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.
Apparently China did not get the memo that the Fed's apologists are furiously scrambling to packpedal on Yellen's "6 month" guidance in virtually all media outlets. The is the only way to explain why Vice Minister of Finance Zhu Guangyao said overnight that "the U.S. Federal Reserve will begin boosting interest rates within six months after exiting “unconventional” monetary policy, and that will have a “significant impact” on the U.S. and world economy, as Market News International reported earlier. Zhu told China Development Forum this weekend “we believe a the Fed meeting this October, the exit of their quantiative easing will complete." In other words while the spin for public and algo consumption is that the Fed will continue placating those long the stock market until everyone's price target on the S&P 500 is hit and everyone can comfortably sell into an ever-present bid, China is already looking for the exits. But while the end of QE appears a given, at least until the market realizes there is no handover to an economy that is a moribund as it has ever been in the past five years, and the Fed has no choice but to untaper and return with an "even more QE" vengeance (it certainly won't be the first time - just recall the "end" of QE1, QE2, Op Twist, etc), a bigger question surrounds whether China, already sliding in credit contraction and suffering a plunging stock market with its housing sector also on the edge of a bubble bust, is about to take over from the Fed and proceed with its own stimulus program. The answer is no.
The red flags contained in the national and global headlines that have come out thus far in 2014 should have spooked investors and economic forecasters. Instead the markets have barely noticed. It seems that the majority opinion on Wall Street and Washington is that we have entered an era of good fortune made possible by the benevolent hand of the Federal Reserve. Ben Bernanke and now Janet Yellen have apparently removed all the economic rough edges that would normally draw blood. As a result of this monetary "baby-proofing," a strong economy is no longer considered necessary for rising stock and real estate prices. But unfortunately, everything has a price, even free money.
With Bernanke gone, the remaining Fed members knowing full well they will be crucified, metaphorically of course (if not literally) when it all inevitably comes crashing down, are finally at liberty with their words... and the truth is bleeding out courtesy of the president of the Dallas Fed, via Bloomberg.
- FISHER SAYS QE WAS A MASSIVE GIFT INTENDED TO BOOST WEALTH
We wonder how President Obama, that crusader for fairness, equality and all time Russell 200,000 highs, will feel about that? In the meantime, just like the Herp, QE is the gift that keeps on giving.. and giving... and giving... to the 0.001%.
Despite the total collapse (flattening) in the Treasury yield curve in the last 2 days, Citi's FX Technicals group is convinced that we have seen a turn in fixed income that will see significantly higher yields in the years ahead and notably higher yields by this yearend also. Furthermore, they believe this will initially come from the belief in a continued taper, and the curve will initially steepen (2’s versus 5’s and 2’s versus 10’s). This normalization, they add, will be a good thing - QE encourages misallocation of capital and poor business decisions which has a negative feedback loop into the economy - but add (as long as yields do not go too far too fast like last year).