Past Rate Hike Cycles and Why We're Likely to Skip a Few Steps Before The Next Crisis

I was watching CNBC for the rate announcement this past week when I heard something that dropped my jaw, but all the talking heads seemed to smile and nod at. Bill Gross had said, and I'm paraphrasing, that the Fed would not be able to get the fed funds rate much above 2%. Another panelist said he agreed because at 3% Corporate America would have no free cash flow. I'm not surprised by this, because I know how dependent business have become on cheap money, but to hear it from the bobble heads on CNBC without the slightest reaction was shocking. It should have been a collective "wait...what!" moment.

It got me thinking about past fed interest rate cycles and how it would be good to provide some charts to illustrate to myself and others what has happened, and what is likely about to happen in the near future.

In the below chart I took some liberties. I attempted to determine an equivalent negative interest rate for the various QE programs based on the duration and size. It was done for continuity and is far from perfect, but it gets the point across.

Bitcoin Price Implications if Craig Wright is Satoshi

Though certainly not 100% definitive, the evidence laid out in both the Wired and Gizmoto's stories on Craig Wright being Satoshi is the most convincing of all the possible candidates I have seen thus far. There are two possibilities, an elaborate hoax or he is the real McCoy. The truth will be revealed in time but it's worth discussing what the ramifications will be on the value of bitcoin if he is the creator. From my prospective there is good and bad news. I'll start with the good.

Bitcoin has had its fair share of price spikes, most being the result of minor monetary and banking crisis including price jumps as a result of the Greek debt crisis, twice, the Cypriot banking bail-in, and the Ruble crisis of 2014. I say that these issues were minor because they did not result in a systemic crisis and, at least for the time being, have been resolved. The other apparent catalyst has been a result of increased exposure for the crypto currency. The most notable being the US congressional hearings held in late 2013 which helped propel bitcoin's price. This spectacular rise in bitcoin was not the largest in relative terms but is by far the largest in dollar terms and was the direct result of the increased attention bitcoin gained from the congressional hearings.

The details of the Wired and Gizmoto stories about Dr. Wright's possible involvement in the creation of bitcoin read like a major Hollywood Blockbuster, and even with the added media attention, I don't think that the C-span congressional hearings would hold a candle to a movie starting Russel Crowe as Wright with his apparent partner David Kleiman being played by Steve Carrell. When Wright/Satoshi story broke, bitcoin saw an immediate $20 rise from the $390's to over $415. Much of the remaining rise to over $460 since may have been influenced by Chinese capital controls, but the increased media attention certainly didn't hurt. If Wright proved to be Satoshi, or part of what is known as Satoshi, the huge media attention and, as I see it inevitable movie, could see bitcoin rise easily into four figures. Short term it would be very bullish to see this story hold up.

Unfortunately, there is also the long run bad news. From everything I have read and seen, Wright seems to be a screaming libertarian who, if he is the inventor, did it with a raised middle digit to the banking industry, central banks, governments, and the rest of the money creation mechanisms of the world. This is supported by several points (if true of course). First was a little fact I picked up in the story. Wright allegedly attempted to build a pencil from scratch. This may not sound like much but it is a clear attempt to participate in the example Milton Friedman used to show the power of capitalism. This is the excerpt from the Wired story describing Wright and his attempt to create a pencil:

He's a climate-change denier, a serial entrepreneur who started companies ranging from security consultancies to a bitcoin bank, and an eccentric who wrote on his blog that he once accepted a challenge to create a pencil from scratch and spent years on the problem, going so far as to make his own bricks to build his own kiln in which to mix the pencil's graphite.

Here is Milton Friedman's illustration of the power of the free market with The Pencil.

You are not going to get someone to attempt this pencil experiment unless they are pretty obsessed with the free market. I love the example, but to attempt to construct a pencil myself would be a whole new level of fanaticism.

The second example of Wright's clear libertarian leanings, and government contempt, is shown when he discusses his supposed Tulip super-computer in the video below. Well not so much about the computer itself but why he called it 'Tulip'. It was a reference to the infamous Tulip bubble in Holland, but he mentioned it for a reason I had not known (again if true). He claimed that part of the reason the bubble popped was because the Dutch Government broke contracts for tulips. He discusses it around minute 9:00. I still need to do some research on the bubble to determine if his claims are true but again it shows his anti-government leanings.

In the same video, at about 14:15, Wright goes on about how it is trade that mainly differentiates us from animals, he also discusses, quite passionately, private property rights. This little rant makes him appears as if he is a screaming libertarian, if not a borderline anarcho capitalist.

My final piece of evidence is a story that recently broke indicating that according to court documents Wright attempted to buy 60 million dollars worth of software and gold using bitcoin. If true it would lend credence to Mr. Wright being Satoshi simply due to the dollar amounts involved, but again this is for others to determine. If again we assume he is Satoshi, buying gold would again indicate someone with an Austrian economic/libertarian bent.

The reason this is important to the long term price of bitcoin is clear, here is someone, that if he invented bitcoin, did it with the mindset of usurping governments and the banking industry from the money creation industry. I for one would love a world in which free markets determined the medium of exchange, and in that world I have little doubt bitcoin would take much of the monetary market share. Unfortunately we don't live in that world and as the loathsome Jamie Dimon indicates below, if governments around the world declare bitcoin illegal it will all but be destroyed. Of course you could not un-invent the blockchain technology, and it would be used, unfortunately it would probably be incorporated in national currencies. More of my thoughts on Dimon's video here.

Why is Wright's, or any Satoshi's, motivation important? Simple, if bitcoins creator is doing is as a big F-U to the government and banks they are waving a red flag in front of the of those money creation behemoths with likely dangerous consequences.

Many attempting to build infrastructure around bitcoin have been trying to distance the crypto-currency from its anti government grass roots in hopes of it going mainstream with the governments blessing. If Wright, or any other libertarian is the creator, that separation will be impossible.

So who would be the ideal creator. I would say a shy, political independent, computer cryptography genius, who's part of as many protected classes as humanly possible, spends as much time giving to charity as he/she can; who created bitcoin simply as a challenge, and the result just happened to be useful. Unfortunately, that probably won't be the case. If the creator is anything like Wright, it will paint a bulls eye on bitcoin. Full disclosure: I hold 0.2% of my portfolio in bitcoin and am slowly adding to the position.

Rate Hike?

My readers fully understand how the bull market in stocks have been the result of ultra easy monetary policy. During the entirety of the bull market of the last 7 years we have had interest rates stuck at zero, and thus Fed interest rate policy has been a constant. The variable has been the other monetary experiments, the four QE programs and operation twist. I divide up QE3 into two distinct programs, the main QE period and the Taper period. Below is a chart, not only showing the bull market, but its drivers, and I'm not talking about healthy economic expansion.

Bitcoin Reality Check

For the most part all of us hold currency for day to day expenses. We hold stocks in retirement and investment funds, and knowingly or unknowingly we hold bonds in those same funds or money market accounts in preparation for investment. There are many who don't hold precious metal, and some of those same people are the ones who tell others that zero is the correct allocation to an asset that has held its value and protected its owners through harrowing economic crisis. I argued that without holding at least some of an asset, even a token amount, it is hard to pass judgment, particularly when you own the others. Without holding at least some of an asset there is a natural human reaction to want to see it fail for fear of that 'missing out' feeling if it does succeed.

I have been a strong bitcoin skeptic for several reasons, most notably its unknown origin coupled with past government research into crypto currency, and what I believe is questionable timing. These coupled together could make one think that bitcoin could be a beta test for a government sponsored crypto currency. With all that said I also have witnessed how bitcoin reacted to the Cyprus bail in, the Greek crisis round one, the Ruble Crisis, Greek Crisis round two, and most recently the Chinese capital controls. The upward reaction of bitcoin to these monetary hiccups can't be ignored if you believe major monetary turmoil is on the horizon as I do.

The Fed is Not Out of Ammo, but it Doesn't Matter if the Gun Blows Up In Thier Face

It is spouted all over main stream and alternative financial media, some variant of, the Federal Reserve is out of ammo. This is pure and utter nonsense and there is absolutely no evidence of the Fed being out of monetary tools.

The Fed could easily restart QE, ban cash, implement negative rates, institute helicopter money, or even the E-Dollar. There are plenty of options for the Fed to further loosen monetary policy. If these statements are made with the belief that the use of these policy tools will result in damage to the feds credibility or that there will be political pressure against such moves, watch a financial crisis to develop and see how easy it is for these tools to be deployed.

When the gun blows up in the feds face, aka market forces in the bond and currency markets dictate the feds direction, that's when the game is over and we are far from that point.

Here is an excerpt from the How They Got Us Into This Mess on how market forces can cause a policy tool misfire.

Asset Expense Index

There are a couple old investing axioms, first, buy low and sell high, and second, invest early and often. With that understanding I would like to analyze the investing environment for the baby boom and millennial generations. The oldest of the baby boomers, if they chose to go, would have graduated college in 1967 or '68. The oldest of the millennials, of which I am one, would have graduated in 2002 or 2003.

If we paid attention to the main stream media we would believe that the biggest financial issue facing millennials is student debt. While there is no doubt that being saddled with a mortgage for what in many cases is a poor product isn't ideal, a little analysis shows student debt shouldn't be the main issue concerning millennials. According to only about 69% of seniors graduating in 2013 have student debt. Of those with student debt, the average amount was $28,400, which is a fraction of what a millennial should acquire in assets, including a home, 401k, pension, et al, in the first 20 years of their career. In this light, asset prices, which millennials should be acquiring early and often as they say, should be more of a concern than education prices.

As Predicted BOE Head Economist and Time 100 Most Influential Suggests E Dollar Concept

Andy Haldane is the Chief Economist and a voting member on policy for the Bank of England. He was also named by Time Magazine as one of the 100 most influential people in the world, let that sink in for a moment before we move on. Now consider he just advocated a move toward the E-Dollar. Of course if it occurred in the UK it would be an E-Pound but what he describes is not similar to what we have forecasted the governmental and banking interests would attempt here, here, here, and here, it is exactly what we have said they would try to fix the monetary mess we find ourselves in.

An E-Dollar concept not only addresses many of the issues the monetary system now faces, it fits the unbreakable covenant of shifting monetary systems throughout history, and particularly the last century; namely the government and banks get stronger. As I have stated in the above posts, I do not believe the E-Dollar is the right course of action, only the path I predict will be followed. Below is an excerpt from the full speech Mr. Haldane made to a group of businessmen in Northern Ireland that shows that what he is advocating is precisely the E-Dollar Concept.

Predictable Government Windfall

With the ongoing equity market correction, and possibly the start of a bear market, it's time to revisit a concept we touched on in How They Got us Into This Mess. The government windfall that results from a credit created boom. This latest credit created boom is just another up leg of what, in reality, is a debt fueled bubble that has been going on for over 80 years and must eventually fail.

Much of the debt taken on recently has been by the government, but new, record amounts of debt is also adding to the burden of car buyers, corporations, students, and of course, traders and investors using margin debt to buy stock. The fed has even managed to prevent the real-estate mortgage market from contracting to a reasonable level with ultra low interest rates and direct intervention in the mortgage market through QE.

If you can believe it, the government balance sheet has been one of the biggest beneficiaries of this ramp up in total credit market debt. As employers believe that good times are here again and here to stay, they start to hire more employees, granted this "recovery" has seen pretty anemic growth, but some jobs are being created. They tax the income from this increased employment. Corporate earnings have also seen a bump, which is also taxed. Finally the income from the sale of stocks is also taxed. All of this helps the government's finances even if the deficit was at very frightening levels at the beginning of this "recovery". And the reason I put recovery in quotes is because if the recovery can't be sustained it is merely an illusion, and as Von Mises said "There is no means to avoiding the final collapse of a boom brought on by credit expansion."

Bitcoin Possibilities

I understand that discussions about bitcoin can be polarizing. Before we move on I ask that bitcoin believers consider that there are many unknown vulnerabilities that bitcoin may have. There are challenges that it will face in the future. Some of these challenges it may not survive unscathed, or survive through at all. To the bitcoin sceptics, I ask that you do not dismiss the possibilities of this amazing new technology, and realize that it truly may be revolutionary. There are those who scoffed at groundbreaking innovations throughout history, not because of a lack on intelligence, many of the perpetrators were brilliant, but because of a stubborn refusal to open their mind to change.

There are a couple prominent theories about the creation of bitcoin, but the truth is the greatest known experts such as Gavin Andresen don't truly know the identity of the developer. Who developed the technology and why is vitally important, but even not knowing for sure, we can look at the most likely origins and drill down the implications of each. Evaluating the possible outcomes and the likelihood of each can help us in how we treat the crypto-currency.

Critical Mass Default

Critical Mass-Definition #1. An amount of material (such as plutonium) that is large enough to allow a nuclear reaction to occur.

Definition #2: The size, number, or amount of something that is needed to cause a particular result.

Critical Mass Default (Full)

Critical Mass-Definition #1. An amount of material (such as plutonium) that is large enough to allow a nuclear reaction to occur.

Definition #2: The size, number, or amount of something that is needed to cause a particular result.

China's Crash In Context

This is a follow-up to a post I made a few months ago, US Strength in the Upcoming Monetary Shift. In that previous post, I challenged the notion that the United States would be entering future negotiations for a new monetary system from a position of weakness. It outlined some of the weaknesses of other world powers and some of the strengths of the United States. It was not to say that the US would sit at the head of the table, though I certainly don’t rule that out, only that it would not be absent, left in a pile of rubble. The US will likely have substantial influence. Many in the alternative financial media take it for granted that the US is going to become a third world nation due to its financial, monetary, and fiscal profligacy, with the Russians and Chinese teaching the Yanks a lesson. The reckless actions of the US will have repercussions, but they will be market driven from simple economic laws, not at the hands of other nations. I believe picking foreign powers as the ‘good guys’ is related to a need for retribution for what is perceived, with good reason, as arrogant and atrocious stewardship as a world power. While understandable I think that is more a gut reaction than proper research and analysis. The remainder of this post with focus on China.

Why Governments Love Pensions

While growing up, my parents, like most parents, tried to give me as much information about different career paths as they could to help guide me in my life choices. I remember my mother telling me about how the benefits, particularly retirement, were often better for most government jobs though the pay usually lacked. She would say: “If you want to go into the military, go in as an officer. Stay in for 20 years and you will secure a great retirement in your early 40’s.”

At the time, I wasn’t all that concerned about retirement, but I listened and remembered those words. Now I remember those words, not in choosing a career path but when seeing stories of how various government pension funds are underfunded and likely doomed.

A First Step Toward Sound Money

Here at The Reset we have dedicated much of our content to determining how the government and banking interests might deal with the failing debt based monetary system here, here, here, and here. This is for good reason since they will likely determine the path taken. I have tried to make it clear that these are not the directions I would like to take our monetary system, so now I would like to offer a first step of what I would consider the right direction. It is only a first small step since changing over 100 years of monetary inertia cannot be done overnight.

The Case For Owning Bitcoin from a Crypto-Currency Skeptic

So why am I, a self proclaimed bitcoin skeptic, discussing why bitcoin has a place in a modern portfolio? No, I have not changed my mind on bitcoin. It is because researching the commonly held belief among financial commentators and advisers that the correct allocation to precious metals is 0% forced me to take a second look at bitcoin.

An absolute claim like, you should not own ANY precious metals, rubbed me the wrong way, but because of my research into bitcoin I had no exposure to the crypto-currency. If there is anything I hate it’s a hypocrite, so lets take a look at the pro’s and cons, risks and rewards of putting some money into bitcoin.

0%? Really? Zero?

I recently got into a disagreement with a colleague of mine. He believes that the proper allocation to gold (or other precious metals) is zero, and as you might know, I feel gold and or silver are an essential part of every portfolio. I'm sure this conversation is not unique and I wanted to address the articles and information found on the web that attempts to support the claim that you should not own any precious metals. I will address this piece by David Marotta specifically since it encompassed several points I found in other sources.

The primary focus of this article is that gold does not show nearly the returns that stocks do. You will get no argument from me on that point, I believe diversified high quality equities should be the majority, and the core, of every portfolio, but I am not contending that gold should be the lion’s share of a portfolio. Only that an allocation of zero is way off base, especially when you consider the environment we currently live.

Never Let a Good Crisis Go to Waste

“Never let a good Crisis go to waste when it’s an opportunity to do things you had never considered or you didn't think were possible.” – Rahm Emanuel, Chicago Mayor, former Congressman and the Obama Administration Chief of Staff

If Rahm is willing to admit such things in public, how much of a stretch is it that he would not try to prevent a looming crisis, or even willfully cause one, if it allowed the opportunity to implement policies he has always believed in, but thought were impossible. Mr. Emanuel is not unique in his thoughts surrounding crisis, he was just the one who allowed the truth to slip out. The above quote was actually a clarification for a previous comment, “You never want a serious crisis to go to waste”, which he is often credited with. His clarification brings no comfort.

E-Dollar vs. Negative Rates

If you are unfamiliar with the E dollar concept, please read this post before reading on.

In my last piece I went over how negative rates exacerbate bubbles. In this post I wanted to cover the likely outcomes resulting from implementing the E-dollar vs. negative rates. They are both solutions that have been raised in the financial mainstream to the monetary problem we are now facing. Specifically, an unsustainable debt resulting from a feature of our debt based monetary system to grow debt generally faster than the underlying economy.

In a negative rate environment there would not be a mechanism to significantly reduce the current debt

Ban on Cash, Negative Rates, and Super Bubbles

Recently there has been has been a rising chorus to do away with cash, here, here, and here. You will hear several reasons why this is necessary but there really is only one. The banking interests want to be able to implement significant negative interest rates and participants in the economy being able to opt out of negative rates by removing cash from the banking system makes this very difficult.

So how did we get here? Over the past 70 plus years we have been living in a credit created bubble that has supported the economy, but as Von Mises said:

The Reason Economists Can Feel Safe Discussing Bans on Cash

Why do economists currently feel as if it is acceptable to discuss banning the use of cash? There is the obvious answer that since their go to solution to periodic faltering of the debt based monetary system of lowering interest rates has hit an end point at the zero lower bound, they feel it is necessary to implement negative rates. Yes they certainly see a necessity, which is interesting, considering they would never admit that changing the monetary rules is an indication of failure of their theories. Yet there was a time when going cashless would have been seen for what it is, a major limitation of freedom, and it wasn't that long ago.

What is a Conspiracy Theory?

In our society the term Conspiracy Theory brings out strong negative reaction in most. Visions of nutcases dance across most people's mind, and several years ago I had the same reaction. That was until, feeling that there was something off in the economy, I started to do my own research. What I found was there were countless undisputed examples throughout American history that if brought up before and even for years after the fact would have been considered what we now call conspiracy theories. Here are a few examples that stuck out to me:

Prior to the United States entering World War One Great Briton's supply line from the US were being devastated by German submarines, U-boats. The Germans attempted to only attack ships that were carrying munitions. There was a passenger liner, the Lusitania, which was supposed to set sail for the UK from New York. The German embassy fearing the passenger liner would steam into danger attempted to warn the American public away from traveling on the Lusitania by putting a notice in news papers. Many papers would not run the warning, though many did.

Alan Greenspan, Angel or Demon

Alan Greenspan is a man derided as the nemesis of Austrian economics and free market capitalismfor good reason. The long standing chairman of the Federal Reserve implemented policies that exacerbated the boom and bust cycle of recent decades. For those paying attention this could end in nothing but failure of the financial system as we know it. To the casual observer he and his apparent strategy was the enemy of sound money, but looking at all of the information available, there are major inconsistencies in this thought process. This post is the second in my challenge series. I will challenge the commonly held belief in the alternative financial media that Alan Greenspan’s motive and end game is to maintain Keynesian economic dominance which his actions seem to support.

Oil Price Drop Root Cause Analysis

The crash in oil prices over the past year is yet another clear-cut example of misallocation of resources caused by low-interest rates imposed by central banks, but to determine the solution to these misallocations we must determine, not just the cause, but the root cause.

As with tech companies in the ‘90’s, and housing in the 2000’s, oil exploration and production deserves investment. It is the markets job to take in all available information and signals to determine the level of that investment. When rates are artificially held too low these signals are distorted and the market cannot properly allocate capital. Investors who might normally invest in a safer asset with a reasonable rate of return are forced to look to alternatives when the Federal Reserve holds rates down with ZIRP and or QE. Those alternative investments may be a questionable tech company, condo’s in Las Vegas, or bonds in a fly by night shale drilling company.

Look Forward to Precious Metals Not Back

The Reset Original Video

There is no standard belief among those who question our debt-based monetary system that is more consistent than the necessity to hold precious metals in one's portfolio for protection. I am not unique, I believe hard assets, particularly gold and silver, are essential in today’s investing environment.

Bitcoin an E-Dollar Beta Test?

The E-Dollar is a new form of currency, albeit a questionable one, that could solve the unsustainable debts of the current monetary system. It fits the mold of past currency overhauls, namely it increases the power of both the banks and the government. This post is the result of new information that has been brought to my attention about bitcoin and not a re-explanation of the E dollar. If you would like more information on the E dollar please read the most recent developments here.

Financial Repression Can't Work This Time

Financial Repression is defined by as measures sometimes used by governments to boost their coffers and/or reduce debt. These measures include the deliberate attempt to hold down interest rates to below inflation, representing a tax on savers and a transfer of benefits from lenders to borrowers.

Obviously, this is an insidious way of reducing a nation's debt load and is simply a shift in the debt load from the public to private sector. Like the use of military force its use should certainly be done with great discretion if at all.

The use of military force often uses the ‘just war doctrine’ to determine IF it can be used. Some of the criteria that must be met under the just war doctrine are all other means of putting an end to the evil must have been shown to be impractical or ineffective and the use of arms must not produce evils and disorders graver than the evil to be eliminated. Both of these conditions could be slightly altered and applied to financial repression but we will focus on another just war doctrine criteria, there must be serious prospects of success. We will attempt to determine if there is a reasonable prospect of success of reducing the national debt load through financial repression.

I Bought What?!

There are several nations that charge investors for the privilege of loaning money to them. Denmark yields are negative past a year, German yields are negative out to the 5 year bond, Switzerland bond yields are negative past 7 years, and even Austria sports negative yields on short term debt.

Now why would any investment entity allow a borrower to take their money, tie it up for several years eliminating the ability to use it, finally ending up with less than they started? Any rational investor would keep the cash and maintain the flexibility to use it if an opportunity or emergency arises. The reason yields have drifted negative is due to out of control monetary policy such as negative overnight rates in Switzerland, Sweden and Denmark, as well as the ECB’s introduction of QE. This coupled with regulations forcing pension funds and insurance companies to buy only “safe” sovereign bonds as their investment have caused this financial abomination. I wish I could force someone, anyone, to buy debt I have taken on where they would pay me interest for their trouble but I guess that privilege is reserved for governments.

Debt Taken On By Fools


It is often touted that total debt carried by a government, or total debt in general, does not matter because debt is one person’s liability and another's asset thus a zero-sum game. This is plugged most loudly by Paul Krugman in an attempt to explain why the enormous debts of nations such as the United States and Japan do not matter. Nothing could be further from the truth.

For example consider a productive farmer and an adjacent town full of people. The townspeople accept the farmers’ food but do not repay the farmer using money earned by providing production and services; they pay him back with IOU’s also known as debt.