"We have a problem with this, and that is central bank hubris. They now think that they are omnipotent, because, essentially the government has said we are going to pass over all control of the economy to the central banks, they say to everybody else including financial market participants that “you don’t know, you don’t understand, we have our models and they are right”. And that kind of hubristic approach is when you sow the seeds of your own destruction."
Were this extreme policy to be implemented it would be a further and deliberate debasement of fiat currencies. Alan Greenspan’s warning of “fiat money in extremis” becomes more real by the day. Were this silly proposal ever to become policy, it would significantly increase the risk of inflation and stagflation. In a worst case scenario, it will lead to currency collapse and hyperinflation.
Even Hellicopter Ben would have balanced remarks. However, Janet Yellen has taken dovishness to an all-time high or low dpending on your perspective.
It is becoming increasingly obvious that we are seeing the disconnect between financial markets and the real economy grow. It is also increasingly obvious (to Citi's FX Technicals team) that not only is QE not helping this dynamic, it is making things worse. It encourages misallocation of capital out of the real economy, it encourages poor risk management, it increases the danger of financial asset inflation/bubbles, and it emboldens fiscal irresponsibility etc.etc. If the Fed was prepared to draw a line under this experiment now rather than continuing to "kick the can down the road" it would not be painless but it would likely be less painful than what we might see later. Failure to do so will likely see us at the "end of the road" at some time in the future and the 'can' being "kicked over the edge of a cliff." Enough is enough.
"The recent trading environment has felt something like walking into a place and having a sense that something is wrong and dangerous but not knowing exactly what will happen or when. “QE Infinity” has so distorted the prices of stocks and bonds that nobody can possibly determine what the investing landscape would look like, or what the condition of the economy and financial system would be, in the absence of Fed bond-buying."
-Paul Singer, Elliott Management
We now appear to be close to the day of reckoning that likely determines what the coming weeks/months hold.
- Do we step back from the brink, see our politicians reach an agreement and carry on? Although to be fair, in 2011 the break below supports that led to accelerated losses in the equity markets actually took place once an agreement was reached.
- Do we break lower thereby causing the negative feedback loop/concerns that feed back into the economy, kill any possibility of tapering and sees the Fed re-establish its dovish credentials (Like 1998 and 2011)
- Do bond yields push higher after an agreement thereby increasing concerns about a negative feedback loop into the economy, housing, emerging markets, Europe (Like 2011) and ultimately the equity market?
Time will tell us the answers to the above questions, but whatever happens, Citi notes it looks like the price action in the near future is at pivotal levels that need to be watched closely.
Given the global central banker's determination to stop prices falling, worries that the outlook is deflationary are unlikely to be realised. In the main this is the view of neoclassical economists, Keynesians and monetarists, who generally foresee a 1930s-style slump unless the economy is stimulated out of it. So successful was the Fed leading other central banks to save the world in 2009 that the precedent is established: if things take a turn for the worse or a systemically important financial institution looks like failing, Superman Ben and his cohort of central bankers will save us all again. Call it kryptonite, or failing animal spirits if you like. It is closer to the truth to understand we are witnessing the early stages of erosion of confidence in government and ultimately its paper money. Ordinary people are finally beginning to suspect this, signalled by the world-wide rush into precious metals last month.
In the end, it was the banksters they chose, and thanks to your government, you got hosed.
Why'd the Fed announce QE 4? Three reasons: the US economy is nose-diving again and the Fed is acting preemptively. The Fed is trying to provide increased liquidity going into the fiscal cliff. The Fed is funding the US’s Government massive deficits.
We have long been pounding the table on what in our view is the biggest detriment to any future growth for not only corporate America, but the entire US (where, sadly, government investment IRRs just happen to be negative - a fact that most won't understand until it is too late, especially not self-anointed economic wisemen whose only solution to everything is "do more of the same" yet who thought the utility of the Internet would be eclipsed by that of the fax machine): the complete lack of capital expenditures at the corporate level, and lack of (re)investment spending. It turns out that, however, that there is more to the story, and as the following chart from SocGen's Albert Edwards shows, not only are companies using up what actual free cash flows they have for such stupid stock boosting gimmicks such as harebrained M&A (just look at the recent fiasco between HP and Autonomy to see how rushed M&A always ends), and of course buybacks, but they are now levering to the hilt to do even more of this. The last time they did this? The golden days of the credit bubble.
The divergence in crude oil and gasoline supply fundamentals could mean not even an SPR oil release, unilateral by the U.S. or not, would significantly bring down gasoline prices as people might expect.
Savers and retirees aren’t the only ones getting screwed by interest rates that have been artificially suppressed by central banks around the world. These days, banks themselves are finding it increasingly difficult to earn even a nominal return on instruments they consider safe. Just last week, Denmark’s Nationalbanken set its deposit rate below zero for the first time, effectively charging commercial banks and others a fee for parking their surpluses in krones. There are numerous reasons why the krone would be a magnet for idle money. For one, Denmark’s economy is among the strongest in Europe. Also, because Danes rejected euro-zone membership in 2000, they enjoy a degree of political and economic autonomy that their neighbors do not have. This will presumably make Denmark less susceptible to the shock waves that follow the inevitable implosion of Greece, Spain, Italy et al. Small wonder, then, that the global stewards of OPM would consider the krone a safe haven even though it now guarantees them at least a small loss on their money. From Denmark’s standpoint, the decision to follow the European Central Bank’s latest rate cut was unavoidable. The alternative would have been to sit idly by as the krone appreciated, hobbling the country’s exports and destabilizing its balance sheet.
Central bank gold demand remains robust as central banks continue to diversify out of the euro and the dollar. Further central bank demand is confirmed in the news this morning that Kazakhstan plans to raise the share of gold in its international reserves from 12% to 15%. So announced central bank Deputy Chairman Bisengaly Tadzhiyakov to reporters today in the capital, Astana. “We’ve already signed contracts for 22 tons,” Tadzhiyakov said. Bloomberg report that immediate-delivery gold was little changed at $1.620.41 an ounce at 10:50 a.m. in Moscow, valuing 22 metric tons of gold at about $1.2 billion. “The bank is ready to buy when suppliers are ready to sell,” Tadzhiyakov said. Kazakhstan said yesterday it will cut its holdings in the euro by a sixth. It was reported in the Reuters Global Gold Forum that the central bank buys all the gold produced in Kazakhstan and owned 98.19T at the end of April, according to the IMF's most recent international finance statistics report. Meanwhile, supply issues remain and South African gold production continues to plummet. South African gold production fell 12.8% in April from a year earlier, Juan -Pierre Terblanche, a spokesman for Statistics South Africa, told Bloomberg.
Here's concrete proof of a mass European bank run. If you missed it, don't worry - there'll be plenty more from where these came from...
The real world revolves around cash flow. Families across the land understand this basic concept. Cash flows in from wages, investments and these days from the government. Cash flows out for food, gasoline, utilities, cable, cell phones, real estate taxes, income taxes, payroll taxes, clothing, mortgage payments, car payments, insurance payments, medical bills, auto repairs, home repairs, appliances, electronic gadgets, education, alcohol (necessary in this economy) and a countless other everyday expenses. If the outflow exceeds the inflow a family may be able to fund the deficit with credit cards for awhile, but ultimately running a cash flow deficit will result in debt default and loss of your home and assets. Ask the millions of Americans that have experienced this exact outcome since 2008 if you believe this is only a theoretical exercise. The Federal government, Federal Reserve, Wall Street banks, regulatory agencies and commercial real estate debtors have colluded since 2008 to pretend cash flow doesn’t matter. Their plan has been to “extend and pretend”, praying for an economic recovery that would save them from their greedy and foolish risk taking during the 2003 – 2007 Caligula-like debauchery.
Debt default means huge losses for the Wall Street criminal banks. Of course the banksters will just demand another taxpayer bailout from the puppet politicians. This repeat scenario gives new meaning to the term shop until you drop. Extending and pretending can work for awhile as accounting obfuscation, rolling over bad debts, and praying for a revival of the glory days can put off the day of reckoning for a couple years. Ultimately it comes down to cash flow, whether you’re a household, retailer, developer, bank or government. America is running on empty and extending and pretending is coming to an end.