TradeSmith Daily

August 2020

Ugly Goldilocks is Turning into Mutant Goldilocks

August 5, 2020John Banks

A number of years ago, long before Jerome “Jay” Powell became Chairman of the Federal Reserve, your editor proposed something called the Ugly Goldilocks scenario. You likely know the children’s story of “Goldilocks and the Three Bears.” Goldilocks didn’t want the porridge that was too hot, or the porridge that was too cold. Instead she ate the porridge that was neither too hot, nor too cold, but “just right.” Wall Street has long used the phrase “Goldilocks Economy” to describe

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Gold, Bonds, and Equities are All Saying the Same Thing

August 6, 2020John Banks

There is a narrative that says the market has lost its mind, and that divergent market signals no longer make sense. The market is broadcasting multiple messages, and the messages are in deep conflict. Through this interpretation, three areas in particular — gold, bonds, and equities — are in direct conflict, and seem to be at odds with each other. Here is how that looks: Gold at nominal all-time highs, surging above $2,000 per ounce, says times are bad and

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How Supply Shocks Create Stagflation (and Why We’re Headed That Way)

August 7, 2020John Banks

Inflation is a funny thing. It comes in different varieties and can show up in different places. As such there is no “one size fits all” version of inflation. The classification really matters. Take the difference between asset price inflation and wage inflation, for example. It is often the case that one exists without the other. Equity and real estate values can go up, while wages stay flat or stagnant. You can also see the reverse — though we haven’t

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Terms You Should Know: Financial Repression and Fiscal Dominance

August 10, 2020John Banks

There are two financial terms that explain what is happening right now. Most investors don’t know these terms, but they are common knowledge among central bankers. The Bank of International Settlements, also known as “the central bank for central banks,” has even published white papers discussing them. The terms are “Financial Repression” and “Fiscal Dominance.” Financial Repression is about what the Federal Reserve is doing now. Fiscal Dominance, meanwhile, covers the factors that are forcing the Fed to engage in

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Stimulus Failure Today Means More Stimulus Tomorrow (the Stock Market Knows This)

August 11, 2020John Banks

The stock market continues to trade vigorously, with the S&P 500 in touching distance of all-time highs. This bullish behavior has many investors confused. Those who are optimistic about a U.S. economic recovery think the market is looking past the short-term news and forecasting blue skies ahead. Those paying attention to the data, meanwhile, are left wondering whether the market has lost its mind. The answer, in our view, goes back to the inevitable nature of stimulus, and the “policy

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Berkshire Hathaway Should Rationally Own Bitcoin

August 13, 2020John Banks

Believe it or not, Berkshire Hathaway is a concentrated stock with a high degree of geopolitical risk. Its positioning is risky, with heavy exposure in a handful of notably vulnerable areas today. The solution is elegant and simple: Berkshire should purchase billions worth of Bitcoin. In fact, we think it would be irresponsible for Berkshire not to do so. Buying Bitcoin would offset Berkshire’s concentrated risk and help the company fulfill its fiduciary duty to investors. There is really no

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How Gresham’s Law Drives the Bitcoin Price

August 14, 2020John Banks

“Gresham’s Law” has been around a long time. It was coined in 1860 by Henry Dunning Macleod, a Scottish economist. But Macleod named Gresham’s Law after Sir Thomas Gresham, a 16th century English financier. Nicolaus Copernicus, the Renaissance-era astronomer who proposed that the Earth revolves around the sun, rather than vice versa, also described a version of Gresham’s Law in a treatise written in 1519, the year Sir Thomas Gresham was born. For this reason, it is sometimes referred to

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Programmable Digital Currencies Are Coming — Here’s What That Means

August 17, 2020John Banks

On Aug. 13, a top official confirmed that the U.S. Federal Reserve is preparing for a digital currency. Lael Brainard, a member of the Federal Reserve Board of Governors since 2014, told an audience last week that the Federal Reserve was experimenting with “a hypothetical digital dollar for research purposes,” according to Bloomberg. Brainard also said the Federal Reserve was partnered with research teams from the Boston Federal Reserve and the Massachusetts Institute of Technology (MIT) in a “multi-year effort

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