"Chaos is coming... The mood of the nation is what unleashes the inflationary genie...it is not a monetary phenomenon."
The world is "suffering from propaganda" according to former hedge fund manager Hugh Hendry, who explains to BloombergTV's Jonathan Ferro that, despite what we are told every day about a "tsunami of money" flooding the world, "The Fed is not printing money, it is simply increasing central bank reserves."
How can one explain, he asks, how the dollar has strengthened so much while The Fed's balance sheet has exploded...
What the global economy needs, Hendry explains, is more dollars and in lieu of The Fed's "responsible" actions, it should abrogate responsibility to The Treasury and focus attention on the FX markets (not the fixed income markets).
The dishevelled Scot reflects on our Ayn-Randian world and says The Treasury should stand up and proclaim that the Dollar Index should trade at 60 (about a 40% devaluation from here).
"Kaboom! Can you imagine the pandemonium... but what would they do," he asks himself rhetorically, "they would print their currency and use that to buy dollars to stop their currencies appreciating."
They would be like the Swiss, Hendry smiles, "buying Facebook regardless of the news."
The hardest thing, he adds, is that "The Fed has to promise to be something they desperately don't want to be - irresponsible."
It's an impossible task, Hendry notes, for The Fed to be so radical, and that's why Hendry believes "we need someone like Joe Rogan" to run The Fed.
As Hendry explains in his "Dawn Of Chaos" paper, Bankers aren’t listening to the Fed any longer...
It’s like watching a poker game. The Fed keeps wagering its QE bets to give the impression that it holds a strong hand. It needs to convince the banks to fold and lend more. Once upon a time the Fed bossed this game; it was the grand master in the art of deception. Back in the chaotic 1970s, the Fed had an Ace it could play, Paul Volker, whose determination to raise interest rates in the teeth of a recession – I don’t think you would call it recklessly irresponsible? But still… – could instil fear into this game of poker.
Volker wanted the banks to fold and to contract their expansionary lending. He needed them to believe that inflation was set to fall and that they would be better off in Treasuries yielding more than 12% than lending to an economy that was set to be pushed over a cliff by the Fed.
Several games and a few bad hands later, the banks finally got the message and took his posturing for real. They changed their risk behaviour, and in doing so they changed the course of history: by buying those cheap Treasuries and lending less, inflation was thus expunged from the credit system. But first the credit markets had to be brought on side. You get it?
You want a solution? Change the mood music
How to do it this time?
Today, the Fed’s challenge is arguably much harder: it must pivot from order to chaos. The Fed needs someone willing to act out of turn, an angle shooter perhaps? The banks have made all the running and have had the upper hand in this parlour game. They keep calling the Fed’s bluff.
“What you got? Really? More reserve printing? I see you and I raise you…” The Fed’s gotta start thinking outside the box!
Of late they’ve shown some signs of understanding this dilemma. Fed chairman don’t dare loosen their ties or remove their jackets. But even so, Fed chief Jerome Powell has been on prime-time morning TV – this almost never happens. Credibly reckless? “I’ll give you credibly reckless,” he declares. He’s been fibbing, arguing that he is really printing money. Fed chiefs never say that. What is more, he says that he’s plenty ready to do more! While housewives across America cower behind their sofas, the bank and the credit markets, his real audience, continue to yawn...
...So, something’s got to be done and it has to be unorthodox. If people can’t bear higher interest rates, then let’s give them something else. CHAOS, anyone? If I were at the Fed, I would appoint podcast-superstar Joe Rogan.
...Can you imagine the poker game with Joe at the table? I’m not so sure the credit market would be so convinced that the “suit” running the Fed was any longer so “stiff”.
We would be running up the speedometer of nominal US GDP and dialling down the ratio of debt to GDP. And with all these new and potent dollars emanating from the high velocity base of the commercial banking system, we could at last address the elephant in the room and the dollar issue.
"I would rather we radicalize The Federal Reserve than radicalize the political economy," and that Hendry says, is the real danger.
"If no one is brave enough to do something crazy like this then the political class will get crazier and crazier" which leads us, Hendry says, "staring into this horrible period going into the election where we are fomenting anger with the virus releasing lots and lots of pent-up frustration at the injustice of how the present system distributes wealth.
"The system is broken," and a "mad, angry political system is something that I fear most."
If they don't install a radical Fed chief, like Joe Rogan, Hendry warns:
"prices will ebb and flow but generally go higher until society snaps... and when we get angry and I wanna fight you to the death, then we are talking about a lot of inflation."
So what is the "unbound by other people's money" Hendry doing with his money?
"I am long gold, I'd be long equities, and I would be long FX volatility... the Saudi peg's not gonna last, Hong Kong's peg's not gonna last...because the world is gonna change."
Hendry concludes on his most ominous note:
"If The Fed doesn't change then the world's going to snap."
Interestingly, the dollar (in gold) appears to be pricing in a significant devaluation of the reserve currency - while the rest of the world's fiat friends desperately keep order...
If we see markets going higher and volatility going higher with it, as Hendry suggests we saw a snapshot of in April, "then you know the world is going to change... this is the dawn of chaos."
"50 years ago the world was chaotic and we were asking authorities to impose order and it's been fantastic for the creditor class. The challenge today is we've had enough of order and we certainly can't take higher interest rates, so give us chaos," but Hendry ends this wondrous 10 minutes of macro malaise by noting that "the hardest thing is for The Fed to promise to be credibly irresponsible... and we need the monetary system to be irresponsible so that our society remains together."
What about hyper-inflation?
"I don’t see that happening in America; elsewhere perhaps, but the US does enjoy some spoils from having the reserve currency after all."
Unless... A public baying for action – any action, and to-hell-with-the-consequences kind of action, the mood that gripped Germany in 1921, Japan in 1935, and which we catch glimpses of with the pandemic of 2020… this is commonly regarded as the classic symptom of collective hysteria. Hysteria is a huge red flag if you are looking for signs that our monetary system will fail.