Friday, 13 May 2022 — Burradoo, Australia

By Brian Chu Editor, The Daily Reckoning Australia

[7 min read]

• The fiat currency system strikes hard…against cryptos
• Battle of wits in the financial war
• Our solution against ‘The Great Reset’
  

Dear Reader,

The world has experienced several unusual events since 2022 began.

As if the last two years haven’t been enough, it’s becoming more surreal.

We had the Russia-Ukraine conflict begin at the end of February.

Then came the spike in the oil price amidst accelerating inflation that is putting more pressure on household budgets.

We also saw how Russia managed to squeeze around trade sanctions and asset confiscations in the wake of the conflict with Ukraine by reflating the ruble’s value using gold and imposing a ruble for oil and gas policy.

Then the broader asset markets began to slide in the second half of last month, accelerating with the RBA’s rate rise last Tuesday and the Federal Reserve's last Wednesday.  

How about the sudden city-wide lockdowns in Shanghai as the Chinese government seeks to implement their zero-COVID policy in a vain attempt to eradicate the virus? The lockdowns are appearing to occur in a few more major cities around the nation.

There’s so much more, but you get the idea that you’re living through unprecedented times.

It’s time to buckle up and get ready as things get rougher!

The fiat currency system strikes hard…against cryptos

It’s almost like there’s no way to hide from the fiat currency system right now. It hit the cryptocurrency space in a big way last week.

Cryptocurrencies have been on a bearish run since last November, slashing the value of the entire market by almost 50%. Bitcoin [BTC] and Ethereum [ETH] have lost more than 50%, with many crypto tokens falling even more.

Just when things couldn’t get worse, Terra Luna [LUNA] saw its tokens drop more than 99% from over US$80 to trade at around 8 US cents as of Thursday evening Sydney time.

Terra Luna was among the top 10 crypto tokens by market value. At its height, it had a market value of more than US$50 billion. The entity behind this token, Terra Labs, built its own decentralised finance (DeFi) community that would allow people to use its digital tokens for exchange. Its flagship token, USD Terra, is an algorithm-driven stablecoin whose price is pegged to the US dollar. It also offered other crypto tokens pegged to other major fiat currencies.

USD Terra was widely used in the crypto community, with a market capitalisation of more than US$16 billion earlier this year.

A raid on the peg of USD Terra began mid-last week when hedge funds saw a vulnerability in USD Terra. The founder, Do Kwon, had wanted to back the value of USD Terra with bitcoin and other cryptos. Hedge funds began selling bitcoins and USD Terra to break the peg between the USD Terra and the US dollar, causing investors to sell and trigger a liquidity crisis.

This raid is very similar to the one that George Soros launched against the Bank of England to crush the British pound in 1991, in which he pocketed more than US$1 billion in profits.

This crisis in the cryptocurrency space also attracted the interest of US Treasury Secretary Janet Yellen, who’s been critical of the lack of financial regulation in the cryptocurrency markets. It seems like she has more ammunition to push for regulation in light of this situation.

While financial regulation on cryptocurrencies sounds good, I have my suspicion that it’s not to create a fair market.

Just think about the markets we have for shares, commodities, and derivatives. The wolf guards the hen house.

Battle of wits in the financial war

Speaking of raids on currency pegs, it reminds me of how Russia revived its ruble by temporarily pegging it to gold. I wrote about this recently.

I was initially very excited about it. After all, I’m a gold enthusiast and I’ve been waiting for someone to step up with the golden cross to fight against the fiat currency beast.

It’s not about looking to President Putin as some saviour, far from it. But anyone who stands up for gold against the fiat currency system and succeeds deserves some credit.

Some naysayers mocked gold enthusiasts for touting the peg by the Russian central bank when it announced it would move from buying gold at a fixed price to a negotiated price in early April. They claim that there’s no return to a gold standard.

They aren’t wrong about that.

I don’t believe a gold standard is the solution either.

And watching the raid on USD Terra and how that’s looking to knockout Terra Luna and the LUNA community made me see the wisdom behind Russia not going forward with pegging the ruble to gold.

You can bet your bottom dollar that the central banks will launch a raid on both gold and rubles to smash the Russian economy if Russia did keep that peg.

It’s a battle of wits, simple as that.

Our solution against ‘The Great Reset’

There's no doubt that the current market conditions are part of the World Economic Forum’s plans to usher in ‘The Great Reset’ so the world can enter ‘The Fourth Industrial Revolution’.

Their dream is a top-down managed society driven by big data and governance systems to keep us ordinary citizens under their watchful eye.

‘You will own nothing, and you will be happy’ is the motto.

What better way to do it than to make us buy assets in a rising market using debt, then raising the interest rates, crashing the markets, and selling it in a panic back to them?

You didn’t think the central banks raised rates so late because they didn’t know what was going on, did you?

Their incompetence is such that you could even attribute it to being a purposeful plan. The bankers wanted to do that.

I call it ‘Reverse Hanlon’s Razor’.

Given that the people running the fiat currency system are now making their move, you need to prepare or be swept away.

We can help.

Our team has been working with world-renowned geopolitical and financial strategist Jim Rickards. He has formulated ‘Jim Rickards’ Fat Tail Portfolio’ project to help you prepare for what’s to come. It takes a comprehensive look at what can happen, its impact, and where you can take opportunities to come out ahead.

My colleague, Nickolai Hubble, and I are on this team. We welcome you to check it out.

The clock is ticking…

God bless,

Brian Chu,
Editor, The Daily Reckoning Australia

By Bill Bonner Editor, The Daily Reckoning Australia

Dear Reader,

According to analyst Ed Yardeni, the average American family is now spending US$3,000 more per year on food and fuel. Here’s the report from Fox News:

‘Gas prices hit a new all-time high on May 10, 2022, amid rising inflation and President Biden’s restrictions on oil and gas production.

‘According to AAA’s average gas price calculator, the national average cost of a regular gallon of gasoline hit $4.374 on Tuesday, the highest since September 2014, when the average monthly cost hit $3.387. 

‘According to Yardeni Research, increased oil costs suggest the average American household will pay almost $2,000 more for gasoline in 2022, according to a March research note.

‘“In addition, we estimate that the average household is currently spending at least $1,000 [according to a seasonally adjusted annual rate] more on food as a result of rapidly rising grocery prices,” Edward Yardeni, the president of the firm, wrote on LinkedIn. “That’s $3,000 less money that households have to spend on other consumer goods and services, which also are experiencing rapid price increases.”’

There are some 400 PhD economists on the Fed payroll. Did any of them foresee the obvious consequences of printing up trillions of dollars’ worth of new money? Apparently not. Did any of them mention that it would make most Americans poorer?

But wait. Their job isn’t to speak the truth to the powerful Fed governors but to protect them from it. Armed with jackass theories and overblown conceits…they stand guard at the temple door.  

Like the vestal virgins, Fed governors are unblemished by the carnal facts of real life…untested by the give and take of real-world commerce…uninstructed by the bid and ask of a real market economy. And with their own backup team of like-minded PhDs on the job, they never have to get a real job…never have to mingle with real businessmen…or sup with real investors.  

Unhinged from reality

Their imaginations, untethered by real-world experience, are thus free to believe whatever they want…no matter how absurd. Such as…

…the idealness of 2% inflation (a total fantasy…supported neither by theory nor experience)…

…or the doctrine of data dependence (otherwise known as ‘driving by looking in the rear-view mirror’), which is how the Fed ran into 9% inflation. ‘Who could have seen that coming?’, they ask one another. But Fed governors were almost the only ones who didn’t see it coming.  

In today’s news, we find Loretta Mester again, the Fed governor we spotlighted yesterday. Ms Mester has no idea whether inflation is coming or going. Here’s Bloomberg on the story:

‘Cleveland Federal Reserve Bank President Loretta Mester said she favors half-point interest-rate increases but would support bigger increments later if inflation doesn’t ease by the second half of the year. 

‘“We don’t rule out 75 forever, right? The cadence we’re going now seems about right to me,” Mester said during an interview on Bloomberg Television with Michael McKee on Tuesday. “We’re going to have to assess whether inflation is actually moving down, and then we’ll be able to get more information after we do a couple of those to see,” she said, referring to 50 basis-point hikes.’

That’s ‘data dependence’. You spend your whole career on the Fed payroll, pretending you know what you’re doing…and then, when it becomes clear that you’ve made a mess of the economy, you try a little rate increase…and see what happens!

… and there’s the ‘wealth effect’. Behind it is the notion that if you can make some people richer, they’ll spend more money…and then the wealth will ‘trickle down’ to the rest of the population.

But the whole idea is transparently ridiculous. If you could make some people richer…why not just make everybody richer? And if you can’t make people richer (which the Fed surely can’t), pretending to make them wealthier (by manipulating their stock prices, or their house prices, for example) is just a scam. There’s no real wealth that can trickle anywhere…just fake wealth dripping like water from a leaky roof, rotting the whole house.

And then, inevitably, the gimmie/stimmy ends, and it’s payback time. Spending goes down…and the ‘The Wealth Effect’ becomes a ‘Poverty Effect’. 

Now we see the elegant symmetry of real life when those who got what they oughtn’t to have gotten get no more…and the awkward, distorted economy — as heavy as a freight train…as clumsy as a barge — comes in for landing.  

Wipe out!

Households are already upping their credit card and mortgage debt…desperately trying to maintain the standard of living to which the feds made them accustomed. The most richly priced stocks are falling 20%, 40%, 50%, while the flaky memes, NFTs, and cryptos are getting wiped out completely.

That’s when we ask: what lever does Ms Mester pull now? What dial does she turn to avoid a hard landing?

As we explored last week, the problem is the metaphor. Fed governors see themselves as the press portrays them — expert pilots tasked with bringing the giant US economy down to Earth without spilling a single drink in the first-class section.  

But not everything is as simple as flying a plane. When you have an argument with your wife, for example, there are no wheels you can turn or throttles you can open to fix it. Nor are you likely to find a technical solution to the problems of laziness, stupidity, greed, vulgarity, ignorance, or bad taste. Each one must be addressed in its own way.   

A better metaphor for describing the Fed’s dilemma is this:

The Fed wanted to liven up the party. As we saw yesterday, Ms Mester and other Fed governors wanted higher inflation rates. So to get people moving, they set fire to the house.

It was fun for a while...the flames gaily dancing in the living room…a warm glow in the parlour. But now, the blaze is out of control. Instead of 2% inflation, they got almost 9%. And so now the Fed is faced with a challenge: putting out the conflagration without damaging the furniture.

It tossed a glass of water towards the flames last week. Next quarter, it may try another 0.05% rate increase. And then, maybe another spritzer in the third quarter…and so on…until…

…still looking in the rear-view mirror…finally…Ms Mester sees the house burnt to the ground.

Regards,

Bill Bonner,
For The Daily Reckoning Australia