The Cantillon Effect

What's all this this then?

Every tragedy could really start with the words:
“Nothing would have happened had it not been that...”

Ludwig Wittgenstein, 𝘊𝘶𝘭𝘵𝘶𝘳𝘦 𝘢𝘯𝘥 𝘝𝘢𝘭𝘶𝘦

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So the Federal Reserve actually keeps track of the amount and the share of Checkable Deposits and Currency Held by Wealth Percentiles.

If you remember the “repo crisis” of September 2019 - explained then as “corporations had to withdraw funds from money market accounts to pay for quarterly tax bills” - that was when the Fed restarted QE, well before Covid.

As I discussed in Why did the Fed go insane with the MBS purchases?, the Fed has a long history of bailing out gamblers, as long as they are very wealthy and connected gamblers:

From Christopher Leonard’s excellent, The Lords of Easy Money, talking about September 2019 (well before Covid gave the Fed more cover):

The central bank had transformed the financial landscape by swamping it with money and in doing so had destroyed one monetary regime and replaced it with a new one. But there was no reliable instrument to measure the terrain of the new regime. This fact was made a stark reality on Monday, when the repo market blew up. The resulting market crisis almost became a full-fledged financial crisis, at a moment in history when the markets were supposed to be stable and in good health.

The only reason that this didn’t happen was that the Fed stepped in, almost instantaneously, and initiated a $400 billion bailout. This bailout was unprecedented, and it benefitted a small group of hedge funds that had essentially hijacked the repo market and used it as a vehicle to make risky bets. The Fed saved them from the consequences of those bets.

And here’s a thought:

The mainstream narrative should therefore be reversed: the stock market did not collapse (in March 2020) because lockdowns had to be imposed; rather, lockdowns had to be imposed because financial markets were collapsing. With lockdowns came the suspension of business transactions, which drained the demand for credit and stopped the contagion. In other words, restructuring the financial architecture through extraordinary monetary policy was contingent on the economy’s engine being turned off. Had the enormous mass of liquidity pumped into the financial sector reached transactions on the ground, a monetary tsunami with catastrophic consequences would have been unleashed.

But I digress. Let’s look at the Fed’s numbers:

Share of Checkable Deposits and Currency Held by Wealth Percentile, Q3 2019 vs Q2, 2022 (latest data)

• Bottom 50%: 10.5% vs 5.9%

• 50th to 90th %: 36.2% vs 26.6%

• 90th to 99th %: 36.4% vs 35%

• 99th to 99.9th %: 11.8% vs 18.2%

• Top 0.1%: 5% vs 13.9%

So the only group that gained share was the top 1%, which overall went from 16.8% to 32.1%, almost doubling.

This is what cheap money does. Even what I call the upper-middle class share dropped over this period, and everyone else lost huge share.

Some can say, well, that’s the share, but everybody got some of the Fed’s fun coupons, and that is true. There’s your spike in inflation in “stuff” (as opposed to stocks and real estate, which were already insane).

Remember though, we always have inflation in the cost of living, this time it just got a little out of hand.

Another way to look at it is to compare the multiplier of how much actual savings changed over this period:

• Bottom 50%: Rose 3.4x

• 50th to 90th %: Rose 4.5x

• 90th to 99th %: Rose 5.9x

• 99th to 99.9th %: Rose 8.6x

• Top 0.1%: Rose 16.8x

"All animals are equal But some animals are more equal than others" - George Orwell

The Cantillon Effect describes the uneven effect inflation has on goods and assets in an economy. Since new fiat money is injected into an economy at specific points, its effects are felt by different people and industries at different times. This causes a distortion in relative prices and benefits certain parties while disadvantaging others.

Here’s a good quote to sum it up:

"Many thinkers assume that lower interest rates benefit the poor, who often pay interest to buy the necessaries of life. Whatever benefits accrue to the poor, however, are dwarfed by benefits to the rich."

- Tom Owens

"The system is designed to enrich people who are connected and only people who are connected, and everybody sees that now."

John Titus

• A rare defense of Powell from Danielle DiMartino Booth. I've bashed Jay a lot - I think he chickened out in 2019, and sprayed the Fed's Cantillon Effect firehouse bigtime in 2020, but don't forget - Alan, Ben & Janet are the root causes of the mess we're in (and have been well rewarded for it.)

"Here in Australia we're still probably at least six months away from the peak [in rental inflation], and that's at the earliest, because if you look at the data from private providers they say that rents are up somewhere between 13% and about 26%, whereas the CPI says by about 5%…"

Tarric Brooker

“You can effectively come out and sell tons of 0DTE options, right? And the way how intraday margining works…it’s so insane that it’s so primitive. They don’t necessarily have good systems in place to identify, “Hey, by the way, you could blow up doing this, right?” And I’m not talking about just retail, I’m talking about larger hedge funds that are doing this, the Bill Hwangs of the world.”

- Kris Sidial

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Bundesbank may need recapitalisation to cover bond-buying losses

Germany’s federal audit office has warned the Bundesbank may need a bailout to cover losses arising from the European Central Bank’s bond-buying scheme, potentially throwing a spanner in the ECB’s plans to carry out similar programmes in the future.

Good!

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Weekly Bankruptcy Filings

No deflation here!

Producer Price Index by Industry: Offices of Lawyers: Bankruptcy and Other Business and Commercial Legal Services, % change year-over-year…

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Still up 3.1% year-over-year. These are single-family houses with mortgages guaranteed by Fannie Mae and Freddie Mac

The S&P CoreLogic Case-Shiller 20-city home price index has now been down year-over-year two months in a row. The last time that happened was early-2007 and late-2010. Prices peaked in April 2006 and bottomed in March 2012.

You too can get a DSCR loan! “Scale to 100 properties or more, without ever showing my tax return or showing proof of income!…None of us are personally liable…this is considered a commercial loan…it’s not going to show on your credit score.”

Florida Single-Family Homes, May 2023

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Tenants say a 3-year ban on evictions kept them housed. Landlords say they’re drowning in debt

Retiree Pamela Haile has paid property taxes, insurance and other bills on a house she lets out in Oakland, but for more than three years her tenants have paid no rent thanks to one of the longest-lasting eviction bans in the country…

While it’s more common to see tenants converging on city halls in California to demand greater protections, in Oakland and surrounding Alameda County small-property landlords staged protests earlier this year demanding an end to the moratoriums.

Many of the landlords were Black, like Haile, or Asian American, and they said the eviction bans had saddled them with debt and foreclosure worries while their tenants, who have jobs, live rent-free.

These mom and pop landlords don’t have the legal teams or the billions in Fed backstops that Stephen Schwarzman and Barry Sternlicht have.

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Las Vegas May 2023: Visitor Traffic Up 1.5% YoY; Convention Traffic up 16% YoY I used to go a lot, but not much any more. The strip is unbearable now. The place was much better when the Mob ran it.

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Man muss immer umkehren - Jacobi (“One must always seek a converse, turn a thought the other end to,” or, via Charlie Munger, “Invert, always invert.”)

Gradually, then suddenly…

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