According to the latest SNB financial release, 18%, or CHF 95 ($102 billion) of the assets held on the SNB's balance sheet are, drumroll, foreign stocks! In other words, the SNB holds 15% of Switzerland's GDP in equities!
The law of unintended consequences is becoming ever more prominent in the economic sphere, as the world becomes exponentially more complex with every passing year. Just as a network grows in complexity and value as the number of connections in that network grows, the global economy becomes more complex, interesting, and hard to manage as the number of individuals, businesses, governmental bodies, and other institutions swells, all of them interconnected by contracts and security instruments, as well as by financial and information flows. It is hubris to presume, as current economic thinking does, that the entire economic world can be managed by manipulating one (albeit major) subset of that network without incurring unintended consequences for the other parts of the network.
There are three financial hurricanes hurtling towards our country and most people are oblivious to the coming catastrophe. The time to prepare is now, not when the hurricane warnings are issued.
Today we get a two-for-one algo kneejerk special, first with the Q1 GDP release due out at 8:30 am which will confirm that for the second year in a row the US economy barely grew (or maybe contracted depending on the Obamacare contribution) in the first quarter, followed by the last pre-June FOMC statement, in which we will find out whether Janet Yellen and her entourage of central planning academics will blame the recent weakness on the weather and West Coast port strikes and proceed with their plan of hiking rates in June (or September, though unclear which year), just so they can push the economy into a full blown recession and launch QE4.
We are paying a high price for too many elites and their ‘frivolous cravings’. Nowadays many countries’ social and political structure relies on debt-driven consumption and increasing levels of entitlements. Blame the policy-makers as the “permanent lie [has become] the only safe form of existence.”
While preserving the farce of the S&P's relentless rise no matter the earnings recession, the 1% GDP or the negative funds flow, has been entirely a central bank mandate in the past month (one which will soon inlude the PBOC), the good news for the BOJs and the NYFeds of the world is that the stock buyback hiatus is almost over, and starting this week the bulk of companies can come right back and proceed to repurchase their stocks at all time highs. And what a come back it will be. According to Goldman, the pace of buybacks is now absolutely off the charts, with nearly $1 trillion in buyback announcements expected in just this calendar year, a mindboggling number, one which is the same size as the largest annual Fed Quantiative Easing amount in any one year going back to the great financial crisis.
If Greece does indeed end up exiting the common currency or if the intractable nature of debt negotiations end up triggering an "accident" that plunges the country into social unrest and years of unprecedented economic hardship, no one wants to be "the one holding the murder weapon."
Nearly two months ago we explained "How Beijing Is Responding To A Soaring Dollar, And Why QE In China Is Now Inevitable" in which we said that "once China, that final quasi-Western nation, proceeds to engage in outright monetization of its debt, then and only then will the terminal phase of the global currency wars start." We may not have long to wait because just hours ago, MarketNews first among the wire services hinted at what we suggested was the endgame: PBOC DISCUSSING DIRECT PURCHASES OF LOCAL GOVT BONDS: MNI
The trio of macro-prudential policy, the onset and evolution of shadow banking, and the nebulous concept of financial stability may have become a toxic cocktail which can be instrumental in moving forward the Federal Reserve’s timeline for lift-off zero bound rates. The intuition here is stooped in concepts of volatility and how market structure evolution may contribute or detract from asset volatility. Volatility is the square root of time. Financial repression times time equals volatility. Financial repression and/or macro-prudential policy times time equals the inverse of financial stability. Financial stability inverted equals volatility squared.
We live in a world with limits, yet our economy needs growth. How can we expect this scenario to play out?
There was once a time, perhaps, when unprecedented things happened only occasionally. In today’s financial markets, unprecedented things are commonplace. The Queen in Lewis Carroll’s ‘[Alice] Through the Looking-Glass’ would sometimes believe as many as six impossible things before breakfast. She is probably working in the bond markets now, where believing anything less than twelve impossible things before breakfast is for wimps.
American banks have largely gained from low interest rates, British banks have suffered losses as a result and in the Eurozone they have been hugely detrimental to banks’ profitability. The ones who have undoubtedly lost out were those quintessential Keynesian villains: the savers. The medicine prescribed by the central banks to correct their “bad” ways has cost them billions. And given that yields have continued to go down since McKinsey's report was published, their misery has only increased. More high fives from Keynes! And yet, even within those groups the impact has been uneven. Who in the household segment is suffering the most because of ultra-low interest rates? The retirees, of course.
Nothing exposes the fallacies of the Fed’s policies like its horror at the prospect of raising rates even a little bit. Rates have been effectively zero for five years.
Nothing is ever permanent with the QE’s because they were doomed from the start. The “dollar” system can never be refined and remade to its prior station because it was irrevocably broken on August 9, 2007. All that QE’s have done is to create reverberation within the downward channel which may, in the end, only exacerbate the degree of imbalance that weighs on the inevitable shift.