Mester on Financial Stability 

Doug Nolan

“When I refer to financial stability, I mean a financial system that is resilient to shocks. 

That is, one in which banks and nonbank financial institutions not only remain solvent but also continue to lend to creditworthy businesses and households during a significant economic downturn, and one in which financial markets continue to intermediate in an orderly fashion during periods of stress.” 

- Cleveland Fed President Loretta Mester, June 22, 2021

I read with keen interest Mester’s presentation, “Financial Stability and Monetary Policy in a Low-Interest-Rate Environment.” 

With rates locked a zero and the Fed’s balance sheet inflating $4.332 TN, or 115%, in 93 weeks to surpass $8.1 TN, there is no more pressing issue than the interplay of monetary policy and Financial Stability.

From one perspective, the March 2020 crisis showcased a financial system resilient to shocks. 

A well-capitalized banking system continued to lend, while there was little concern for financial institution solvencies. 

Meanwhile, financial markets clearly did not “continue to intermediate in an orderly fashion.” 

When I refer to Financial Stability, for starters I mean a financial system that does not require monumental liquidity injections and bailouts that clearly come with dangerous unintended consequences. 

Speculative Bubbles are reflective of financial instability. 

June 24 – New York Times (Jeanna Smialek): 

“As Federal Reserve Chair Jerome H. Powell and Treasury Secretary Steven Mnuchin scrambled to save faltering markets at the start of the pandemic last year, America’s top economic officials were in near-constant contact with a Wall Street executive whose firm stood to benefit financially from the rescue. 

Laurence D. Fink, the chief executive of BlackRock, the world’s largest asset manager, was in frequent touch with Mr. Mnuchin and Mr. Powell in the days before and after many of the Fed’s emergency rescue programs were announced in late March. Emails… along with public releases, underscore the extent to which Mr. Fink planned alongside the government for parts of a financial rescue that his firm referred to in one message as ‘the project’ that he and the Fed were ‘working on together.’”

Curiously, Mester’s discussion of the March 2020 instability episode fails to mention the dislocation that unfolded throughout the ETF complex. 

“ETF” or “exchanged-traded funds” cannot be found in her paper. 

“Bubble” not included. 

Nor was there a mention of the Fed’s hasty decision to purchase corporate debt and fixed-income ETF shares. 

Mester specifically addressed that “$125 billion flowed out of prime money market funds in March 2020.” 

Yet not a peep regarding the run on ETF shares, which risked a full-fledged collapse across the equities and fixed-income markets. 


“The pandemic also revealed some structural issues in the U.S. Treasury market, one of the most important and most liquid markets in the global financial system. 

In March 2020, amid great uncertainty about the emerging global pandemic, many investors sought to move into cash and began liquidating their positions, even their positions in U.S. Treasuries, which are usually viewed as safe-haven assets. 

Pressure to sell was widespread and overwhelmed the dealers who play a central role in this market by intermediating between buyers and sellers. 

Stresses rose to a level that necessitated aggressive actions by the Fed, including purchasing large volumes of Treasury securities and agency mortgage-backed securities and conducting operations in the repo market.”

Again, the omissions are noteworthy: No mention of hedge funds, leveraged speculation or the derivatives industry. 

The most crucial market in the world was in complete disarray, revealing acute financial instability. 

What were the root causes? 

What role did monetary policy play? 

And what is the Fed doing to address market structural shortcomings? 


“While these actions were able to re-establish smooth functioning in the Treasury market, they did not address the underlying structural issues that propagated the stresses.”

I do Credit Mester for stating the obvious: 

“I would like to see financial stability considerations explicitly incorporated into the monetary policy framework, with an acknowledgment that nonconventional monetary policy has the potential to increase the risks to financial stability…” 


“Given the limits on cyclical macroprudential tools in the U.S., focus is better placed on improving the resiliency of the financial system’s structure across the business and financial cycles.” 

“My second recommendation recognizes that much of our regulatory, supervisory, and macroprudential apparatus is focused on banks, yet financial activity is increasingly moving outside of the banking system.”

After the role the “shadow” non-banks played in the 2008 crisis, the lack of Fed focus is inexcusable. 

“[Money market fund] outflows forced the funds to redeem their commercial paper holdings, thereby creating more stress in short-term funding markets. 

These runs were severe enough to require the Fed to intervene with emergency facilities. 

Reforms to the structure of these funds to reduce the risk of runs are now being considered by U.S. regulators.”

Arguably, the risk of a systemically destabilizing run is today greater for the ETF complex than with money market funds. 

Again, there is no mention of exchanged-traded funds. 

Apparently, no “reforms to the structure of these funds to reduce the risk of runs” are being contemplated.

The sordid process unfolded over the past few decades. 

These days, debt doesn’t matter, and deficits don’t matter. 

QE to the tune of $120 billion a month in the face of a booming economy and bubbling securities and housing markets is accepted as enlightened policy. 

Zero rates – and near-zero returns for savers – are perfectly acceptable. 

Stocks always go up. 

The Fed is prepared with its liquidity backstop to rescue the marketplace in the event of any trouble. 

QE is a proven commodity – no longer unconventional.

There is a monumental flaw in contemporary central banking doctrine, one not debated and seemingly not even recognized: it is perilous for central banks to manipulate the securities markets as their chief mechanism for managing financial conditions.

Traditionally, central banks adjusted short-term funding markets to, on the margin, either encourage or discourage bank lending. 

The banking system for generations was the key instrument for regulating system lending conditions and Credit availability, along with the overall monetary backdrop.

The Fed’s focus began to shift during the prolonged Greenspan era. 

Especially in response to early-nineties banking system impairment (post-eighties Bubble), the Greenspan Fed started using “activist” monetary policy to achieve specific market outcomes. 

It orchestrated a steep yield curve to recapitalize the banking system. 

It employed lower interest-rates to bolster bond prices and, as such, market demand for Credit instruments. 

This loosening of financial conditions worked to promote bond issuance and, as such, Credit growth. 

The “Maestro” learned to wield incredible market power with small rate adjustments or, more often, with mere comments.

I found it confounding at the time that such a momentous change in monetary policy doctrine evolved without as much as a debate. 

The new regime proved a godsend for the leveraged speculating community.

Speculative leverage ballooned, creating fragilities and repeated crises. 

This required ever-grander market bailouts. 

Each crisis backdrop afforded the Fed the opportunity to take another incremental “activist” leap. 

Of course, the markets beckoned for as much – and who would argue against Fed intervention with the markets and economy in distress? 

One of these days, our central bank will be held accountable.

The Fed was essentially pegging low interest rates, nurturing asset inflation and (with the help of the GSEs) backstopping marketplace liquidity. 

As one would expect, this stoked risk-taking and leveraging. 

It also momentously impacted the derivatives marketplace.

The new Fed policy regime allowed the derivatives complex to operate under the assumption of liquid and continuous markets, despite the reality of a long history of markets suffering recurring bouts of illiquidity and discontinuity. 

Basically, the Fed’s regime fundamentally altered pricing for market risk “insurance.” 

Think in terms of selling flood insurance with the Federal Reserve right there to safeguard against torrential rainfall. 

The availability of cheap market protection promoted risk-taking and leveraging, fundamentally altering market behavior and structure.

The upshot was a historic Bubble that burst in 2008 – providing a golden opportunity for the Fed to add QE to its expanding arsenal. 

It’s no exaggeration saying, “the world will never be the same.” 

At that point, the Fed was wedded to market intervention and manipulation to maintain the ultra-loose financial conditions necessary to hold Bubble collapse at bay. 

Not only did the Bernanke Fed expand Federal Reserve Credit by $1.0 TN, but the reflation strategy focused on coercing savers into the risk markets. 

While there was some protest within the economic community, consumer price inflation was at the time viewed as the major risk. 

It was not the time to fret prospective market excess and the inflation of historic Bubbles. 

I warned of a “Moneyness of Risk Assets” dynamic, where activist Fed policymaking was distorting the perception of price and liquidity risks (equities and corporate Credit, in particular). 

Just as Greenspan was a godsend to the leveraged speculation community and derivatives players, Bernanke’s policy regime was tailor-made for the newest innovation in financial speculation: exchange-traded funds.

The Fed had one last chance to rein in the Bubble. 

It announced its non-conventional policy “exit” plan in 2011, with the expectation of paring back some of its unprecedented balance sheet expansion. 

But instead of exiting, the Fed again doubled asset holdings over three years to $4.5 TN. 

And the policy evolution went beyond adding massive amounts of liquidity in a non-crisis environment. 

With essentially no fanfare, Bernanke sank deeper into activist policy quicksand in 2013: “If financial conditions were to tighten to the extent that they jeopardized the achievement of our inflation and employment objectives, then we would have to push back against that.”

Dr. Bernanke was essentially telegraphing the Fed would not tolerate the consequences of weak securities markets – let alone a correction or bear market. It was monumental. 

The Fed was no longer only backstopping the markets against crisis dynamics. 

Our central bank wanted loose financial conditions, and it was ready and willing to do whatever it takes to ensure inflating markets. 

Fed mandates could only be accomplished through robust securities markets. 

At that point, the Fed was managing financial conditions in name only. 

It orchestrated booming markets to accomplish its economic objectives.

It’s all been fairly predictable since then: escalating speculative excess, over-leveraging, Bubble Dynamics, and recurring market instability. 

And each bout of market turmoil ensured only more outlandish Fed market intervention: Powell’s “pivot,” the 2019 “insurance” stimulus in the face of booming stock markets and unemployment at multi-decade lows, and then the Monetary Fiasco unleashed in March 2020. 

The Fed’s balance sheet has about doubled in 15 months, while our central bank ventured into buying corporate bonds and ETFs. 

Importantly, it thoroughly convinced the marketplace that “whatever it takes” can be literally interpreted when it comes to sustaining Bubble markets. 

Manias were spawned in precarious “Terminal Phase Excess.”

Now what do they do? 

The Fed and global central bank community have inflated myriad historic Bubbles. 

They’ve irreparably distorted market prices and function. 

The upshot is momentous risk distortions throughout – with particular emphasis on unprecedented leveraged speculation, the derivatives complex and the ETF industry. 

The money market funds should be the least of the Fed’s concerns. 

Goodhart’s (British economist Charles Goodhart) Law is germane: 

“When a measure becomes a target, it ceases to be a good measure.” 

The Fed’s overarching objective must be to ensure monetary stability. 

To focus on managing financial conditions through securities markets interventions is to propagate monetary instability. 

It only nurtures price distortions, speculative leverage, asset inflation, Bubbles, resource misallocation, and financial and economic instability. 

Moreover, such a policy course will favor a segment of the population and economy. 

It will spur inequality and put the Fed’s institutional credibility in jeopardy. 

I appreciate Loretta Mester’s attention to the critical issue of financial stability. 

Unfortunately, these types of discussions are moot if they exclude the Fed’s now longstanding role in promoting market distortions and Bubbles. 

Speculative finance is inherently destabilizing. It is self-reinforcing on the upside and highly disruptive on the downside. 

Fed policy has evolved to the point of essentially guaranteeing loose financial conditions and, as such, promoting speculative finance and overheated Bubble markets. 

This flawed policy regime is anathema to Financial Stability. 

 Paradise lost

Twilight of the tax haven

A global corporate-tax pact would ruin a lucrative business model

As is often the case in multilateral matters, America held the key. 

When Janet Yellen, its treasury secretary, announced earlier this year that it was time to end the “race to the bottom” on corporate tax, her remarks supercharged sputtering talks over a global deal to overhaul how much tax multinational companies pay, and where.

Talks are focused on two main changes: reallocating taxing rights towards countries where economic activity takes place, rather than where firms choose to book profits; and setting a minimum global tax rate. 

Finance ministers from the G7 group of rich countries gave the re-energised negotiating process a big fillip at their meeting on June 4th-5th, backing a minimum rate of “at least 15%” and a redistribution of taxing rights that guarantees “market” countries—ie, those where companies sell stuff—a bigger portion of taxing rights: on “at least 20% of profit exceeding a 10% margin for the largest and most profitable multinational enterprises”. 

They also signalled a desire to defuse a transatlantic row over the taxation of (mostly American) digital giants, vowing to “provide for appropriate co-ordination” between the application of new international tax rules and the removal of punitive digital-services taxes, which European countries and others have slapped on the sales of big tech firms.

This gives the broader G20, the main forum for international tax talks, which also includes the likes of China and Russia, plenty to chew over. 

It is hoping to agree on terms as soon as July, spurring the other 120 or so countries and territories involved in the talks to fall into line. Germany’s finance minister has predicted a “revolution” in global tax rules “in just a few weeks”.

All revolutions have winners and losers. 

In this case the clearest victors would be large economies where multinationals make lots of sales but book relatively little taxable profit, thanks to tax-planning that siphons income to low-tax jurisdictions. 

This mismatch has grown along with the rise of digital giants like Apple and Google, the assets of which are largely intangible. 

Poor countries where global companies have factories and other operations stand to benefit, too, though not by as much as they think they should. 

The most obvious losers will be the havens that, starting more than half a century ago, took increasing advantage as globalisation made capital more footloose—offering what they saw as much-needed tax competition, and what many others saw as beggar-thy-neighbour economics.

A study in 2018 concluded that around 40% of multinationals’ overseas profits are artificially shifted to low-tax countries. 

One official closely involved in the current talks thinks the deal taking shape could “all but kill the havens”. 

However, havens come in various shapes and sizes, from taxless Caribbean paradises to merely tax-light hubs in Europe and Asia. 

Some have more to fear than others.

Paradise lost

Things look bleak for the palm-fringed, zero-tax territories, such as Bermuda, the British Virgin Islands (bvi) and the Cayman Islands. 

Though they make nothing in corporate-tax revenue, they have, to differing degrees, come to rely on fees from subsidiaries of large companies and a cottage industry of accountants, lawyers and other corporate-service providers that sprouted up locally to serve them. 

Their revenue is mere crumbs compared to the taxes saved by those firms, but a lot for such small economies. 

Corporate and financial services accounted for over 60% of the bvi’s government revenue in 2018.

The type of deal that the Biden administration is pushing (and the G7 has backed)—which would apply the global minimum rate on a country-by-country basis, rather than in aggregate—would blow up these havens’ business model. 

They are livid, but there is nothing they can do. 

A diplomat says they are in the process of being “neutralised”, and are “irrelevant” to the talks. 

“No one wants to hear from them.” 

Some at least have other revenue streams: Cayman is a big domicile for hedge funds, Bermuda for insurers.

Better-connected economies that have traditionally been friendly to corporate-tax-planners are less easy to dismiss. 

Several European Union countries, such as Ireland and Cyprus, have lured investment with a low corporate-income-tax rate (both levy 12.5%), or, as Luxembourg and the Netherlands have done, with rules that make them attractive conduits in tax structures, helping companies avoid tax in other countries. 

An imf study in 2019 found that such “phantom” investment had pushed Luxembourg’s stock of foreign-direct investment to $4trn, an improbable one-tenth of the global total. 

Hong Kong and Singapore have also benefited as corporate-tax entrepots.

Some of the more egregious loopholes fuelling these flows have been closed in recent years, following an oecd-brokered deal in 2015. 

Among them is the Double Irish, which funnels profits to subsidiaries registered in Ireland but tax-domiciled in Bermuda or the Cayman Islands, and which may have saved Google alone tens of billions of dollars over a decade.

There is still plenty to lose, though. 

Ireland is particularly nervous, having come to rely on its 12.5% rate to attract foreign investment, much of it involving real people, offices and factories. 

Corporate tax now accounts for a record 20% of the country’s total tax take. 

The Irish have been lobbying America, the source of much of their investment, against a radical reallocation of taxing rights and a minimum tax above 12.5%. 

Ireland’s finance minister, Paschal Donohoe, has argued that smaller countries should be allowed to use tax policy to make up for the advantages of scale, location and resources that big ones enjoy.

Even a minimum rate of 12.5%, or only just above it, could cost Ireland, though, when you factor in tax breaks. 

Many big companies using it pay an effective rate in the single digits. 

The country’s “patent box”, a scheme for profits from innovation, charges just 6.25%. 

A firm paying that might quickly tire of Irish charms if faced with a six-percentage-point top-up. 

The government has pencilled in an annual tax-revenue loss from the putative global deal of €2bn ($2.5bn)—around 2.4% of public revenue, and the equivalent on a gdp basis to America losing nearly $140bn.

Ireland has some friends in the eu. 

Hungary, with a rate of 9%, is a noisy champion of tax competition. 

Cyprus and Malta are sympathetic, too, though “happy to sit in Ireland’s shadow”, says another official. Outside the eu, Singapore and Switzerland have signalled that they consider 15% too high. 

The Asian hub would be happier with 10%.

Luxembourg and the Netherlands, however, have undergone Damascene conversions. 

The Grand Duchy, lambasted after a leak in 2014 exposed sweetheart tax deals with dozens of multinationals, has passed reforms that narrow tax-arbitrage opportunities and increase tax-ruling transparency. 

It says it could live with any deal that levels the playing field. 

The Dutch government, stung by public criticism of its tolerance of tax tricks, has also been trying to close loopholes. 

“We won’t be the ones who obstruct the deal,” says Hans Vijlbrief, the Dutch state secretary for finance. 

“My goal is to not be mentioned any more in the list of tax paradises.”

That leaves Ireland and other eu malcontents in a bind. 

They could in theory wield vetoes, since the bloc’s tax decisions require unanimity. 

But that looks highly unlikely given the support for change from the union’s big members and America—not to mention the awful politics of blocking a deal seen by the public as necessary to force big business to pay its fair share.

Moreover, America and others could impose minimum taxes on their own companies even without a global deal; indeed, America already has a version for intangible income, albeit set at just 10.5%. 

The revolution is coming, barring an unexpected breakdown in talks. 

And with it, a golden era for the world’s tax havens may be drawing to a close. 

Gold Investors Ignore The Fed

Adam Hamilton

CPA, Principal & Co-Founder of Zeal LLC

Gold was just hammered lower after the latest FOMC decision. 

Heavy gold-futures selling erupted after a third of top Fed officials implied they saw a couple potential rate hikes way out into year-end 2023. 

While leveraged gold-futures speculators panicked, gold investors ignored these faint tidings of slight tightening way off in the distant future. 

Their resolve is bullish for gold, as investors control far more capital than speculators.

Gold has two dominant primary drivers, speculators’ gold-futures trading and normal investment capital flows. 

The interplay of these overwhelmingly determines gold’s price trends, so traders need to carefully follow them. 

The extreme leverage inherent in gold futures makes their gold-price impact bigger over the shorter term, while the vast pools of investment capital make it more important to gold over the longer term.

Last week I wrote an essay on the Fed gold-futures purge, analyzing that FOMC decision and the heavy gold-futures selling that pummeled gold in its wake. 

In a nutshell, 6 out of 18 top Fed officials think their federal-funds rate might be 50 basis points higher by the end of 2023! 

That may as well be an eternity away, and the so-called dot plot those individual outlooks came from is a notoriously-inaccurate forecaster.

But with the super-low margin requirements for gold futures, speculators could run insanely-high leverage up to 20.7x leading into that FOMC decision! 

That kind of amplification breeds extreme risks, as a mere 4.8% gold move against speculators’ positions would wipe out 100% of their capital deployed. 

So they had to exit fast after that hawkish Fed surprise goosed the US dollar, fueling self-feeding gold-futures selling.

The more gold-futures contracts dumped, the faster gold fell. 

The sharper gold’s plunge, the more other speculators were forced to liquidate longs or face catastrophic losses. 

That’s why gold plummeted 4.5% in just two trading days following those far-away dots creeping higher. 

While all this was covered in depth in last week’s essay, there wasn’t yet enough data to evaluate the FOMC’s impact on gold investment flows.

Now there is, and investors shrugged off those distant-future potential rate hikes so far. 

That’s very bullish for this battered metal in the coming weeks and months. 

Speculators’ gold-futures selling quickly exhausts itself, as these traders’ capital firepower is very limited. 

As long as the resulting gold plunge doesn’t scare investors into fleeing, this metal is nicely set up for a sharp mean-reversion rebound to new upleg highs.

Unfortunately comprehensive gold supply-and-demand data showing investment flows is only published quarterly by the World Gold Council. 

That compares to weekly for speculators’ gold-futures positioning. 

But thankfully a great proxy for global gold investment demand is available daily. 

That is the physical-gold-bullion holdings of the leading and dominant gold exchange-traded funds, which are both American ones.

They are the gargantuan GLD SPDR Gold Shares and IAU iShares Gold Trust. 

As of the WGC’s latest quarterly fundamental report covering Q1’21, GLD and IAU commanded 29.0% and 14.1% of all the gold held by all the world’s physically-backed gold ETFs! 

The next-largest competitor trading in the UK only weighed in at 6.3%. And gold-ETF capital flows are also increasingly dominating overall gold investment.

Q1’21 is a great example, as evident in the WGC’s latest fantastic Gold Demand Trends report. 

Overall world gold demand was quite week, plunging 23.0% year-over-year or 244.2 metric tons. 

Yet traditional bar-and-coin investment demand was very strong, blasting 35.5% or 89.0t higher. 

Gold’s only material demand category that plunged was gold-ETF demand, plummeting from +299.1t in Q1’20 to -177.9t in Q1’21.

And of last quarter’s 177.9t worldwide draw in gold-ETF holdings, GLD+IAU accounted for 154.4t or 87%! 

These American gold-ETF giants were responsible for nearly 7/8ths of the only gold-capital-flows shift that mattered last quarter. 

And that’s certainly no anomaly, many quarters have seen global gold ETFs overwhelmingly dominated by GLD+IAU command most of the relevant quarterly supply-and-demand action.

Consider Q2’20, the post-lockdown-stock-panic quarter in which gold soared 12.9% in a sharp mean-reversion rally. 

Bar-and-coin investment demand plunged 28.9% YoY that quarter as gold’s soaring prices retarded buying. 

Yet overall investment demand still rocketed 101.0% higher, fueled by gold-ETF capital inflows skyrocketing 478.7% YoY to 435.8t! 

GLD+IAU alone accounted for 63.5% of that, over 5/8ths!

The American stock markets are the largest and most-important in the world by far, dwarfing everything else. 

And American stock traders’ favorite gold trading vehicles are these giant US gold-exchange-traded funds. 

So it makes sense that vast amounts of American stock-market capital sloshing into and out of gold via GLD and IAU would often dominate this metal’s capital flows, and thus gold price action as well.

The only way physically-backed gold ETFs can succeed in tracking their metal is if they act as conduits for stock-market capital. 

That’s because gold-ETF-share supply and demand is independent from gold’s own. 

If GLD+IAU shares are being bought faster than gold itself, their share prices will decouple from gold’s to the upside. 

So ETF managers have to quickly step in and offset any excess ETF-share demand.

They do that by issuing sufficient new gold-ETF shares to absorb differential demand. 

Then the cash they raise from those share sales is immediately plowed into physical gold bullion, boosting their holdings held in trust for shareholders. 

Thus rising GLD+IAU holdings reveal American stock-market capital flowing into gold. 

That is exactly what has happened on balance since last week’s FOMC-dot-plot hawkish surprise.

Had gold investors started fleeing as gold-futures speculators’ frantic selling hammered this metal sharply lower in the Fed’s wake, GLD+IAU would’ve seen big draws. 

Their shares would’ve been sold faster than gold, forcing ETF managers to buy back any excess ETF-share supply. 

The cash necessary to finance those gold-ETF buybacks would be raised by selling some of their underlying physical-gold-bullion holdings.

Again as explained in depth in last week’s essay, gold’s 4.5% plummeting in the 26 hours following that FOMC decision had to be driven by speculators dumping gold-futures contracts. 

Investment capital flows almost never bully gold around that fast. 

Unlike the hyper-leveraged gold-futures speculators, investors usually own gold outright with no leverage. 

At most in GLD+IAU, they can only run the 2.0x stock-market limit.

Any investor reaction to gold’s futures-driven plunge last week would show up in GLD+IAU holdings, but not instantly like that leveraged futures selling. 

Now we have six full trading days of GLD+IAU data since that hawkish FOMC surprise, giving a clearer picture of how gold investment flows are responding. 

And so far investors are ignoring the Fed, as GLD+IAU holdings have actually risen modestly on balance since!

This chart shows GLD+IAU holdings in dark blue superimposed over gold’s price action in recent years. 

Note that major gold uplegs and corrections are fueled by gold-ETF capital flows. 

Gold’s last extended correction of 18.5% over 7.0 months ending in early March was partially driven by GLD+IAU suffering a 10.9% or 192.8t holdings draw. 

That exacerbated gold’s downside, unleashing more gold-futures selling.

Gold investment capital flows as represented by GLD+IAU holdings usually lag major gold uplegs and corrections. 

Investors generally don’t start recognizing key trend reversals transitioning between uplegs and corrections until weeks or sometimes months after those turns. 

Investors need to see gold move far enough and long enough to confirm a trend change before they will join in. 

That process is now underway.

While gold’s last correction hit its nadir of $1,681 in early March, GLD+IAU holdings kept grinding lower on inertia until the end of April sinking to 1,512.8t. 

Gold had finally rallied long enough and high enough to convince investors to start riding its young upleg. 

By mid-June on FOMC eve, GLD+IAU holdings had climbed 2.3% or 34.8t. 

As they don’t change direction often, that proved a young gold upleg was underway.

Last Wednesday the FOMC did nothing, keeping both its zero-interest-rate policy and $120b per month of quantitative-easing bond monetizations in place. 

The official FOMC statement gave no hints of changes in either, this crazy-easy monetary policy would continue indefinitely. 

Yet unofficially just a third of the top Fed officials saw slightly-higher rates up to 2.5 years into the future by year-end 2023, that hawkish dot plot.

In his usual post-FOMC-meeting press conference, the Fed chair himself dismissed the dot plot warning it is “not a great forecaster of future rate moves.” 

Yet currency traders still bid the US dollar sharply higher, which frightened the gold-futures speculators into selling en masse hammering gold down 1.6% in just the couple hours between that dot-plot release and the US close. 

But that didn’t scare the unleveraged investors.

That FOMC day GLD+IAU holdings edged 0.1% higher, implying slight American-stock-market-capital inflows into gold despite the carnage. 

Unfortunately that hyper-leveraged gold-futures selling snowballed overnight, blasting gold another 3.0% lower to $1,774 last Thursday. 

Gold’s worst down day since way back in early January, shattering the psychologically-important $1,800 level, could have rattled investors’ resolve.

Yet GLD+IAU holdings only drifted a trivial 0.2% lower that day! 

And that slight selling reversed hard to sizable buying the very next trading day, last Friday. 

While gold slumped another 0.6% extending its post-FOMC losses on those distant hawkish dots, GLD+IAU holdings surged up 0.7% to hit a new gold-upleg high of 1,556.8t! 

Investors didn’t seem worried gold had plummeted 5.2% in just three trading days.

And they certainly shouldn’t have been. 

Two potential rate hikes over a couple years into the future, which wasn’t even a consensus view among top Fed officials, was meaningless. 

The dot plot has a long history of proving radically wrong on future rate-hike timing and magnitude. 

And heavy gold-futures selling is always very finite, quickly burning itself out. 

Gold investors knew that gold-futures drama couldn’t last long.

This Monday, gold finally bounced with a solid 1.2% gain. 

Gold-futures speculators were likely buying again, with the hawkish-dots US-dollar surge finally petering out. 

GLD+IAU holdings slumped another 0.2% that day, but that doesn’t mean investors were selling. 

When gold is surging on futures buying, and American stock investors aren’t joining in, the gold ETFs see draws to equalize supply-demand differentials.

In those scenarios, gold’s price is rising faster than gold-ETF shares’ prices. 

In order to keep them from decoupling from gold to the downside, the gold-ETF managers have to buy back additional shares. 

They raise the cash to do this by selling some of these ETFs’ physical-gold-bullion holdings. 

That drives draws on gold up days where investors aren’t participating. 

This Tuesday, GLD+IAU holdings edged back up 0.1%.

Since I write these weekly essays on Thursdays during the US session, their data cutoff is Wednesday’s close. 

That day GLD+IAU holdings slumped another 0.2% to 1,551.5t as gold drifted a trivial 0.1% lower. 

Overall in these latest six trading days immediately following that hawkish dot plot, GLD+IAU holdings climbed a modest 0.3% or 3.9t. 

That’s despite gold still languishing 4.5% lower. 

Investors are strong hands!

Had the FOMC officially warned rate hikes might be coming later this year, or said it was going to soon start slowing its QE bond purchases, investors may have had some justification for lowering their gold allocations. 

But two potential rate hikes way out into late 2023? 

Come on! 

Gold investors are prudent in ignoring that colossal Fed nothingburger. 

This hyper-easy FOMC is still vomiting vast amounts of new money.

While these six post-FOMC trading days have been encouraging on the gold-investment front, that isn’t long enough to get us out of the woods. 

As this chart shows, heavy gold-futures selling hammering gold sharply lower can trigger big differential gold-ETF-share selling in response. 

Two recent episodes of that are highlighted in this chart. 

But both happened during gold corrections, and gold-ETF selling started quickly.

Gold was in an indisputable young upleg when this latest hawkish-dots scare hit. 

And the lack of any notable differential gold-ETF-share selling since argues that investors aren’t worried. 

This profligate Fed is still pumping $120b per month of new QE money into the US economy, even after its balance sheet has ballooned an absurd 87.0% or $3,752b higher in just 15.2 months since March 2020’s stock panic!

The Fed has nearly doubled the US-dollar supply in just over a year, and its printing presses are still spinning hellbent for leather. 

If the Fed starts tapering QE late this year, and that slowing of QE lasts through 2022, that implies another $1,440b of money printing is still coming! 

And if the stock markets fall seriously in response to tapering, the Fed will quickly stop for fear of a stock bear spawning a depression.

As gold investors know, there’s simply no reason to be bearish on gold today given this crazy-inflationary monetary backdrop from this FOMC. 

A third of top Fed officials maybe seeing two quarter-point rate hikes years into the future in 2023 is nothing to fear today. 

And if gold investors hold strong and don’t join in the gold-futures-spawned selling, those latter speculators will soon return mean-reverting gold sharply higher.

The biggest beneficiary of gold rebounding and resuming its young upleg will be the stocks of its miners. 

The major gold miners of the leading GDX gold-stock ETF tend to amplify material gold moves by 2x to 3x, so they were crushed sharply lower in this hawkish-dots gold-futures carnage. 

Their gains as gold recovers will also amplify its upside, making this anomalous selloff a good time to load up on great gold stocks.

The bottom line is gold investors have ignored their metal’s sharp plunge following last week’s hawkish FOMC surprise so far. 

The holdings of the dominant American gold ETFs, the best high-resolution proxy for overall gold investment demand, have actually climbed slightly in the wake of those latest dots. 

It is silly to fear a third of top Fed officials seeing slightly-higher rates way out into year-end 2023, an eternity away.

The FOMC doing nothing last week remains really bullish for gold. 

Both the Fed’s zero interest rates and $120b of monthly QE remain in place indefinitely, flooding the world with ever-more freshly-conjured US dollars. 

And the heavy gold-futures selling spawned by those hawkish dots is already exhausted, paving the way for a sharp mean-reversion rebound in the yellow metal. 

Investors are wise to stay deployed in gold.

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We overcome popular greed and fear by diligently studying market cycles. 

We trade on time-tested indicators derived from technical, sentimental, and fundamental research. 

That has already led to unrealized gains in this current young upleg as high as +68.7% on our recent newsletter stock trades!

To multiply your wealth trading high-potential gold stocks, you need to stay informed about what’s going on in this sector. 

West risks retreating into Covid limbo

Vaccination rates are slowing as Americans in particular assume that the pandemic is over

Edward Luce

People in Los Angeles queue for Covid-19 testing. To increase inoculation rates, governments face the challenge of pitting freedom against security © Jae C. Hong/AP

One clear pattern from the first 18 months of coronavirus is that each apparent certainty is overtaken by events. 

The latest is that the west — chiefly, the US and western Europe — is moving to post-pandemic normality. 

That is far from assured. As vaccination rates taper off, the goal of reaching herd immunity is bumping up against the cultural resisters. 

Two steps forward are followed by one back. 

The concern is that new mutations will outpace the west’s ability to inoculate its laggards. 

They have already caused President Joe Biden to miss his goal of 70 per cent vaccination by July 4 — the first self-imposed target he will have flunked. 

The White House says it will be met a few weeks later. 

But that could require steps Biden and the states have so far avoided for fear of inflaming the culture wars, such as mandating students to get their shots before going back to school. 

Similar difficulties await most European countries. 

The slow ones are catching up with the early adopters partly because the latter are reaching a plateau. 

The risk that the west will be forced into another winter shutdown should not be downplayed. 

Governments face two big challenges. 

The first is to navigate the age-old battle between freedom and security. 

Almost every western nation, not just the English-speaking ones, has opted for persuasion over coercion. 

Lottery tickets and free beer work better than imposing fines on the hesitant. 

But the rollout’s early successes are sapping momentum to win over society’s holdouts — the young, the religious and various marginalised groups. 

The US faces a growing free-rider problem. 

As social distancing evaporates, so does the incentive to vaccinate. 

More than anywhere else, Americans have embraced the idea that the pandemic is over. 

Sports stadiums are nearing capacity. 

Indoor restaurants are teeming. 

Masks are seen as elitist in much of the country. 

Some of this stems from the Center for Disease Control’s rash declaration in May that only the unvaccinated need mask up indoors. 

America’s cultural divisions are bad terrain for such an honour system, especially when vaccine certificates are so easy to forge. 

This pop-up event in New York’s Times Square earlier this month highlights the lack of social distancing prevalent in much of the US and other western nations © Angela Weiss/AFP via Getty Images

Plummeting death rates further reduce America’s sense of urgency. 

The Delta variant first detected in India may be far more contagious than its predecessors. 

But the west’s leading vaccines have so far proved effective at keeping hospitalisation rates down. 

Britain is now dominated by Delta but its death toll has barely increased. This is great news. 

Yet the virus’s history suggests this could be one stage in a longer mutative journey. 

Getting to 70 per cent inoculation looks do-able in most western countries. 

Reaching 85 per cent is ambitious — and probably beyond America’s reach. 

Compared with that hill, however, the rest of the world looks Himalayan. 

Biden and his G7 counterparts won applause earlier this month for their global pledge of 870m vaccine shots. 

That is far better than nothing. 

But they are too few and their distribution will take too long. 

Only half of America’s 500m pledge will be distributed this year. 

The west has thus undertaken to cover far less than a fifth of the world’s 11bn demand. 

China and Russia will probably add at least as much with their vaccines, although at lower rates of effectiveness. 

This is both a missed geopolitical opportunity for the west and a viral risk to its citizens. 

The cost-benefit analysis is hard to grasp. 

IMF experts estimate that it would cost $50bn to inoculate most of the world by mid-2022. 

The west has a once in a generation chance to stamp its brand on global wellbeing. 

In February, Biden signed a $1.9tn stimulus that drew criticism from many economists as unnecessarily large. 

For barely 3 per cent of that, the west could win the gratitude of billions. 

In football terms, Biden is standing before an open goal. 

Supply constraints would quickly ease if global vaccination were made a priority. 

Politics explains most of the west’s hesitation. 

Leaders fear the populist attacks that would greet large subsidies to foreigners. 

Yet such caution also carries risks. 

The Delta variant already accounts for a third of new US infections, and is growing in continental Europe. 

Should new variants follow, another winter lockdown would loom. 

Good luck seeking re-election in those circumstances. 

Western democracies then would no longer seem quite so prudent.

“Transitory” Inflation? — Sublime Yet Ridiculous

By Matthew Piepenburg

History is a funny thing, almost as funny as human nature. 

The policy makers, including their latest meme of “transitory inflation,” are no exception to such psychological tragi-comedy.

In short, we don’t see inflation as “transitory.”

Transitory Hope, Timeless Lies

It’s sometimes helpful to step outside of market history to gain perspective on human behavior, and hence, measure leadership trends at other desperate turning points similar to the one markets are now careening toward.

By late 1864, for example, as Union forces under General Grant bore closer to Richmond at the tail-end of a long and passionate civil war which a grossly outnumbered Confederate Army was (by then) destined to lose, hope nevertheless sprung eternal from an increasingly discredited leadership. 

Jefferson Davis, President of the Confederate States, described the mounting casualties, dying currency and withering food supplies as only “transitory.”

Less than 100 years later, as the German Wehrmacht lost its 6th Army to the cold winter and red-hot resistance of the Red Army, the propaganda machine in Berlin described that war-ending turning point in 1943 as merely a “temporary setback.”

Speaking of dying armies, Napoleon’s 1812 march into Russia with 360,000 soldiers ended in disaster when he marched out with just under 15,000 soldiers left, prompting the infamous (and shivering) Bonaparte to declare, “It’s only a small step from the sublime to the ridiculous.

Transitory Inflation: More Fantasies from On High

Fast-forward to the Fed’s current war against natural market forces and we see yet another ridiculous example of a losing war whose inflationary death toll is being otherwise touted by our financial leadership as “transitory” or “temporary.”

Like the foregoing military examples, market bulls, sell-siders, politicians and central bankers share an uncanny capacity to ignore the obvious and promote the fantastical—as fantasy is often easier to bear (and sell to the masses) than reality.

Fantasy, after all, is as effective a tool for re-lection, Fed-tenure and advisory fees in a losing market war as it is a patriotic weapon in a losing military war.

The most recent example of fantasy as policy is now evident in the popular meme that the +4% year-on-year inflation numbers in April and May are merely “transitory.”

In short, we are now being told not to worry about inflation.

That is, we can all calm down, for inflation, we are asked to believe, is as “temporary” today as the year 1-year cap on QE we were promised from Bernanke as far back as 2009, when the Fed’s balance sheet was under $1T rather than the current $7+T.

So much for promises of the “temporary” …

As for inflation being anything but “transitory,” we’ve given countless warnings, proofs and solutions to current and increasing inflation to come.

Like Robert E. Lee’s outnumbered army, the math makes future of inflation, and the slow death of the dollar, inevitable rather than theoretical.

And yet now more than ever there are those telling us not to worry about inflation or its implications.

Defending the Dis-Inflationary

In fact, and in all fairness to those who feel deflation rather than inflation is ahead, we’ve given fair voice to their viewsas well.

Nevertheless, and sadly, it seems necessary, yet again, to return to history, economic Real Politik and math to help the inflationary truth sink in.

That is, it’s time to fact-check the hope-peddlers so common to the main stream financial propaganda that surrounds us today as markets move from the Fed-supported sublime to the inflationary ridiculous.

In all fairness to the great inflation vs. deflation debate (or war), there are, again, fair arguments to be made against inflation as a long-term reality.

The latest and most common arguments against current inflation include the popular belief that supply-chain disruptions on everything from lumber to computer chips are only “temporary.”

Once these “transitory” disruptions are resolved, supply will recover and inflationary forces will vanish.

Fair enough.

Another argument gaining bullish momentum against inflation is blaming the “temporary” climb in the CPI measure of inflation on rising car prices.

Fair enough.

Deflationary pundits will also remind us that inflation numbers are un-naturally high because they measure rising prices in silly little things like food and energy. Thus, if you take them out of the equation, then inflation is really closer to 2%, so why panic?

Then again, if you have a report card with 3 A’s and 2 F’s, that too is not a problem if you simply disregard the 2 F’s… Besides, who needs food or energy anyway?

Deflationists (as well MMT fantasy pushers) will further remind that even the extreme monetary expansion unleashed by central bank money printers is not inflationary, as all that printed money never hits “velocity speed” in the real economy, and thus has no inflationary impact.

Fair enough.

Finally, the pro-deflationist camp will rightfully remind us that massive debt levels, decades of Uncle Sam’s ability to export inflation overseas and the slow economic growth of the pandemic economy will cool demand and keep prices low rather than high—all anti-inflationary forces.

Fair enough.

But here’s the rub: “Fair enough” is not the same as “true enough,” and whether one chooses to believe it or not, inflation is not only coming, it’s already here and it isn’t going to be “transitory.”

Inflation: Anything but “Transitory”

Ok, so how can we be so certain in a world of uncertainty?

Well, for one thing, the very CPI scale used to measure inflation is the open joke on Wall Street, and measures inflation about as well as Lance Armstrong’s lie detector measures truth.

We’ve addressed this topic ad nauseum.

Thus, dis-inflationary pundits can defend all day long the “transitory” nature of rising prices on everything from computer chips to used trucks, but they are ignoring the larger fact of defending their non-inflationary case with a discredited CPI witness…

Adding to the inflationary reality which is anything but “transitory” is the very definition of inflation itself, which hinges less upon that bogus CPI scale and far more upon a single metric: Increases in the broad money supply.

In case such an evidentiary (as well as mathematically obvious) increase doesn’t give you an inflationary chill, just consider the following increase in the M1 money supply. 

A picture, after all, says 1000 words (or billions) …

Furthermore, even if one discredits money printing (i.e., monetary policy) as inflationary due to the lack of “velocity” of printed dollars trapped behind the Hoover-like dam of the Fed, Treasury Department and TBTF banks, one simply can’t deny the inflationary effects of fiscal policy—that is: money pouring directly (and at increasing velocity) into the real economy.

Biden, for example, is proposing a $6T budget to Congress. Will it pass? Or will it be watered down to a meager $5.5T or $4.8T?

But what’s a trillion here or a trillion there in this surreal new abnormal? Given all the money spewing out of DC, trillions have become banalized to mean almost nothing to a nation and market addicted to fake money.

Then again, we all know how addictions end: You either quit or die.

Furthermore, and quite telling, is the simple fact that the Fed itself favors inflation, as there’s no better way to get themselves out of a $30T public debt hole of their own digging than by sucker-punching the masses with deliberate inflation to pay off their own debt binge with increasingly inflation-debased dollars.

The FOMC, like any general staff in a losing war, will pretend that such a currency casualty is “transitory,” or that they otherwise have the “temporary inflation battle” under control.

The Fed calls their battle plan “symmetrical inflationary targeting,” pretending to the world that they can order inflation around like a cadet at West Point.

But then again, if the Fed controls the very scale that measures inflation, perhaps they can keep bluffing (lying) their way around otherwise obvious inflation a bit longer. Either way, the end result is unavoidable.

But think about that for a second: The Fed measuring its own inflationary policy is like the Wuhan Lab measuring its own viral leaks…

An Ode to Fed Apologists

Fed apologists/cheerleaders, however, will continue with their fantasy defense that the Fed will eventually “tackle” the inflationary problem once they have full confirmation that it’s running too hot.

We discussed the open dishonesty as well as mathematical impossibility of the Fed tackling the debt (and hence inflation) problem “down the road” in a recorded interview here.

Despite such contrary math, the cheerleaders tell us the Fed will eventually step in with some needed “tapering” to keep inflation under control.

Furthermore, the Fed itself will make even more comical claims that they are very worried about unemployment, and that if jobs reports (and non-farm payrolls) continue to disappoint, the FOMC superheroes will need to keep printing money to buy bonds and keep rates low.

After all, the Fed was created to help the little guy, right? 

The Fed’s entire mission is to keep employment strong, right?

Well, if you believe that, do a little more research on who created the Fed and why…

The Fed’s Real Mandate: Faking It

But even if historical research on the Fed’s true origins and mission are of no interest, then just stick to current math and basic realism.

As I’ve written so many times elsewhere, the Fed is not holding back its “tapering” option just to help improve employment.


Instead, the Fed is going to hold back tapering because they have taken our nation to the highest levels of debt danger ever seen in its history; thus, if they were to ever “taper” and allow rates to naturally rise, Uncle Sam (and the markets) would be insolvent faster than Powell can mince words on 60 Minutes.

In short, “tapering” is not an option, it’s a fantasy buzz-word for troops otherwise losing morale.

This means the money printers will continue to run hot to the tune of billions per month and deficit spending (along with Fed balance sheets) will continue run hot to the tune of trillions per year, which means inflation is and will be anything but “transitory.”

Does this mean that the year-over-year rate of change in inflation will be 4%, then 5% then 6% with each passing month on a never-ending rise to the north?


Inflation numbers, including the fictional ones coming out of DC, will see peaks and valleys, and I’m not suggesting inflation will hit 18% by the time you read this.

Nor am I suggesting that periods of disinflationary “relief” won’t make the headlines soon if, for example, lumber and car prices revert to their means, which is always possible, if not likely, once bottlenecks at saw mills and shipping ports are reduced.

And hey, maybe Fauci et all will be able to lock us all down with ever-knew COVID variant headlines which crush demand and alas, dis-inflate the CPI.

Again, nothing moves in a straight line, including inflation, but the trends and realities (monetary and fiscal excess) discussed above are not “transitory” and thus neither is (or will be) inflation.

Of course, inflation is a deadly enemy. It eats away at market returns, savings accounts, currency power and hence spending power.

Like the winter outside of Moscow, Borodino, Petersburg or Stalingrad, it’s a silent killer.

And like Napoleon’s army in Russia or Lee at Gettysburg, our financial leaders now stand before a cannonade of fatal money supply levels and yet still think (or tell us) they are winning…

In short, they have already taken our markets, economies and currencies over that fine line from the sublime to the ridiculous.

But like many of their faithful soldiers and current investors, those with the most to lose just don’t know the danger they are already in or the war their currencies will inevitably lose.

That’s neither sublime nor ridiculous; just tragic.

Leveling Up Is Hard to Do

If clustering of knowledge-based firms resumes as the pandemic fades, the momentum toward ever-increasing geographic inequality risks becoming inexorable. The first step toward addressing the problem is to recognize that a holistic approach to public policy – one that adopts the viewpoint of users and administrators – is essential.

Diane Coyle

CAMBRIDGE – One of the economic challenges facing all Western governments in these uniquely testing times is how to redress geographic inequalities that have emerged over several decades. 

Tackling this problem will require policymakers to adjust their perspective and adopt a much more holistic approach to economic development.

In the United Kingdom, regional inequality has given rise to its own vocabulary: the “red wall” of longtime Labour but now Conservative electoral constituencies in England’s former industrial heartlands, and the imperative of “leveling up” the country to bring about a more equitable economic balance between the struggling north and the richer south. 

But many governments face the same challenge of restoring prosperity to rural communities and small towns that have not shared in the economic boom enjoyed by large urban areas.

The pandemic-induced trend of working from home might temper these underlying economic dynamics, but it is unlikely to reverse them. 

The most productive businesses in today’s services-oriented Western economies are those best able to attract highly skilled employees, and that rely on “tacit” knowledge, or know-how – insights that are impossible to write down in detail.

This type of expertise tends to cluster together, because knowledge workers thrive on the presence of other similar people with whom to share ideas, and they also like environments with abundant cultural amenities. 

This has produced today’s well-known clusters in technology, the creative sector, finance, and professional services. 

Platforms such as Zoom and Microsoft Teams have kept such know-how businesses going through the pandemic, but they are an imperfect substitute for exchanging ideas in person: nobody schedules a Zoom meeting to share a serendipitous idea that came to mind while they were making coffee.

If this “superstar” clustering resumes as the pandemic fades, the momentum toward ever-increasing geographic inequality could become inexorable. 

We might then have to learn to live with large differences in economic outcomes and even life expectancy across the space of a few miles.

There is no shortage of policy ideas to halt or reverse this uneven trend. 

Infrastructure investment tops the list, and is needed anyway after decades of failure to maintain or enhance assets that are essential enablers of productivity and growth. 

But many infrastructure projects – some involving new bridges or expansion of broadband – have not had the hoped-for impact on the places they were intended to help. 

Such investments on their own will be insufficient. 

Economically disadvantaged areas need other kinds of public and private investment, including in skills, new technology adoption by businesses of all kinds, health, education, and other key social infrastructure.

But even this wish list of desirable policies will not be enough to trigger a virtuous cycle of growth in “left-behind” places in the absence of better coordination of government policies, public spending, and private investment decisions. 

An economy is like an orchestra: it will not perform if some sections – the woodwinds, say, or the strings – are missing. 

In unproductive areas, policymakers need to fix the economy’s entire underlying structure by lining up all its parts.

Policymakers must therefore break with the conventional pattern of clever analysts devising a strategy and handing it over to others to implement. 

Public-interest technology, sometimes referred to as “govtech,” demonstrates the integrated approach that will be needed. 

As recent books focusing on the United States and the UK make clear, digitizing public services to make them more efficient opens a path to redesigning the processes involved, rather than simply replacing paper with bytes.

The key change in perspective needed to deliver better outcomes more cheaply and efficiently is to design policies from the viewpoint of users and administrators, rather than that of the policy analyst. 

An abundance of evidence from the US and the UK shows that talking to the people involved reveals vital information. 

In many cases, the barriers to a government service’s uptake or success may lie in a completely different policy domain, whose analysts would otherwise never imagine that their contribution could be useful. 

For example, the lack of a bus service or after-school childcare may affect an unemployed person’s ability to take part in a training program. 

The powerful logic of designing a digital process uncovers the analog landscape through which people are forced to navigate.

Of course, better bus services are not the solution to the leveling-up challenge (although in some countries they may prove surprisingly important). 

But recognizing the need for a holistic approach to regional development is essential to address the problem. 

The real breakthrough will come from making such collaboration happen.

Digitalization has been transforming how businesses operate since the 1990s. 

It can do the same for government policies, so that they better serve all citizens, no matter where they live.

Diane Coyle, Professor of Public Policy at the University of Cambridge, is the author, most recently, of Markets, State, and People: Economics for Public Policy.