One of the bigger asset bubbles in recent US history has nothing to do with stock, bonds or commodities, We are talking about farmland. And yet, like all other bubbles - be they the result of retail euphoria or central bank rigging - this one too must come to a close, and as the WSJ reports, the first crack in the farmland bubble are appearing, after farmland values declined in parts of the Midwest for the first time in decades last year "reflecting a cooling in the market driven by two years of bumper crops and sharply lower grain prices, according to Federal Reserve reports on Thursday." the average price of farmland in the Federal Reserve Bank of Chicago’s district, which includes Illinois, Iowa and other big farm states, fell 3% in 2014, marking the first annual decline since 1986, which makes farmlands the only asset class that had not seen a down year in nearly three decades!
Now that Europe has demonstrated that one can go NIRP and not crash the system, will the Fed - once its silly obsession with hiking rates in the summer only to launch even more easing and/or QE as the ECB did in 2008 and 2011 - follow suit and join a rising tide of "developed" world central banks in punishing savers for hoarding cash? In a note released last night titled "Revisiting Negative Interest Rates in the US", Goldman shares its thought on the matter. It goes without saying that Goldman is important, because whatever Goldman's econ team shares with Goldman's Bill Dudley over at the NY Fed, usually tends to become official policy with a 3-6 month lag.
What happens if one expands the Eurozone NIRP universe to include the debt of other countries including Japan, Denmark, Sweden, Switzerland and so on? Conveniently, JPM has done the analysis and finds that a mindblowing $3.6 trillion of government debt traded with a negative yield as recently as last week. This represents 16% of the JPM Global Government Bond Index, or in other words nearly a fifth of all global government debt is now trading with a negative yield, meaning investors pay sovereigns, using other people's money of course, for the privilege of buying their issuance!
It is my expectation, unless these deflationary trends reverse course in very short order, that if the Fed raises rates it will invoke a fairly negative response from both the markets and economy. However, I also believe that the Fed understands that we are closer to the next economic recession than not. For the Federal Reserve, the worst case scenario is being caught with rates at the "zero bound" when that occurs. For this reason, while raising rates will likely spark a potential recession and market correction, from the Fed’s perspective this might be the “lesser of two evils.”
It appears markets are on the verge of learning just how damaging the unintended consequences will be from multiple years of extreme central bank promises now that the Fed has run out of the ammunition to keep the utopian market façade alive. The structure of the ECB QE and the Greek situation make the backdrop considerably more troubling and difficult.
Over the past 48 hours, the world has been bombarded with a relentless array of soundbites, originating either at the ECB, or - inexplicably - out of Greece, the one place which has been explicitly isolated by Frankfurt, that the European Central Bank's QE will benefit everyone. Setting the record straight: it won't, and not just in our own words but those of JPM's Nikolaos Panigirtzoglou, who just said what has been painfully clear to all but the 99% ever since the start of QE, namely this: "The wealth effects that come with QE are not evenly distributing. The boost in equity and housing wealth is mostly benefiting their major owners, i.e. the wealthy." Thank you JPM. Now if only the central banks will also admit what we have been saying for 6 years, then there will be one less reason for us to continue existing.
More than six years after the last recession, deflation remains an imminent threat. The continued hope is that the next round of interventions will be the one that finally sparks the inflationary pressures needed to jump start the engine of economic recovery. Unfortunately, that has yet to be the case, and the rate of diminishing returns from each program continue to increase. The collapse in commodity prices, interest rates and the surge in dollar are all clear signs that money is seeking "safety" over "risk." Maybe you should be asking yourself what it is that they know that you don't? The answer could be extremely important.
Market Wrap: Futures Lower After BOJ Disappoints, ECB's Nowotny Warns "Not To Get Overexcited"; China SoarsSubmitted by Tyler Durden on 01/21/2015 07:55 -0400
Three days after Chinese stocks suffered their biggest plunge in 7 years, the bubble euphoria is back and laying ruin to the banks' best laid plans that this selloff will finally be the start of an RRR-cut, after China's habitual gamblers promptly forget the market crash that happened just 48 hours ago and once again went all-in, sending the Shanghai Composite soaring most since October 9, 2009. It wasn't just China that appears confused: so is the BOJ whose minutes disappointed markets which had been expecting at least a little additional monetary goosing from the Japanese central bank involving at least a cut of the rate on overnight excess reserves, sending both the USDJPY and US equity futures lower. Finally, in the easter egg department, with the much-anticipated ECB announcement just 24 hours away, none other than the ECB's Ewald Nowotny threw a glass of cold water in the faces of algos everywhere when he said that tomorrow's meeting will be interesting but one "shouldn’t get overexcited about it."
It will be even more disruptive if some among them decide that the only reason for the failure of their collective delusion of grandeur is that they have not been deluded enough and that even more wild-eyed palliatives are therefore needed. Disruption on such a scale is not what the budding entrepreneur wants to contend with as he contemplates whether to risk both his capital and his reputation in launching or expanding a business, in ordering new equipment, or hiring new staff and so fostering a meaningful recovery. Disruption on such a scale is not something we should wish to inflict upon a system we have been both unable and unwilling to fully repair. Either way – damned if they do, damned if they don’t – disruption seems to be what we will get in the months ahead.
Martin Armstrong, Max Keiser and High-Level Economists Weigh In
"There is no automatic adjustment of current account deficits and surpluses, they can get totally out of hand. There are effects from big countries to little ones, like Switzerland. The system is dangerously unanchored. It is every man for himself. And we do not know what the long-term consequences of this will be. And if countries get in serious trouble, think of the Russians at the moment, there is nobody at the center of the system who has the responsibility of providing liquidity to people who desperately need it. If we have a number of small countries or one big country which run into trouble, the resources of the International Monetary Fund to deal with this are very limited. The idea that all countries act in their own individual interest, that you just let the exchange rate float and the whole system will be fine: This all is a dangerous illusion."
Back in June, the world was speechless when Goldman's head of the ECB, Mario Draghi, stunned the world when he took Bernanke's ZIRP and raised him one better by announcing the ECB would send deposit rates into negative territory, in the process launching the Neutron bomb known as N(egative)IRP and pushing European monetary policy into the "twilight zone", forcing savers to pay (!) for the privilege of keeping the product of their labor in the form of fiat currency instead of invested in a global ponzi scheme built on capital market so broken even the BIS can no longer contain its shocked amazement. Well, the US economy may be "decoupling" (just as it did right before Lehman) and one pundit after another are once again (incorrectly) predicting that the Fed may raise rates, but when it comes to the true "value" of money, US banks have just shown that when it comes to spread between reality and the economic outlook, the schism has never been deeper.
Enter US NIRP.
"The time to liquidate a given position is now seven times as long as in 2008, reflecting much smaller trade sizes in fixed income markets. In part the current liquidity illusion is a product of the risk asymmetries implied by the zero lower bound on interest rates, excess reserves in the system, and perceived central bank reaction functions. However, interest rates in advanced economies won’t remain this low forever. Once the process of normalization begins, or perhaps if market perceptions shift, and it is expected to begin, a re-pricing can be expected. The orderliness of that transition is an open question."
The “unintended consequences” of the negative interest rate policy will vastly outweigh the perceived advantages of any short term boost to economic activity they may provoke. Given that the failure of these interventions is already absolutely certain, we must be prepared for even more interventions to “fix” the failures produced by the previous ones. Many modern-day intellectuals appear quite keen on abolishing the market economy and replacing it with some form of command economy (just as long as their personal plans are implemented of course). They should be careful what they wish for.
Here Is The Only Thing You Need To Know As Goldman's|New York Fed's Bill Dudley Testifies To The SenateSubmitted by Tyler Durden on 11/21/2014 11:55 -0400
As everyone listens in silence as Goldman's New York Fed's Bill Dudley gets emotional during his Senate Banking Committee testimony, and his only response to why there is Goldman capture of the NY Fed being that $3 trillion in Fed excess reserves have made banks "stable", yet why absolutely nothing will change, there is only one thing everyone needs to see to understand just how the system works. Presenting the total donations by Goldman Sachs to members of Congress in 2014 alone.