Just over an hour ago the Fed disclosed that as part of its most recent reverse repo operation, it had handed out to 93 dealer banks and other financial intermediaries, both foreign and domestic, some $242 billion in Treasurys in what is now the biggest reverse repo operation in history, a privilege for which the collateral-starved banks paid the Fed the king's ransom of 0.05% in annual interest, i.e., nothing.
"The US reached a peak in prosperity and influence in the world in the 1950s or 1960s," Marc Faber explains to an Australian audience at the recent World War D conference; but since the 70s the superpower has been locked into a cycle of bubbles, busts and growing debt. "There are some people who claim to be economists who will tell you debts do not matter," but the real story is different, he warns. "When you drop dollar bills into the economy... it won't lift all prices and assets equally at the same time," Faber explains, "in the 60s and 70s, extra money flowing through the economy inflated wages; in the early 2000s, money printing inflated commodities;" but, the Gloom, Boom, & Doom Report editor points out, this price and asset growth is never equal, warning that "we live in a new word... where the old world order is largely bypassed."
One of the evils of massive over-financialization is that it enables Wall Street to scalp vast “rents” from the Main Street economy. These zero sum extractions not only bloat the paper wealth of the 1% but also fund a parasitic bubble finance infrastructure that would largely not exist in a world of free market finance and honest money. The infrastructure of bubble finance can be likened to the illegal drug cartels. In that dystopic world, the immense revenue “surplus” from the 1000-fold elevation of drug prices owing to government enforced scarcity finances a giant but uneconomic apparatus of sourcing, transportation, wholesaling, distribution, corruption, coercion, murder and mayhem that would not even exist in a free market. The latter would only need LTL trucking lines and $900 vending machines. In this context, the sprawling empire known as Bloomberg LP is the Juarez Cartel of bubble finance.
"The idea that stimulation, even if only in form but not reality, can be withdrawn without draconian economic results is simply false. Chair Yellen is truly dedicated to full employment and is going to go into shock over the next few short months at the divergence between her economic modeling, the behavioral economic projections and the degree of economic contraction in the US." The US (and world) economy are not growing. Ben Bernanke and his counterparts in other countries pumped like mad to hide the dysfunction. Flooding with liquidity did nothing to heal the distortions and made them worse.
The "Massive Gift" That Keeps On Giving: How QE Boosted Inequality To Levels Surpassing The Great DepressionSubmitted by Tyler Durden on 03/29/2014 17:02 -0400
A week ago, the official truth about QE finally emerged when the Fed's Fisher admitted that "QE was a massive gift intended to boost wealth." Fisher did not need to clarify just who the gift was aimed at - it was clear . But just in case there is any confusion, here is a chart confirming that all the events of the past 5 years have done, courtesy of the Fed's manipulation of the stock market to all time artificial highs, is to push the ratio of the average income of the "Top 10%" to the "Bottom 10%" to a previously unseen level, wildly surpassing the previous record inequailty highs that culminated in the Great Depression, and which were subsequently rapidly "equalized" by WWII.
The entire capital market structure has become mispriced.
International discord over Ukraine does not bode well for the settlement of differences over the IMF’s future. Though the G7 is excluding Russia from its number, in retaliation for its action in Crimea, this does not amount to isolating Russia. There has been no suggestion that Russia be excluded from the G20. The USA and its allies have suspected that several other G20 members would not stand for it. This suspicion was confirmed yesterday when the BRICS foreign ministers, assembled at the international conference in The Hague, issued a statement condemning ‘the escalation of hostile language, sanctions and counter-sanctions’. They affirmed that the custodianship of the G20 belongs to all member-states equally and no one member-state can unilaterally determine its nature and character. In short, their statement read like a manifesto for a pluralist world in which no one nation, bloc or set of values would predominate.
The idea of “under-shooting inflation from below” is just ritual incantation. It provides the monetary central planners an excuse to keep the printing presses running red hot, but the true aim is not hard to see. After a 30 year rolling national LBO that has taken credit market debt outstanding to $59 trillion and to an off-the-charts leverage ratio of 3.5X national income, the American economy is saddled with $30 trillion of incremental household, business, financial and public debt compared to its historically sound leverage ratio of 1.5X GDP. We are at peak debt. Household, business and government balance sheets are tapped-out. The problem is not too little CPI inflation, but the unavoidability of a pay-back era of sustained debt deflation.
In the WSJ’s February 24th exposé of the turmoil at the helm of Pimco, we saw a curious bit about tension at “the Beach” increasing in the summer of 2013. During this period, according to the Journal, conflict between then co-CIOs Bill Gross and Mohamed E-Erian became apparent to staff, and Gross restricted trading at the firm. We wanted to see what insights a quantitative analysis of Pimco Total Return Fund (PTTRX) could offer about the summer and Total Return’s recent performance, a topic of increasing scrutiny amongst the investment community.
Yellen’s decision to continue tapering QE indicates that she is aware of the fact the markets are getting out of control again or are approaching a bubble. This is further confirmed this by her decision to drop the 6.5% unemployment threshold as well as her suggestion that interest rate hikes could come as soon as six months after QE ends this coming December.
As Fortune's Stephen Gandel begins, "if you hate the Fed, you have a new hero." He is referring to none other than GMO's Jeremy Grantham who aggressively takes on the status-quo-hugging faith in the omnipotence in Central banking prowess with fact and anecdote in this brief interview..."Higher interest rates would have increased the wealth of savers. Instead, they became collateral damage of Bernanke's policies. The theory is that lower interest rates are supposed to spur capital spending, right? Then why is capital spending so weak at this stage of the cycle. There is no evidence at all that quantitative easing has boosted capital spending. We have always come roaring back from recessions, even after the mismanaged Great Depression. This time we are not..we have never had such a limited recovery."
Words matter, and the Fed’s words matter more than anyone’s. But this is the classic mistake that academic economists always make – the quasireligious belief in theory over practice, in the triumph of bloodless ideas over the market’s fang and claw. Woodford’s ideas are sweet music to the enormous egos of the academics who control the Fed: you can save the world just by stating your brilliant policy intentions. Your words will become self-fulfilling prophecies as the markets shape themselves in expectation of your mighty deeds. And so what do we get? Horror shows like Bernanke’s press conferences last summer or Yellen’s press conference last week. If the Fed was surprised by the rotten tomatoes thrown up on the stage last year, they ain’t seen nothing yet.
Chart 1 proves it is crystal clear that every time the US Federal Reserve acts to "save us" from one crisis, it directly sows the seeds for an even bigger crisis in the future.
When you ponder the implications of allowing a small group of powerful wealthy unaccountable men to control the currency of a nation over the last one hundred years, you understand why our public education system sucks. The average American has experienced a fourteen year recession caused by the monetary policies of the Federal Reserve. Our leaders could have learned the lesson of two Fed induced collapses in the space of eight years and voluntarily abandoned the policies of reckless credit expansion, instead embracing policies encouraging saving, capital investment and balanced budgets. They have chosen the same cure as the disease, which will lead to crisis, catastrophe and collapse.
As promised, the Johnson/Crapo bill has finally arrived. There are 442 pages of legal mumbo jumbo, guaranteed to cure all forms of insomnia and those suffering from low blood pressure. The agencies have been providing cheap financing to borrowers, courtesy of the Fed. The agencies have been providing cheap and bullet proof insurance for bond investors, courtesy of the Treasury. The Bill somehow expects some mysterious private capital will come in to insure the first loss position and the Government (including the FOMC) can gracefully exit its role in the mortgage monopoly. That is more than overly optimistic. Can anyone quantify that in dollars as well as mortgage rates? In summary, the Bill is going to increase mortgage compliance costs. It will confuse, rather than clarify, the mortgage application and approval process. It is a disaster. Fortunately, we suspect the Bill has no chance of passing in its present form.