This page has been archived and commenting is disabled.

The Fed Isn’t Providing “Monetary Morphine”; It’s Spreading Financial Cancer That's Killing the Markets & Democratic Capitalism

Phoenix Capital Research's picture





 

While the vast majority of commentators look at the market action of the last three months and celebrate, I cannot help but shudder. The reason is that the stock market has been propped up solely by Central Bank and/or Federal Government intervention or the hope of more intervention.

 

That alone is worrisome as it indicates the stock market no longer cares for economic or financial fundamentals (something that has been clear for several years now).

 

However, far more worrisome is fact that the Fed and Federal Government are now not only propping up stock prices, but are openly trying to crush other assets (especially politically dangerous commodities such as oil and gasoline) in an attempt to make it appear that inflation is under control.

 

Consider the following:

 

  1. The sudden talk of “sterilized QE” or QE that won’t involve more money printing (read: There is No Such Thing as Sterilized QE).
  2. The sudden and curious collapse in precious metals (right after Bernanke says QE 3 isn’t coming anytime soon… only for the Fed to leak the “sterilized QE” talk a week after Gold and Silver collapse).
  3. The Government’s decision to unlock our Strategic Petroleum Reserves again (crushing gas prices which were the primary inflationary concern of the Obama administration)
  4. Those Wall Streeters close to the Fed (Goldman’s Jan Hatzius) predicting “sterilized QE” coming in April or June

 

All of these moves have two goals:

 

  1. Propping up stocks
  2. Crushing those commodities/ assets that are politically (and economically) dangerous (gasoline, food prices).

 

The take away point that I’m trying to make here is that we’re now at the point of intervention in which the Fed is openly managing the markets right down to specific asset classes.

 

Never in history has Central Planning gone well for either the markets or the economy. Wall Street and the mainstream media may cheer that stocks are up and inflation “transitory” (despite clear evidence that the latter point is false: the bond market indicates real inflation to be around 10%). However, I for one am truly terrified by what I see occurring in the markets.

 

The reason for this is that I do not view what’s happening through the same lens as most investment commentators. Most commentators, including Fed officials, view the Fed’s involvement in the markets as being akin to a drug dealer trying to cure an addict of his/her addiction by providing more drugs (see Dallas President Fisher’s recent speech on the market’s need for “monetary morphine”).

 

I disagree with the “addiction” metaphor because it implies that the markets/ addict could potentially become healthy if the dealer stopped dishing out the drugs. This ties in with Bernanke’s claims that everything is under control and that he can remove the excess liquidity anytime he wants to.

 

Remember, Bernanke is speaking from the perspective of an economist: someone who believes that monetary policy and the economy are items that are separate from human psychology or emotion (much as an addiction can be viewed as a physical issue that can be cleared up by physical removal of the drug and the body adjusting accordingly).

 

However, the markets and the economy are not standalone items or “real things” in of themselves. They are in fact measures of human activity. And human activity is guided by reason and emotions, which are based on varying amounts of evidence and belief.

 

With that in mind, I believe Central Bank intervention is not a drug or “hit” for an addict. Instead, it is a cancer that has spread throughout the financial system’s psyche and which is killing the markets and Democratic capitalism.

 

The markets are supposed to be based on Capitalism. And Capitalism, particularly Democratic Capitalism, which is based on the involvement of the general population, by definition requires two primary items:

 

  1. The risk of failure as well as the opportunity for success
  2. Trust between market participants

 

The Fed’s policies have damaged both of these areas beyond repair.

 

Regarding #1, the Fed’s action of bailing out the connected elite erased the concept of risk of failure for that group entirely. The Big Banks continue to engage in reckless practices including drawing down loan loss reserves, refusing to come clean about their true balance sheet risk, paying out record bonuses, and of course, screwing their clients (the Greg Smith op-ed in the New York Times is only the beginning of the whistleblowing for Wall Street).

 

Put simply, the Big Banks, and even well-connected hedge funds (several of which were warned in advance of the Fed’s upcoming moves in private meetings with Fed officials) are now basing their business models and investment strategies on the idea that risk of failure is next to none.

 

This in turn has destroyed the second principle of Democratic Capitalism: trust between market participants.

 

By supporting the very folks who should have failed (the Big Banks) the Fed has engendered distrust from those who were not on the receiving end of the bailouts (Main Street). Indeed, housing data has now made it clear that the policies implemented by the Fed were aimed at propping up the Big Banks/ Wall Street, NOT the housing market/ Main Street.

 

As a result, the markets are now viewed by market participants and the general public as a “rigged game.” This, in turn, has caused two trends to emerge:

 

  1. Investors leaving the market en masse (the mutual fund industry saw investors pull $132 billion from stock-based funds in 2011 while the hedge fund industry experienced a net removal of funds in 4Q11 for the first time since 2Q09).
  2. Those investors who remain market participants simply betting on continued Fed intervention and/or front-running Fed policies when they can.

 

Put another way, the Fed has killed the most important form of trust for Democratic Capitalism. I’m referring to the trust that there is one set of rules/ guidelines for all market participants or that the person on the other side of the transaction has the same risk of failure and opportunity for success as you or I do.

 

Indeed, things have gotten so bad that even those on the receiving end of Fed largesse no longer trust one another as evinced by inter-bank lending in the US and the EU.

 

As if this was not bad enough, the Fed is not only killing the basic trust of Democratic Capitalism and replacing it with another, more “sickly” form of trust: the trust that the Fed will continue to prop up those institutions that should have failed as well as the stock market in general.

 

This fits well within my “cancer” metaphor, as the Fed is literally killing off the positive form of Democratic trust needed for Capitalism and spreading a negative Moral Hazard-based form of trust, much as cancer cells kill off healthy cells by infecting them until they too are cancerous.

 

So while the mainstream media and various “gurus” view the Fed’s actions as saving capitalism, I totally disagree.

 

The Fed’s actions have permitted cancerous beliefs to spread throughout the financial system, thereby killing Democratic Capitalism which is the basis of the capital markets.

 

Short-term, this may have allowed the “patient” (the markets) to continue to function, much as can someone with cancer can continue to function normally for a while before the disease makes it impossible. But long-term the end result will prove disastrous.

 

I’ll address the “end result” in my next research piece. But for now, everyone should know that whether the “end result” happens next week, next month, next year, or further down the road, it will be akin to what happens when cancer spreads unchecked throughout a patient.

 

Graham Summers

PS. If you enjoyed this piece, swing by www.gainspainscapital.com for more market commentary and economic insights.

 

 

 

 


- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Sat, 03/17/2012 - 03:00 | Link to Comment Blue Horshoe Lo...
Blue Horshoe Loves Annacott Steel's picture

Dear Benjamin Shalom Bernanke,

Fascism never works.

Sincerely,

An Austrian Economist

Fri, 03/16/2012 - 21:57 | Link to Comment rsnoble
rsnoble's picture

If they're crushing food prices........we are going to fucking starve before this over.

Fri, 03/16/2012 - 21:01 | Link to Comment AndrewCostello
AndrewCostello's picture

These guys know damn well that they are destroying the future of humanity.  But they just don't care.  They can only think short term and the very idea of long term stability is something they reject.  They would rather have everything now, and leave nothing for others.

This is why humanity really is doomed.

 

http://www.amazon.com/Simple-Wealth-Mr-Andrew-Costello/dp/1463523017/ref

 

 

Fri, 03/16/2012 - 22:00 | Link to Comment rsnoble
rsnoble's picture

Never was the saying "You can't take it with you" more appropriate.

Fri, 03/16/2012 - 19:48 | Link to Comment max2205
max2205's picture

Unicorns and fairy dust

Fri, 03/16/2012 - 21:03 | Link to Comment comrade pravda
comrade pravda's picture

The USA is a police state with two parties pretending to provide the people with a little choice.   Let's call these parties by new names: Coke and Pepsi.  If you can tell the difference between Democrats and Republicans, you are drinking some bad shit.

Fortunately, collapse is coming.  The system is not sustainable.  At the current rate of sales, China will have dumped all of its US govt bonds by the end of 2012.  Folks will catch on to what China is doing, and China will speed up its sales.  China dumps T-bonds and buys oil.  Oil Bomber is happy to help out by selling oil from the SPR.

So all you fucktards at Vampire Squid et al enjoy what you achieved.  Your parasite load on the system has killed it.

Fri, 03/16/2012 - 19:16 | Link to Comment JohnKozac
JohnKozac's picture

I hate cancer.

Fri, 03/16/2012 - 19:14 | Link to Comment apu123
apu123's picture

Nice piece Graham, I enjoyed that one!

Fri, 03/16/2012 - 19:47 | Link to Comment skepticCarl
skepticCarl's picture

There was not one new thought expressed in that rant.  Nearly every commentor on this site makes these same points.

Fri, 03/16/2012 - 19:02 | Link to Comment Zola
Zola's picture

Graham, i will go out on a limb and say that this was a decent piece of writing for once.

Fri, 03/16/2012 - 18:42 | Link to Comment Paul Thomason
Paul Thomason's picture

So goes Apple, so goes the market good article worth a read here 'Apple Enters Danger Phase'

I'd be watching Apple more than the Fed right now.

Fri, 03/16/2012 - 18:31 | Link to Comment Melin
Melin's picture

What's "Democratic capitalism" or as it's also written here "Democratic Capitalism?"  How does it differ from Laissez-faire?

Fri, 03/16/2012 - 18:12 | Link to Comment Sudden Debt
Sudden Debt's picture

financial fundamentals .... Whatever... I'll have 2 of those and a milkshake to go please.

Fri, 03/16/2012 - 18:18 | Link to Comment Moe Howard
Moe Howard's picture

Hold the fries.

Fri, 03/16/2012 - 17:46 | Link to Comment proLiberty
proLiberty's picture

Every transaction involving money by necessity is a bid based on the value of both the money and the item or service being exchanged for it.   The myriad of participants in the active and dynamic economy cannot make rational economic calculations when the time value of money is being massively manipulated by the central bank.  This never ends well.  Indeed, it has been the cause of wars. 

 

 

Fri, 03/16/2012 - 17:28 | Link to Comment Eric L. Prentis
Eric L. Prentis's picture

Dear Graham Summers;

Love what you say.

The trust is gone! Witness the looting at MF Global.

All broker/dealers should be outraged and petitioning Congress about MFG’s $1.6 billion dollar plundering of their clients’ segregated accounts. Regardless what the 2005 bankruptcy law states, Jamie Dimon at JPMorgan Chase should be shamed and ostracized from polite society until he gives the MFG money back. Even if Dimon said, “Let MFG clients eat shit,” he would change his mind if Wall Street boycotted him.

How do broker/dealers expect to hold on to their clients, who can now expect the same MFG treatment, when the $707 trillion OTC derivatives market goes bust? Trust in the financial system now HAS TO BE EARNED. The ball is now in Wall Street’s court.

Fri, 03/16/2012 - 17:17 | Link to Comment Bartanist
Bartanist's picture

In the past we had all been led to believe that the capital formation process was a way of putting excess capital created through value adding activities (labor) back to work into more value adding activities. The outcome is more and more capital generated and more and more value adding activity.

Today, this is no longer the case and they (the runnners of the current Ponzi-nomics) no longer even make a pretense that there is a capital formation and reinvestment process. Today money, not capital is created out of thin air and it is shoved into the market as a substitute for capital, with the purpose of diluting actual/historical capital, and collecting a higher percentage of it within the large banks and their owners.

Now, banks own virtually all assets; company bonds & stocks, real property and everything else they can get their hands on. Capital is being destroyed or made obsolete at an alarming rate and being replaced with pseudo-assets (ETFs, options, futures, CDOs, other derivatives, debt laden fiat currency, bucket shop bets) and the underlying assets that people think they own, are either in reality owned by someone else, re-hypothecated or of such low quality that they are incapable of generating any kind of cash (capital) return on investment, EVER.

Since the banks are not even making the smallest attempt to reverse this process of hyper-fiat exchange for value, one has to wonder about the real end game. However, regardless of the true purpose and master designer, one has to admit that the current situation is one heck of a set-up for something.

Fri, 03/16/2012 - 18:38 | Link to Comment HD
HD's picture

Nice post mate.

Fri, 03/16/2012 - 17:06 | Link to Comment GovtMediaLiars
GovtMediaLiars's picture

I Don't know.

Looks like a market flying high on something. And it sure as hell isn't macro fundamentals. :p

With that in mind, I believe Central Bank intervention is not a drug or “hit” for an addict. Instead, it is a cancer that has spread throughout the financial system’s psyche and which is killing the markets and Democratic capitalism.

And the addict is in the late stages. Seriously, probably even terminally ill. 

Cheers!

Fri, 03/16/2012 - 20:10 | Link to Comment New World Chaos
New World Chaos's picture

Money is one of Satan's neurotransmitters.  He must be tripping balls.  Fiat gives him the ability to create his own drugs out of nothing, so he's like the rat repeatedly pressing the big red button in the scientist's pharmacological doomsday machine.  Gonna OD soon.  It won't be the end of him, though- like a cancer, he can slowly regenerate from a single cell.  Getting rid of him permanently will require Divine intervention.

Fri, 03/16/2012 - 20:15 | Link to Comment knukles
knukles's picture

Must be a job for Goldman Sachs.... God's Tireless Workers

Fri, 03/16/2012 - 16:55 | Link to Comment Herkimer Jerkimer
Herkimer Jerkimer's picture

Hear! Hear!

Excellent!

It needs to be on the front page of ever media outlet!

You.

Nailed.

It.

•J•
V-V

Fri, 03/16/2012 - 17:42 | Link to Comment Zero Govt
Zero Govt's picture

is the graphic (bottom of your post) a hammer and nail or someone being nailed??

Fri, 03/16/2012 - 16:50 | Link to Comment AE911Truth
AE911Truth's picture

I think everyone globally agrees the Federal Reserve US Dollar system enables the owners of the $ franchise to steal wealth from productive members of the global economy. This must be stopped. We need a monetary system that provides savers protection from this type of theft. What makes the most sense to me is FOFOA's FreeGold.

http://fofoa.blogspot.com/

Fri, 03/16/2012 - 15:20 | Link to Comment SheepDog-One
SheepDog-One's picture

Well really what theyre doing is monetizing the debt, the last act of all failed empires.

Fri, 03/16/2012 - 18:42 | Link to Comment akak
akak's picture

NO NO NO!!!

According to the deflationists, we are going to experience a magically APPRECIATING fiat currency --- the government's exponentially-rising debt is irrelevant!  Yes, for the very FIRST time in history, an overspending government with an unsustainable and rising level of debt will see its symbolic fiat currency RISE in value along with the level of that debt!  Golly, I simply just can't wait!

Fri, 03/16/2012 - 15:14 | Link to Comment digitlman
digitlman's picture

Professor Obvious makes another post!

Fri, 03/16/2012 - 16:18 | Link to Comment TheCanimal
TheCanimal's picture

I saw no post from Professor Obvious.  However, what the FED is doing is printing money out of thin air to make the gov't debt owed cheaper.

Fri, 03/16/2012 - 17:43 | Link to Comment Moe Howard
Moe Howard's picture

What's going on with your avatar? It's scaring me. Can you put the gray bag back on your head? thanks.

Fri, 03/16/2012 - 17:47 | Link to Comment Zero Govt
Zero Govt's picture

he's going to a fancy dress tonight that's all

Fri, 03/16/2012 - 16:27 | Link to Comment SheepDog-One
SheepDog-One's picture

Yea, monetizing the debt. Its nothing new, all failed empires with their failed fiats do it as their last desperate act. 

Fri, 03/16/2012 - 17:49 | Link to Comment Zero Govt
Zero Govt's picture

the "last desperate act" will hopefully be Ben Bernanke flying out the 5th floor window...

'Splat!'

We could have told him it wouldn't work, it has never worked, but he just wouldn't fucking listen!

Another Govt suicide, another bwankers life wasted, ho hum

Fri, 03/16/2012 - 22:22 | Link to Comment Everyman
Everyman's picture

 

the "last desperate act" will hopefully be Ben Bernanke flying out the 5th floor window...

'Splat!'

Hopefully he will fall on something softer thatn concrete that has spikes, and I hope he dies a long painful drawn out death.  This POS is the worst fucking thing that has ever happened to this country.

 

Fri, 03/16/2012 - 21:59 | Link to Comment rsnoble
rsnoble's picture

Probably won't be suicide.

Fri, 03/16/2012 - 18:39 | Link to Comment akak
akak's picture

I will be there waiting, with popcorn.

Do NOT follow this link or you will be banned from the site!