in the world’s second-largest country to just ~150k. A recent uptick in new cases prompted the decision – which some Indians are calling “Lockdown 5”, given that it’s the fourth extension.

A paper published just yesterday by a team of analysts at Goldman Sachs shows how India’s easing – moderate though it was – has seemingly led to a rebound in new cases. This underlines two themes: 1) that the strict lockdown imposed by Modi – which is broadly popular even if it has left many disillusioned – appears to have been effective…and the notion that many Indians are still afraid to venture back out into society.

Case in point: electricity generation tumbled again the week before last…

…and mobility and other activity indicators remain weak…

…even as lockdown measures have eased across the country.

Source: GS

According to the FT, the new timeline will allow restaurants, hotels, malls and places of worship to open from June 8 as it looks to resume economic activity despite the country’s rising coronavirus caseload.

Though some reopening measures have been introduced around India in recent weeks, the government said Saturday that strict lockdown measures will remain in effect in designated “containment zones” – neighborhoods where the virus is said to be especially prevalent.

Widespread rioting is the latest obstacle for the US economy. At this point, every state has at least started the process of reopening their economies, even as the number of cases reported daily continues to rise in some (though the gulf between the worst-hit states and virtually every other state remains vast).

With a headline trumpeting more promising “green shoots” now that the nadir of what one analyst called “our 2 month recession” has supposedly been reached, the FT heralded data showing an increase in traffic and a fall in panic purchases at US supermarkets as “signs that Americans are taking their first cautious steps back to normality after coronavirus flatlined the economy.”

However, economic data released over the last few days offer a decidedly more mixed picture. As a plunge in private wages continues to crimp spending, traumatized Americans are putting more money aside, and a recent gauge of consumer sentiment suggests that while most Americans believe the economy will continue to improve, they expect economic conditions, broadly speaking, will remain “unfavorable” in the coming year.

Brussels’ unelected bureaucrats bristle at accusations they are “out of touch” with the common man, but on Saturday, as some of America’s largest cities burned, the EU leadership called on President Trump to reconsider his decision to cut ties with the WHO.

Meanwhile, in the UK, PM Boris Johnson is facing growing criticism over his plan to start reopening Britain in earnest on Monday…after receiving torrents of criticism that his lockdown measures were overly restrictive.

Finally, some more bad news for Russia as its lockdown measures finally start to lift. After a long streak of slowing cases, the country recorded its highest daily jump in new coronavirus cases in more than a week on Saturday, as the total number of infections closed in on 400k. Brazil also reported another harrowing statistic on Friday evening as it overtook Spain to become the country with the fifth-highest death toll in the world, with ~28k confirmed deaths.

Russian public health officials recorded 8,952 new cases of Covid-19 and 181 deaths from the virus. Official figures on Saturday showed a total of 396,575 infections and 4,555 deaths.

Authored by Charles Hugh Smith via OfTwoMinds blog,

Once the pool of greater fools dries up, stocks crash regardless of what the Fed does or bleats.

The conventional view is the Federal Reserve creating trillions of dollars out of thin air will trigger inflation. Not so fast. Yes, creating trillions of dollars out of thin air will eventually devalue the purchasing power of each dollar–what we call inflation–but first all the unprecedented asset bubbles will pop and valuations will crash.

Let’s call this a deflationary deluge as unsustainable asset prices are eroded by a hard rain of reality. To understand the enormity of the current bubbles, please glance at the charts below. The first chart depicts recent stock market bubbles; note the extreme height of the current bubble.

The next chart shows the S&P 500, and the extraordinary amplification of the bubble that reached its apex in February 2020. Note that each ramp higher takes less time to reach its peak. The most recent snapback rally gained about 870 points in a mere two months–a move that took roughly 5 years in the early 2000s.

Real estate and other assets have also soared in unprecedented bubbles. Old bungalows that sold for $150,000 less than 20 years ago are now supposedly worth over $1 million.

What made this possible? An equivalent bubble in debt. Every sector–household, corporate and government–has borrowed astronomical sums of money to keep the bubble economy glued together. In this rising tide of currency and capital, whatever had scarcity value–real estate, art, stocks–was purchased with the borrowed money as a store of value and / or as a source of income in a world starved of low-risk yields by central banks that dropped interest rates to near zero.

Assets don’t have to rise, but the interest and principal on debt has to be paid. That’s the rub with buying assets with borrowed money.

The price of assets is set on the margins. In a neighborhood of 100 houses, the price of all the houses is set by the most recent handful of sales. If each house was valued at $1 million, and three houses sell for $800,000, the value of the other 97 houses falls to $800,000 each.

All bubbles rely on a greater fool willing to pay a higher price than the previous somewhat lesser fool. The problem is the supply of greater fools quickly drops to zero when euphoria is replaced by fear and the marginal buyers are no longer willing to pay outlandish sums for houses, stocks, boats, etc.

Every greater fool who abandons a market sticks a pin in the bubble. As prices start eroding, those who bought the over-valued assets with borrowed money start realizing they have to make the interest payments even if the asset is losing value. The only rational choice is to run to the exit and sell the asset.

But since so many recent buyers bought with borrowed money, the exit is quickly jammed with desperate sellers. This triggers market crashes as marginal buyers desperate to sell will drop their price, while the delusional herd still believes the bubble valuations are not just fair but “under-valued.”

This is why the majority refuses to sell until it’s too late. They believed the fairy tales that “real estate never drops,” Apple is a bargain at $300 (see chart below), etc., and are unwilling to suspend those beliefs even as the deflationary deluge washes away their wealth.

By the time they realize the impossibility of getting their wealth back, it’s too late to do anything other than salvage what’s left by selling now rather than later.

Bubbles tend to rise and drop in rough symmetry, meaning they tend to retrace the entire bubble, though the descent is often much faster than the ascent.

The greatest fairy tale of them all is the Fed has our back. The belief here is that all the dollars created out of thin air by the Fed will flow into stocks. But there is no actual causal mechanism in this belief; the Fed can create dollars out of thin air but they don’t have to flow into the stock market; they can go elsewhere. They only flow into stocks because the financiers, banks and other parasites and predators are counting on greater fools to pay ever higher prices for stocks based on their erroneous faith that the Fed’s new money magically goes straight into stocks.

Once the pool of greater fools dries up, stocks crash regardless of what the Fed does or bleats, up to the point that the Fed is given the legal go-ahead to buy stocks directly. That’s when the inflation everyone anticipates will begin. But inflation is just as unruly a beast as an asset bubble, and control is never quite as complete as the Fed claims.

First the deflationary deluge, then the tsunami of inflation. Both destroy the wealth of believers in fairy tales.

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Update (11:19 ET): Prepare for a night of hell, as per Fox News’ report that 50 cities could see protests on Saturday night. 

PROTESTS EXPECTED IN 50+ U.S CITIES TONIGHT – FOX NEWS second wave coming

— FXHedge (@Fxhedgers) May 30, 2020

* * *

Minnesota Governor Tim Walz summed-up the current chaos erupting nationwide perfectly:

“This is absolutely no longer about George Floyd or addressing inequities anymore. This is an organized attack designed to destabilize civil society.”

Protests raged overnight in dozens of U.S. cities, including Minneapolis, Washington, D.C., New York City, Atlanta, Houston, and several large metro areas on the West Coast. 

Protests or social unrest was seen in these major metros on Friday night: 

• Houston & Fort Worth, TX
• NYC
• Chicago, IL
• Atlanta, GA
• Washington D.C.
• Detroit, MI
• Fort Wayne, IN
• Kansas City, MO
• Des Moines, IA
• Vegas, NV
• Charlotte, NC
• San Jose, CA
• Boston, MA
• Memphis, TN
• Columbus, OH
• Denver, CO
• Cincinnati, OH
• Portland, ME
• Louisville, KY

Starting in Minneapolis, where unrest continued into the fourth night following the death of George Floyd, a man who was killed by Minneapolis Police on Monday, had Minnesota National Guard Adjutant General Jon Jensen and Governor Tim Walz announce the request for 1,000 more soldiers from the National Guard as widespread rioting and looting continued. 

“This is the largest civilian deployment in Minnesota history that we have out there today, and quite candidly right now, we do not have the numbers,” Walz said Saturday morning.” We cannot arrest people when we are trying to hold ground because of the sheer size, the dynamics, and wanton violence.”

Jensen expects by Saturday evening, up to 1,700 soldiers will be “ready to go.” On Friday night, assault rifle-wielding soldiers were spotted on the streets within the ranks of local police. 

A fleet of armored Humvees lined the street “on Chicago Ave in between Lake St. and 31st as firefighters battle raging fires 8 blocks from where George Floyd was killed,” tweeted Unicorn Riot. 

Protesters appeared to have torched a Wells Fargo bank. 

Wells Fargo by the 5th Precinct in Minneapolis pic.twitter.com/otu1Q7IqbK

— Tony Webster (@webster) May 30, 2020

Building structure(s) are still on fire on Saturday morning. 

This is the area around the 5th Precinct pic.twitter.com/BnGo3YUxTx

— Tony Webster (@webster) May 30, 2020

The view from my apartment is getting intense. Stay safe #Minneapolis.

LynLake Speedway (I believe) is on fire. Uptown, Lake & Aldrich. pic.twitter.com/XA75GYhlrz

— CodyGriz (@CodyGriz) May 30, 2020

Check cashing stores (pictured here) and pawn shops burning all over town. pic.twitter.com/e8BQpPBvc0

— Tony Webster (@webster) May 30, 2020

Chaos and destruction continue into the weekend.  

O’Reilly Auto Parts right now in Minneapolis pic.twitter.com/531cNWMhnX

— Matt Finn (@MattFinnFNC) May 30, 2020

What appears to be an Auto Zone on fire right now in Minneapolis pic.twitter.com/l4IdRfyjt9

— Matt Finn (@MattFinnFNC) May 30, 2020

Live in Downtown Minneapolis right now: pic.twitter.com/kbcWrKL9bK

— Matt Finn (@MattFinnFNC) May 30, 2020

Scenes last night from Interstate 35W, a major highway system in the U.S. that passes through downtown Minneapolis, where protesters broke into a moving UPS truck and stole packages.

Protestors getting into the back of a UPS truck as it goes by on 35W @KSTP pic.twitter.com/hmVUpJ82vo

— Callan Gray (@CallanGrayNews) May 30, 2020

In response to Washington, D.C. protests on Friday evening, President Trump thanked the Secret Service on Saturday morning for protecting the White house.

“Many Secret Service agents just waiting for action,” President Trump tweeted. 

Meanwhile, the Treasury Department in DC was breached by rioters, who spray-painted the building. According to CNN, some of the protesters were stopped by US Secret Service but eventually let go.

At least one protestor spray painted graffiti on the bank building. pic.twitter.com/GSglZWAI18

— Clarence Williams (@nu1wcf) May 29, 2020

Down in Atlanta, CNN’s headquarters were attacked by protesters on Friday evening. 

Several stunning images of the unrest in Atlanta last night.

An angry mob lit NYPD Police vans on fire last night:  

#Breaking Protesters set #NYPD van on fire. @NY1 @RonLeeReporting captured this video in Fort Green, #Brooklyn. pic.twitter.com/cefEVet9gO

— Dean Meminger (@DeanMeminger) May 30, 2020

Rioting in Brooklyn overnight. 

Rioters pushing the lines in Brooklyn pic.twitter.com/8hcyjsyTwO

— Rob O’Donnell (@odonnell_r) May 30, 2020

From Houston to Phoenix to Portland, police forces have reported widespread social unrest. 

Our officers made nearly 200 arrests of those who participated in unlawful assemblies throughout the day & night. Most will be charged with obstructing a roadway.

4 of our officers suffered minor injuries & 8 police vehicles were damaged.

Updates will be posted here. #hounews

— Houston Police (@houstonpolice) May 30, 2020

Property throughout the downtown Phoenix area has been vandalized as some demonstrators engage in criminal behavior, breaking windows and doors to municipal and private business and destroy cars parked along the street.

— Phoenix Police (@PhoenixPolice) May 30, 2020

Two arrests have been made related to this evenings riot. Another arrest was made around 3:30 p.m. yesterday afternoon related to the demonstration near the Justice Center. Details will be provided in a press release when more information becomes available.

— Portland Police (@PortlandPolice) May 30, 2020

As things spiral out of control, two Federal Protective Service officers suffered gunshot wounds in Oakland, California, last night, leaving one of them dead. 

Oakland was crazy in the overnight, one protester stole a skid loader tractor and drove it down the street. 

Earlier in #Oakland : Rioters use a mini bulldozer during the riots in that citypic.twitter.com/Dym89pcTaw

— Shark NewsWires (@SharkNewsWires) May 30, 2020

Protesters clashed with police in Oakland. 

Meanwhile, the protest / riot in Oakland CA has gotten out of control…large crowd, flames, smoke…reaching critical mass. pic.twitter.com/eW5kMVur8k

— ZeroHedge (@govttrader) May 30, 2020

Protesters looting a car dealership in Oakland. 

Part 1 of 2 Oakland 🚗 #GeorgeFloyd #Oakland #bayarea #california #protests #riots #TheSavageRoom #Savage pic.twitter.com/bRer6HWtgF

— The Savage Room (@The_SavageRoom) May 30, 2020

Several years ago, US Northern Command “rehearsed non-lethal riot control tactics” at Davis-Monthan AFB in Arizona. Perhaps preparation for widespread social unrest across the country. The government has known this day was coming… 

President Trump signed an executive order in late March that allows the Pentagon to mobilize up to a million troops to combat the coronavirus outbreak in the country. The order could now be directed at social unrest. It’s only a matter of time before more state governors activate National Guard troops like Minnesota did early this week. 

We were the first to note Friday, the federal government flew a military drone above Minneapolis to spy on protesters.   

A perfect storm develops: 40 million unemployed, economy crashed, record polarization and wealth inequality at extremes, the country is quickly descending into chaos into the summer months. So what happens when the government stops unleashing helicopter money for people who recently lost their jobs?