We have argued that it is a perilous myth that central bankers these days control a general price level. They instead incentivize massive financial flows into securities markets and fashionable sectors. Over time, ramifications and consequences reach the profound. For one, excess liquidity promotes over/mal-investment. It’s only the scope and nature that remain in question. If major Bubble flows inundate new technology investment, the resulting surge in the supply of high-margin products engenders disinflationary pressures elsewhere. Policy responses to perceived heightened “deflation” risks then only work to exacerbate Bubbles, mounting imbalances and structural fragilities. This was a critical facet of “Roaring Twenties” analysis that was lost in time.
Having exposed the reality that the world's capital markets are a manipulated shell game, Janus' Bill Gross has a message for the perpetual bulls in his latest letter to investors - "say a little prayer." Gross continues, "low interest rates are not the cure – they are part of the problem," warning that ZIRP has enabled, "a host of zombie and future zombie corporations now roam the real economy. Schumpeter’s 'creative destruction' – the supposed heart of capitalistic progress – has been neutered. The old remains in place, and new investment is stifled." As he previously warned, when the central bank manipulation is removed the likely trajectory of prices is downward...
"Today is Day 1 of Year 7 of the 'recovery', and yet economists everywhere proclaims 3% growth is just around the corner," rages Jim Bianco as he addresses what 'bugs him', exclaiming "that ship has sailed." Bianco and Santelli go on to slay Keynesian big government dragons and the incessant bullshit from officials like Jack Lew who opine on Greece and other potential systemic risks as being a non-event - "what is priced in is that everything will work itself out at the 11th hour," leaving a huge asymmetric risk. Well worth the price of admission...
Central bankers have promised ad nauseum to keep rates low for long periods of time. And they have delivered. Their claim is that this helps the economy recover, but that is just a silly idea. What it does do is help create the illusion of a recovering economy. What we have is the financial system posing as the economy. And a vast majority of people falling for that sleight of hand. Now the central bankers come face to face with Hyman Minsky’s credo that ‘Stability Breeds Instability’. Ultra low rates (ZIRP) are not a natural phenomenon, and that must of necessity mean that they distort economies in ways that are inherently unpredictable. For central bankers, investors, politicians, everyone. That is the essence of what is being consistently denied, all the time.
"Seasonally adjusted housing starts for February plunged by one of the largest amounts in the post-crisis period. The chart below shows a subset of the February non-farm payroll report, residential construction jobs. Seasonally adjusted these jobs increased by 17,200 in February, the most in two years (Feb 2013 was greater) and the second most in four years. So while economists are blaming the weather for the plunge in housing starts, residential construction jobs were fairly robust in February. This makes no sense."
"Today, if you own an asset, say stocks or a home, and it went up in price, you do not perceive it as permanent. You fear it could go back down and you spend none of that money. You are not going to alter your investment decisions or your business decisions. That is why the QE-programs did not work. The goal of the Fed was to push up asset prices. With that in mind, they do not want asset prices to go down because they think it will create a reverse wealth effect. QE has been all about pushing up markets and they are not going to throw that to the wind.... By pushing up asset prices ECB president Draghi is going to make the same mistake as the Fed."
Since the beginning of this year, Wall Street economists and analysts have been consistently prognosticating that following the Federal Reserve's latest bond buying campaign, economic growth would gather steam and interest rates would begin to rise. This has consistently been the wrong call. The recent decline in interest rates should really not be a surprise as there is little evidence that current rates of economic growth are set to increase markedly anytime soon. Consumers are still heavily levered; wage growth remains anemic, and business owners are still operating on an "as needed basis." This "economic reality" continues to constrain the ability of the economy to grow organically at strong enough rates to sustain higher interest rates. This is a point that seems to be lost on most economists who forget that the Federal Reserve has been pumping in trillions of dollars of liquidity into the economy to pull forward future consumption.
To put the events of October 15 in context, here is a 1-minute clip courtesy of Nanex showing the daily history bond market liquidity starting with 2008 and going through November 2014.
This doesn't happen very often. Marketwatch reports that Jim Bianco points out in a recent market comment that the 67 economists taking part in a regular Bloomberg survey have a unanimous forecast regarding treasury bond yields: they will be higher 6 months from now... and a separate poll of economists recently showed that exactly zero expect the economy to contract. This is an astonishing degree of consensus thinking, but it perfectly mirrors the complacency we see in stock market sentiment and positioning data. The probability that such a unanimous view will turn out to be correct is traditionally extremely low. The economy is likely resting on a much weaker foundation than is generally believed. This is not least the result of massive monetary pumping and deficit spending, both of which tend to severely weaken the economy on a structural level, even though they can create a temporary illusion of 'growth'.
For some, especially Bruins fans, it appears hockey is better than porn, but only until you lose the Cup... According to the people at pornhub.com, when the game ended around 11 p.m. ET, something funny happened. The people in Chicago were busy celebrating their second Stanley Cup in four years, so traffic stayed down. But in Boston? Obviously, it skyrocketed from people looking for a... relief.
The venerable UBS floorman asks (and answers) an interesting question. With the re-institution of the payroll tax and higher level rates and with spending lowered by sequestration, will the Treasury need to offer fewer bonds? And if so, will the Fed remain steadfast in its purchasing 'size' (good for bond bulls since secondary demand will increase) or reduce its 'size' to meet the lower monetization needs of the Treasury (bad for equity bulls since flow is all that matters.) Thoughts below...
The underlying question in Bill Gross' latest monthly letter, built around Jeremy Stein's (in)famous speech earlier this month, is the following: "How do we know when irrational exuberance has unduly escalated asset values?" He then proceeds to provide a very politically correct answer, which is to be expected for the manager of the world's largest bond fund. Our answer is simpler: We know there is an irrational exuberance asset bubble, because the Fed is still in existence. Far simpler.