View From The Bridge: Moral Hazard Or Paranoia?

Tyler Durden's picture

Submitted by Clive Hale of View From The Bridge

Moral Hazard Or Paranoia?

The Bank of England has purchased 50% of the gilts issued since 2009 and owns 32% of the whole gilt issuance currently in existence. Do you think this has something to do with yields being down at all time lows? Assuming we had access to a printing press it would be illegal if we tried to pull the same stunt. Compared to the Fed, the BoJ and the ECB the UK is almost a minor league player in this systematic global rigging of sovereign debt markets.

The definition of moral hazard has changed over time. It used to refer to the bailing out of “lesser” banks and “minor” economies, which just encouraged others to carry on regardless. Now we have the wholesale support of major economies, their governments and banking overlords to the detriment of anyone else. Government securities used to be the home, during periods of market unrest, for flight to safety investors and others of a cautious disposition. They were also the marker for the risk free rate when calculating the value of equity markets and other instruments. As an aside would the LIBOR scandal have happened if we had had a properly functioning bond market? Hmm.

On the basis that most sovereign debt issues produce a negative real yield to redemption, investors are being “encouraged” to search for income elsewhere. High yielding corporate bonds have been one of the favourites, but didn’t we have an “issue” with this asset class a few years back or has that episode been consigned to the memory vacuum? Yes a very different set of underlying instruments I agree, but as Mark Twain said, “History doesn’t repeat but it rhymes.” Having enjoyed decades of capital growth from bond investments, those with a lower risk appetite have few other options than to increase their equity weightings.

If you believe that money printing is the answer; that governments can continue to increase debt levels ad infinitum; that austerity in Europe will propel their economies, unfazed, onwards and upwards and that China will eventually get the hang of capitalism; then I would agree that equity markets look like a steal. In P/E terms the FTSE is at half the level it was at 10 years ago.

But according to “Economics 101”, quantitative easing, on the heroic scale we have witnessed thus far, should already have led to rampant if not hyper inflation. That it hasn’t is down to the continuing decline in the velocity of circulation of money. In simple terms the banks aren’t lending (compared with the amount of money available to them), but instead are punting on financial assets, which is where “inflation” is ending up and benefitting their balance sheets... Charles Hugh-Smith put the Fed’s actions into context very well, if indelicately for some, on his recent Of Two Minds website. BoE, ECB and BoJ please take note.

“We can view unprecedented Federal deficit spending as a misguided attempt to compensate for the implosion of money velocity. I say "attempt" because the Treasury borrowing and blowing $6 trillion over the past five years and the Federal Reserve printing $2 trillion, backstopping the parasitic financial cartel and buying over $1 trillion each of mortgage securities and Treasury bonds has only kept the economy stumbling along at essentially zero growth while real wages have declined by 7% to 9%.”

Markets generally front run the economy, but if, as many folk believe, including our commentator above, that quantitative easing has been a failure from the start, then why are equity markets indicating an upturn in economic activity? At the end of the day, if the central banks continue to believe they have no other option than money printing and you can put up with the volatility, it’s all aboard the equity train. Bond yields won’t rise much either; if at all. The gold price should give some indication of whether this strategy is working or not, but that is a market that is far easier to rig than sovereign debt – the Germans seem to think so as they contemplate repatriating some of their bullion held by other central banks.

Moral hazard or paranoia; your choice.

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Super Broccoli's picture

so the question is : when does the bonds & stocks inflationary ponzi breaks ?

nope-1004's picture

IMO, when currency wars escalate.  It's now not about "debt", but FX.  Once other nations start shunning the dollar and search out new options, the debt question becomes an FX problem.


GMadScientist's picture

Essentially's been an even race to the bottom with CBs taking turns punching humanity in the nuts, but eventually, like all thieves, they will turn on each other and when that happens, whoever is deemed the ugliest girl at the ball will get dumped hard.

The Magic 8-ball says, "Reply Hazy, Ask Again"...and then just sinks to the bottom...wonder what that means.

Seer's picture

A race to the bottom in order to be on top!  I think that says all one needs to know about how totally out of the "norm" we are.  We're in a Rabbit Hole that's IN a Rabbit Hole!

I'd further state that it's "growth" that is being kicked in the nuts.  At some point TPTB will HAVE to come out and admit that growth is finished: if not, then it's full steam ahead on the war front...

BTW - My crystal ball works much better than the Magic 8-ball.

Bendromeda Strain's picture

Bass said as much in that last CNBS appearance. The bond market is in a clenched fist, so it is currency that will feel the wrath of vigilantes instead. First the yen, then the greenback. It will be at that point that the freegold(ish) proposition for the Euro is tested.

LawsofPhysics's picture

"It will be at that point that the freegold(ish) proposition for the Euro is tested."


Correct.  And part of the real reason Germany (and China) are repatriating gold as fast as they can.

Seer's picture

Couldn't they repatriate faster?  Or, would stepping up the speed essentially turn off the lights (in the middle of them still trying to grope around for their offshore gold)?

Perhaps all the major CBs are negotiating all of this now?  I don't think that there's any single player that can control things.

BadKiTTy's picture

Ah! But havent you heard that ShittyBank are now bearish on gold!! hahah. 

Sell all your gold I tell you, seek safety in bonds, CDS, CDO, Faceplant, Groupon Bwhahahahahahahahaha 



Totentänzerlied's picture

In Germany's case, why not spend more on new bullion, rather than wait 10 or however many years?

Sudden Debt's picture

it all depends on the real economy as it's correlated very tightly and.... WHOEHAHAHAHAHAHAHAHA!!!!

I'm sorry :) I tried to tell the joke but I just can't :) that shit is just to funny :)

TaxSlave's picture

The banking system is walking dead, hopelessly insolvent, lying about the value of the 'assets' on their balance sheets.  Writing them down to market value would mean the end of the system.  Their only hope is to wave a magic wand and replace the fake 'value' with paper money.  That's where QE is going.  Slowly enough to hopefully not cause panic, fast enough to keep up the pretense of solvency.  I don't think it can work.

When does it break?  When the victim of the con realizes he's been had, and refuses to trade real value for paper that enslaves him.

Seer's picture

They're patching holes that cannot be patched with anything other than MEANINGFUL PHYSICAL stuff.  All the worthless assets they've been accumulating has been an attempt at this, but the deflation of the growth meme is increasing faster than they can collect assets (w/o completely alienating everyone from the game- kind of hard to play in a game of dress-up when you have no clothes).

Sudden Debt's picture

Everything has a ending... besides a hotdog.... that has 2 endings...

Village Smithy's picture

That really is the big question. I can't answer it but I can provide this. It breaks when the TBTF decide that this ponzi has run it's course and a new one is ready to ride. Perhaps if we can figure out what that next new ride is we can watch it and we will recognise when the transfer begins. Nothing seems obvious for the moment. Commodities are out because a rise in price will kill the parasites' host(us). PMs are out because it will kill the parasite, (too much of a liquidity drain). For now equities and bonds are it. They provide a nice slow draining of the country's lifeblood. They want us struggling but not rebeling. 

Sudden Debt's picture

moral hazard... is that some kind of monkey?


GMadScientist's picture

any relation to the dukes of the same name?


Seer's picture

"Hazard Construction" was the name of a construction company I once ran across.  Always wondered what it was like when they first went to acquire insurance...

ugmug's picture

We've entered the era of BOGO Economics - Buy One Economy (with debt) Get One Free.

Seer's picture

It's a set of books, pre-cooked!  Ready to go, just add fantasy!

MFLTucson's picture

Printed money is half of the story; the other half which goes to the issue of inflation is economic reports that are riddled with fraud and deception.  You will not see inflation till it hits you in the face if the reports are inaccurate or intentionally misleading. Equities are terribly extended and not being bought by the public.  That says more than artificial prices built on deception and banks investing free money in this casino.  

dark pools of soros's picture

That's the corporate way.. It grows as it erodes

Seer's picture

Perhaps it's stuff like this that's responsible for keeping things propped up (until now):

Germany's Hess sacks managers suspected of fraud

Garbage in garbage out...  Shouldn't be a shock that the numbers don't quite agree with reality.

withnmeans's picture

It is all about illegal KITING, the people need to file a law suit...

The whole world is doing, I guess it is legal again, know body informed me of the change.

Brings to mind all those horror stories of cattle buyers, circling those checks from bank to bank to bank and not having a dime!

Carry on !!

GMadScientist's picture

This daft bloke should not be allowed to post until he can define the term nominal and be forced to look at a graph of historical P/E ratios longer than 5 years.

Hedgetard55's picture

We have had hyperinflation, in stox and bonds and oil and food.

Village Smithy's picture

Yes this genetically engineered parasite is working to perfection. Feeding off of it's host (middleclass working people), limiting the host's ability to flourish but not quite killing it.

buzzsaw99's picture

...but if, as many folk believe, including our commentator above, that quantitative easing has been a failure from the start, then why are equity markets indicating an upturn in economic activity?


This statement proves the author does does understand the real purpose of QE infinity. The stock market is up, bank balance sheets are healthier, those were the only goals of QE.

Bendromeda Strain's picture

Exactly - equity markets indicate an upturn of more monetization, nothing else.

dark pools of soros's picture

This comment shows the commenter does not understand 'entertaining the thought' as a pretext to driving ones point farther home. :)

LawsofPhysics's picture

Unless you can provide us with a specific date, fuck off please.  That article is less than useless.

joego1's picture

I pick moral hazard, now just write me the tickict so I can finish this rape.

yogibear's picture

You can bet behind the scenes the Germans are demanding their delivery sooner than 7 years.

Since they want all of their gold from France they probably want more than what's announced from the US.

Remember this fed says one thing and does another

Neither want to cause a panic. The currency wars are having an effect. This is one of many.

Just a matter of time before the US dollar drops like a rock.



Seer's picture

Germans will definitely need real money, as it appears that their economic prowess is not what many have been led to believe it is:

Germany's Hess sacks managers suspected of fraud

virgilcaine's picture

Anyone else short lumber...?

Village Smithy's picture

It sounds like you are trading using common sense. That can be risky in an $85 billion printed per month world.

MFLTucson's picture

The real question is what if anything we are reading is reality?

mkhs's picture

The buddhist say everything is just an illusion.

adr's picture

It all built one hell of a nice set. A giant production, complete with actors, special effects, the whole shebang.

The facade looks fantastic and as long as people keep looking at the surace, they don't realize the buildings only have walls that face the camera.

The news media only focuses on the kingdoms of the coast. As long as the free money trickles to the wealthy that fill the $200 a plate restaurants and Tiffany counters, they can report all is well. They stock market is hitting all time highs, they can report all is well. New car sales appear to be on a tear, corporations keep beating EPS estimates, all is well in fact even better than before.

The key to a convincing illusion, is that all the players must be in on it. If one person allows a mirror to turn ever so slightly, the pulleys and cranks might be visable. An astounding trick becomes a fraudulent act of deception. Every animal trick ended up killing the poor bird in the cage, but as long as the magician had another feathered friend hiding up his sleeve, the audience was none the wiser. An act of murder, covered up by smoke and glitter, the room filled with thunderous applause.

People appear to be doing fine, restaurants are filled (apparently), stores have shoppers, and home values are rising. Chrysler broke sales records. Just don't look behind the curtain.

If I go to the land of the doctors and lawyers outside Cleveland, I'll see packed restuarants and Coach purses flying out the door. If I go to the Walmart near the ghetto, I'll see carts full of food and toys. Again, don't look past the facade.

What about the working people? The mall near my house is a ghost town. People eat out at Applebee's because they have two for $20 meals, hell at lunch two people can eat for less than $15. McDonalds may be crap, but I challenge you to make 10 hamburgers of equal size from store bought goods for $10. It isn't possible. My house lost 20% of its value in four years, during the period when home prices supposedly increased each year.

I work on the inside of commerce. I see the real numbers, I see the real shipments. I get to see hundreds of millions in inventory shipped back from the stores that supposedly sold the product. I'm never fooled by the facade, because I've been trained to spot the illusion.

I see the parking lot of the abandoned building filled with cars. Thousands of brand new cars, all booked as sold. I see the 75% off clearance rack full of goods that disappears after closing one day, but before opening the next.

I see the people who obtain wealth without work, manipulating everyting so the source of their power is never seen. The facade fell down in 2007, we all gt to see the forklift holding the girl above the table. But just like a wife that jabs you in the ribs when you spoil the trick, the peple would rather be fooled. It's easier to believe in magic, than to know the truth you are just a fool.

joego1's picture

The cardboard village we call America. NIce post

Seer's picture

I like the title of one of Derrick Jensen's books- The Culture of Make Believe

Bansters-in-my- feces's picture

Off topic kinda. Heres a view from the bridge.... *India HIKES IMPORT TAX ON GOLD BY 50%


Silver lease rates just went negative again for the 1,2,and 3 month rates.

And Joni Teves from UBS,.AG says "chunky" silver sales "as more of a function of seasonality"


Fuck is he dumb or just a liar...?

Winston Churchill's picture

Time to go long on gold smugglers,and black markets..

The Arab dhows will start carrying gold back to Mumbai again.,as they did for years.

January is the new 'season' for PM purchases ?

Who could have known  ?

Quinvarius's picture

I suspect the Indians decided they could buy silver for a while.  All I hear since India announced that hike is that the silver supply chain is a mess.

eddiebe's picture

The military might of the U.S. forces are holding the show together along with the dumbed down and or hungry working poor. Anyone that doesn't toe the line gets prosecuted if they are poor. If they are' in power' they are put there by the ones in power. If they dare go against the dollar hegemony they face the full might of the empire covertly first and if that doesnt work, overtly. The U.S. military does not serve the US people that idiotically put 'support the troops' bumper stickers on their cars, but the omni-national parasites that not only keep them on the treadmill, but are making sure their kids and grandkids remain on it too. 

How's that for moral hazard. I wish it was paranoia. But then I suppose I'm just preaching to the choir here..

Quinvarius's picture

It can take as much as 4-10 years for the hyperinflation to starts to manifest itself.  Most people will never even react to it.  They will just roll over and go down the tubes.  I read somewhere that it had to hit 25% a week in some South American country before people really started waking up to it.  But it was too late then.  It is coming.  It has always been the only thing on the menu.

H E D G E H O G's picture

great posts/replies guys. i believe each thought paints a different brush stroke of this massively complex mural of the SCAM that is being perpetrated upon us all, from the propping up of the equities market through the Treasury pipeline, low/no interest rates for savers, the hidden theft from inflation and the corresponding lie of low inflation, the suppression/manipulation of real monies, ie. gold/silver, control of the mainstream Liberal media propaganda machine, false government statistics, ie., unemployment, housing, CPI, "held gold", the ignorance, fraud, greed of our "public representatives", the overwhelming subsidized welfare state, the use of threats for dissension, ie., burying of the Constitution, military force, police state, NDAA, and the deterioration of moral fabric in our society, complacency. sounds like a page out of history to me, and none of the civilizations i'm thinking of survived. good luck to all of you.

Seer's picture

I wish people would stop playing victim.  We've ALL been involved in this Ponzi.  Perpetual growth on a finite planet IS a Ponzi.  Carpetbaggers have always been part of this equation- they didn't invent the game, they merely have, pardon the pun, capitalized on it.

All the pretty social contracts were all centered around a world of plenty.  They are no longer going to be so pretty as they attempt to continue in a zero/negative growth world.

The longer people see this as victimization the longer it'll take for them to adjust to hardcore reality (a lesson on what the word "subsistence" means) that's coming.

BTW - I see that you didn't include private fraud.  Hm... Apparently bad guys only exist in govt...

Floodmaster's picture

Bernanke practically kill the stock market (low volume).. Apple or Facebook are now bloated with government subsidized money. i think we are going to see a Greenspan's Housing Bubble part 2.

Seer's picture

"For headache, BANG HEAD HERE!"

We've become a parody of a parody...

Spain's bankers to strike as job cuts loom