"What The Left Hand Giveth, The Right Hand Taketh Away"
One of the most insidious side-effects of the centrally-planned New Normal has been the artificial role switch of the two main asset classes, equities and bonds, which as David Rosenberg explained previously, can be characterized as follows: stocks for the yield, bonds for the price. The trouble with this is that it is contrary to everything inherent in investor and trader psychology. This in turn touches on another topic: as a result of collapsing interest rates, interest income from debt has plunged by a whopping $450 billion/year in nominal terms, forcing public corporations to shelve out dividends, as Dividend income takes the place of Interest Income, merely to keep some investor interest in capital markets awake. There is a two-fold problem with the surge in equity dividends: i) it forces management teams to reallocate cash away from projects which generate higher IRR in the longer term, such as CapEx, R&D, and innovation, or even simple M&A, and ii) the dividend spike is simply not enough to offset the lost interest income. This precisely is one the points of UBS' George Magnus in his newsletter in which he asks Cui Bono from global uncoordinated easing. His observations: "In the US household interest income from assets has dropped to below $1 trillion, compared to $1.4 trillion in 2008. That $400 billion drop is equivalent to a fall from 11.5% to below 7.5% as share of personal income, and, in passing, to the size of President Obama’s stimulus programme in 2009."
Of particular note: if interest income as a percentage of total personal income had remained at its 2008 level, the total would now be over $1.5 trillion. It is this $550 billion annual delta that the Fed has directly, though its policies, taken away from US consumers in terms of purchasing power.
So while the Fed has taken away the bond market as a venue in which to generate current income, it is the structural failures of equities in a post-HFT world (stories of mini, amd maxi, Flash Crashes are now a daily occurrence) that prevent investors from having the same confidence about current income in a market in which terminal and fatal capital loss are all too real fears.
And there are those who still wonder why the US consumer is withering away, and absent such crutches as soaring Federal non-revolving debt, used for anything but its designated purposes, would have less purchasing power now than before the crisis as a result of the Fed's failed policies.
As George Magnus so poetically summarizes it "What the left hand giveth, the right hand taketh away."
And yet, it is not true that everyone loses equally from the Fed's policies. Bernanke does benefit one group of people: the ultra-wealthy, aka the "1%", which owns the bulk of its assets in America's $52 trillion in financial assets and which is the most direct beneficiary of QEternity.
Magnus' conclusion: it is time Bernanke woke up and smelled the coffee, because what he is effectively doing via Monetary policy could be the most socially disruptive phenomenon seen in developed Western society in ages:
Central banks don’t have a social welfare function in their remit. But it can’t make economic sense for them to pursue policies, ad nauseam, that drain interest income from the economy, threaten the solvency of pension plans, and redistribute wealth and income, in effect, to richer households with a low marginal propensity to consume. And it could result in a political backlash when the call for radical economic policy changes and innovative political thinking requires a high level of social cohesion.
The flipside to this argument is to just let Bernanke continue with his catastrophic policy, and hope he accelerates the advent of the inevitable end even more, as the final outcome is merely one which ends with the tearing down of the Marriner Eccles building. Sadly at this point, that particular outcome is no longer a question of if, but when.
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