The Fed has shifted its basilisk gaze from the economic cycle to the credit cycle.

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Jerome Powell, speaking Parseltongue.

In my first post, I introduced the concept of the Participant Ponzi.  In this post, I will show how the current Participant Ponzi in the U.S. stock market has come to exist. The Participant Ponzi in Practice In my previous post, I outlined the necessary conditions for a Participant Ponzi to exist.  They include:

One or more sources of consistent, indiscriminate (value indifferent) buyers;Steadily rising prices with no sustained or extreme drawdowns;Supply constraints, and;Rationalization.  All these conditions are currently present in the U.S. equity market. Condition 1: Consistent, Indiscriminate Buyers There can be no debate that there have been multiple…

In a Participant Ponzi, the participants play the role of the “fraudster”.

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Sports franchises are a good example of a Participant Ponzi.

In a traditional Ponzi scheme, early investors are paid out with later investors investment flows.  As the number of investors grows, it requires more new investors to pay out earlier investors when they liquidate their holdings to realize their (unknowingly fraudulent) gains. In this way, the flows into the investment are

critical to keep the Ponzi going. In the stock market, the flow dynamics are the same as in a traditional Ponzi scheme.  For the sage advice of "buy low, sell high" to work, later investors have to stand ready to take out early investors who are selling. The difference…

Anyone buying the Miami Beach 3.25% bonds of 49 is taking massive uncompensated risk.

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Miami could turn into Atlantis.

Generally speaking, most entrepreneurs should have a barbell approach to managing their total wealth.  This requires looking at the entire balance sheet when managing their assets, which I have discussed at length here. Total Wealth Approach In short, a Total Wealth approach considers the business assets and liabilities, as well as

personal real estate and expected cash flows, side by side with financial assets. As a heuristic, entrepreneurs can think of their business interest as a concentrated equity position.  This concentrated equity position typically overwhelms their financial assets in size.  Because of this, the liquid financial assets should be treated…

MMT creates zombie companies that are enabled to drag their dead legs around and gnaw on the capital that should go to corporations that would replace them.

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Central bank-enabled companies.

This is the third post in a series on Modern Monetary Theory.  The first post introduced the theory, the second critiqued it, and this one explains the investment implications. Buy U.S. Treasury Bonds As discussed in my previous post, MMT is deflationary, not inflationary, so it should lead to lower interest

rates.  I believe the Japanese and EU experiments with monetary stimulus and asset purchases have born this out. Chart 1:  Japanese Stock Market, Government Debt and Central Bank Balance Sheet Source: Bloomberg In the chart above, the Nikkei 225 Index is the white line, the red line is Japanese…

The biggest problem with MMT is that debt is deflationary, not inflationary.

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Robert Mugabe, MMT economist.

This post continues my series on Modern Monetary Theory (“MMT”).  You can find my previous post, where I explained how MMT works, here.  In this post, I critique various parts of MMT theory. “Countries Don’t Go Bankrupt” This idea has been in circulation before.  Indeed, Walter Wriston, the CEO of Citibank, once went all-in

on it.  "Wriston's most remarkable achievement at Citibank was persuading Washington that lending money to governments in developing countries was nearly risk-free."[1]  About these loans, Wriston notoriously said, "They're the best loans I have.  Sovereign nations don't go bankrupt."[2] The truth, as anyone with even a…