For most speculators, the notion that ‘short squeezes’ should be banned is utterly preposterous. Why then, do we embrace this absurd postulate in the sphere of money?

 

I always reiterate the simple (but perhaps backward) idea that debt is a short on money. It helps us see the folly of certain public policies by exploding the flaws of unintegrated and compartmentalized thought.  Let me make this concept clear:

 

What does shorting a stock entail? One borrows a stock, sells it on the market for money, and buys it back at a later date. If one sells the stock higher than one buys it, one can keep the difference. Otherwise, one pays the difference. What is debt then? Well, one borrows money, ‘sells’ it for something (e.g. a house) and ‘buys’ that money back at a later date. If one ‘sells money’ higher than one ‘buys money’, one can keep the difference. Otherwise, one pays the difference. The symmetry should be clear. In normal, everyday language; ‘selling money’ consists of buying things and ‘buying money’ consists of selling things. In everyday life, we happen to think of prices in terms of money; this doesn’t change the principle that debt is a short on money.

 

‘Hey, we don’t like this short squeeze, we’re going to ban it!’

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An update of the weekly Fed Balance Sheet (proportions) chart:

 

Fed Balance Sheet Proportions Chart

Click to enlarge. Source: Federal Reserve

 

The peculiar thing about post-2008 monetary policy is that it’s not just about quantity, it’s also about quality. The means by which the Fed has rigged the game of speculation in money has been to alter the quantity of stuff backing the dollar as well as the quality of stuff backing the dollar. In more politically correct and jargonistic terms; the Fed has unconventionally altered the composition of its assets while engaging in balance sheet expansions. This is why I post the (above) weekly Fed balance sheet chart of the Fed’s Assets (% Total Assets). People don’t look at the Fed’s balance sheet like this, so – as a contrarian – I’m sitting up straight and watching carefully.

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An update of the daily treasury statement charts:

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As I have discussed previously; in order for currencies to be sound and functioning, there must be a profit-motive in owning them. In our particular age of irredeemable fiat currencies, this gives rise to a strangely significant bond market.

 

The profit-motive involved with fiat currencies:

 

It is my contention that market prices will tend to imply that the entire stock of central banking liabilities (central bank notes & reserve balances) will only purchase a proportion of that central bank’s assets. This can been understood readily by a simple example: Suppose there existed a fiat currency consisting of ‘greshams-law notes’. Say, the entire stock of 100 notes was backed by 100 ounces of gold. Each note is some kind of claim on a proportion of the central bank’s assets (1 ounce of gold); so can we imagine that – in the market – people would trade more than one once of gold for 1 greshams-law note? I contend not. Rather, I say that market prices will reflect the fact that ‘greshams-law notes’ are ‘good for’ – at most – 1 ounce of gold.

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An update of the daily treasury statement charts:

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An update of the daily treasury statement charts:

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As contrarian investors, we should seek to oppose or avoid consensual modes of thinking (however dearly we hold them). So, in a market populated with increasing numbers of ‘bubble-watchers’, what’s a contrarian to do?

 

First of all, allow me to support my statement with some objective evidence. Please see the chart of the (financial) google searches for the word ‘bubble’ over the past seven years:

 

(Financial) Google Searches for 'Bubble'

Click to enlarge. Source: Google Insights

 

My personal contention is that this group of ‘bubble-watchers’ is already large. However, even if you have misgivings about this group’s size, it should be evident that it is growing (see chart). Can you blame them? After all, we’ve (potentially) had ‘bubbles’ in TMT, real estate, oil, the Dow, junk bonds etc. all in the past decade. Is it any wonder that people call every price-rise a ‘bubble’ these days? Furthermore, there has been an abundance of people who have missed these ‘bubbles’, and are desperate to catch/call the next one.

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