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Russell Napier: "Central Banks Are Now Powerless To Prevent A Steep Rise In Real Rates"
From Russell Napier of Eric
The failure of the SNB, invisible cloth and a one-way ticket to Palookaville
Definition of ‘fix’ (Oxford English Dictionary):
(v) To fasten, make firm; to deprive of volatility or fluidity
(v) To adjust, make ready for use
(v) To mend, repair
(n) Any arrangement through which laws rules or regulations are
circumvented.
(n) A dose of a narcotic drug
The Swiss National Bank (SNB) failed to ‘fix’ the exchange rate between the Swiss Franc and the Euro. The simple lesson which investors must learn from this is --- central bankers cannot fix very much. The inability of the Swiss National Bank to ‘fix’ the exchange rate will come to be seen as the end of the bull market in the omnipotence of central bankers.
Think for just a moment of all the key variables which you believe are ‘fixed’ (made firm), fixed (repaired) , fixed (circumvention of the laws of supply and demand) or fixed (dosed with monetary narcotics) by central bankers. These various fixes by central bankers across the world can also fail. That process of failure began in Bern and Zurich early one morning on January 15th 2015.
As the OED entries for the word ‘fix’ make clear, the failure of the SNB to fix the exchange rate was on many levels. It failed to ‘ fix’ the exchange rate in terms of making the Swiss Franc ‘firm’ to the Euro and hence ‘deprive it of volatility or fluidity’. It failed to ‘fix’ the exchange rate as the ‘laws‘ of supply and demand were ultimately not circumvented.
For many, particularly Swiss exporters, the material appreciation of the Swiss Franc on the international exchanges will not ‘fix’ the currency in terms of making it ‘ready for use’. Finally, the adjustment in the exchange rate removes, rather than administers, the dose of monetary ‘narcotic’ in the form of excess growth in Swiss Franc liquidity and cheap funding for speculators in Euro. The monetary ‘fix’, which was the by-product of fixing the exchange rate, has ceased to be and the price of equities has collapsed.
Let us now list some of the other other things which investors believe that central bankers have fixed:
Central bank policy is creating liquidity.
Wrong --- the growth in broad money is slowing across the world.
Central bank policy is allowing a frictionless de-gearing.
Wrong --- debt to GDP levels of almost every country in the world are rising.
Central bank policy is creating inflation.
Wrong --- inflation in most jurisdictions is now back to, or below, the levels recorded in late 2009.
Central bank policy is fixing key exchange rates and securing growth.
Wrong --- in numerous jurisdictions, from Poland to China and beyond, this exchange rate intervention is slowing the growth in liquidity and thus the growth in the economy.
Central bank policy is keeping real interest rates low and stimulating demand.
Wrong --- the decline in inflation from peak levels in 2011 means that real rates of interest are rising. The growth in demand in most jurisdictions remains very sluggish by historical standards.
Central bank policy is driving up asset prices and creating a positive wealth impact which is bolstering consumption.
Wrong --- savings rates have not declined materially.
Central bank policy is creating greater financial stability.
Wrong --- whatever positives impact central banks are having on bank capital etc they have failed to prevent the biggest emerging market debt boom in history. That boom is particularly dangerous because either the borrower or lender is taking huge foreign exchange risks and because a large proportion of that debt has been provided by open-ended bond funds which can be subject to runs.
The above is a list of some of the very important things that central banks have very clearly failed to fix since the bull market in central bank omnipotence began in 2009. Investors, enriched by the central banks’ attempts to fix things, find themselves victims of the same self-delusion which afflicted the ‘honest old minister’-
So the honest old minister went to the room where the two swindlers sat working away at their empty looms.
"Heaven help me," he thought as his eyes flew wide open, "I can't see anything at all". But he did not say so.
Both the swindlers begged him to be so kind as to come near to approve the excellent pattern, the beautiful colors. They pointed to the empty looms, and the poor old minister stared as hard as he dared. He couldn't see anything, because there was nothing to see. "Heaven have mercy," he thought. "Can it be that I'm a fool? I'd have never guessed it, and not a soul must know. Am I unfit to be the minister? It would never do to let on that I can't see the cloth."
"Don't hesitate to tell us what you think of it," said one of the weavers.
"Oh, it's beautiful -it's enchanting." The old minister peered through his spectacles. "Such a pattern, what colours!" I'll be sure to tell the Emperor how delighted I am with it."
The Emperor’s New Clothes (Hans Christian Andersen)
Nobody today is extolling the wonderful patterns and colours of the SNB’s fixing policy. So, if you see the failure of the SNB as the signal that the bull market in central bank omnipotence has peaked, where should you be looking for other failures to fix to become visible? This is a long list but some obvious places to start are:
Poland and the Czech Republic
The ‘fix’ to the Euro has created huge foreign currency borrowing, some in Swiss Francs, which is increasingly difficult to service in two economies already subject to deflation. Devaluation would bring bankruptcy so weathering deflation and sharply higher real rates of interest is now the consequence of the central bank ‘ fix’. Equities in general and highly geared equities in particular (banks) will not fare well in such an environment.
China
The ‘fix’ of the exchange rate at a time of a deterioration in the external accounts brings tighter monetary policy to China as it needs monetary easing. Here foreign currency debt to GDP levels are low enough to allow the central bank to walk away from the exchange rate ‘fix’ and de-value.
USA
How can the Fed fix the key global problem of collapsing global US$ liquidity as manifested by an ever rising US$? QE failed to depreciate the US$ and no other policy responses to its rise and rise over the past six months have been mooted. Perhaps, in extremis, swap lines and the extension of the Fed’s balance sheet to buy government securities denominated in foreign currencies might be possible. However, that particular ‘fix’ will remain politically toxic until the impact of the global slowing is felt much more strongly within the US. Until things get significantly worse, the rise in the US$ cannot be fixed.
The above is a short list of central bank ‘fixes’ which are already failing. Investors need to react to these failures today because there are more to come. However, the greatest failure of all will be the realization that with nominal rates close to zero the inability of the central banks to generate inflation means they are powerless to prevent a steep rise in real rates of interest for the first time since the nineteen thirties. The consensus continues to argue that the rise in real rates of interest is irrelevant, as it is more than offset by a ‘tax cut’ for consumers driven primarily be lower oil prices. Perhaps.
But, then again, perhaps not. As US inflation falls to its lowest level since 1961, apart from the lower level seen in the GFC, let us remember why Ben Bernanke thought that deflation was best avoided:
‘Deflation is in almost all cases a side-effect of a collapse of aggregate demand, a drop in spending so severe that producers must cut prices on an on-going basis in order to find buyers. Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending: namely, recession, rising unemployment, and financial stress.’
November 21st 2002, before the National Economists’ Club, Washington D.C.
In that speech Bernanke makes it clear that the central bank must ‘fix’ inflation within the safety buffer of 1% to 3% to prevent dramatic rises in real rates of interest. QE has failed to do this as inflation reached 0.8% in 4Q 2014. The TIPS market now expects prices to be lower one year out than they are today. (Inflation-linked government debt markets are pricing in deflation in Italy, Germany and the US). The current failure to ‘fix’ inflation is a failure to control real rates of interest, with the dire economic consequences Bernanke outlined in November 2002.
So, if central bankers cannot use their weapons of market distortion to ‘fix’ things, do policy makers abandon intervention and allow the laws of supply and demand to prevail? Of course they don’t. They simply move on from using central bank powers of market distortion to legislative/regulatory powers of distortion. Like the money-men manipulating second-rate prize fighters, the owners of capital have been the key beneficiaries since the ‘fix’ came in from central bankers in 2009 to try to defeat deflation. History, however, is very clear that the owners of capital will not be the beneficiaries when the ‘fix’ is in from government.
The failure of the SNB to ‘fix’ their exchange rate will be seen as the watershed when we moved from one type of ‘fix’ to another. And being on the wrong side of any fix means, if you need reminding, you don’t get to go where you always wanted to be when you started off and you never come back from where you end up.
‘Remember that night in the Garden? You came down to my dressing room and you said, "Kid, this ain't your night. We're going for the price on Wilson." You remember that? "This ain't your night!" My night! I coulda taken Wilson apart! So what happens? He gets the title shot outdoors on the ballpark and what do I get? A one-way ticket to Palookaville! ‘
Marlon Brando as Terry in On The Waterfront (Budd Schulberg)
All aboard?
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When will all countries collectively pull a Greece and say "Attention stupid countries who lent to us: we're not paying back our debt. Thanks for lending to us but so sorry... Done."
Is Japan going to launch nuclear missiles at the US if we default in earnest, instead of inflating the debt away? Is China? Maybe Greece? The French (after Iran owns them)?
"Central Banks Are Now Powerless To Prevent A Steep Rise In Real Rates"
So I guess that's supposed to mean that when they fire up the printing press and monetize EVERYTHING, then the subsequent published numbers are all bogus & fudged.
Color me SHOCKED Russ! Is that why you get paid the BIG BUCKS?
Horry shite, I just saw a full page CrEamer ad on the hedge.
Who has gone full retard?
Anyways, this article is just plain Wrong!
yes! How is this possible? The author states as fact;
Central bank policy is creating inflation.
Wrong --- inflation in most jurisdictions is now back to, or below, the levels recorded in late 2009.?????????????????????
inflation in most jurisdictions is now back to, or below, the levels recorded in late 2009.
Simple...the most important export from the US was inflation...and when QE stopped in the US, our exported inflation stopped as well.
All imports into Canada (and especially food) are now going way higher in price. That is exporting inflation via the strong doelarr policy.
Napier is full of shit on that point. The US is still exporting inflation all over the world, and it will only get worse going forward.
I shop at a convenience store for most of my groceries and there is this imported from USA tartar sauce I like. Bought it last year and it was $4.99 Today it is $6.39 For 355 ml. Fuck that I'm putting ketchup, not Hienz, and horseradish on my fish.
Screw that!
Make your own tartar sauce with mayo, relish, onion and lemon juice:
http://allrecipes.com/recipe/tartar-sauce-i/
[btw, the best cocktail sauce is just chili-sauce, lemon juice, horseradish and a dash of Worcestorshire...]
The author believes that real rates could get out of control, because nominal rates are bounded by 0%.
Bounded by 0%??
The author has not been paying attention.
Ha! the last I heard Worcestershire Sauce had been bought up the the Krauts and was being
made in Germany......Would that make it.........
Scheiße Deutsch Sauce
Exactly correct. These dumb fucks have to know having a stronger USSA dollar is exporting inflation world wide. How else did the Arab Spring happen? Not the false flag one, the real one that started by some poor bastard lighting himself on fire to protest the insane rise in prices for basic goods. So lets do this again, only this time lets have a whole bunch of human torches around the globe next to all that great dry seething tinder. This is going to blow sky high next time, and they HAVE to be counting on it. The result is not some weak banks that are going to be sacrifised (Bear Stearns, Lehman, BofA, AIG, etc) while the strong banks get bailed out by the taxpayers. This time it's soveriegn countries, and you can bet soveriegn implosions will be met with civil and/or regional war. Arab Spring 2.0 only world wide this time. The sociopaths are beginnning to feed on each other. A sign the end is getting closer and closer.
Definition of ‘fix’ (Oxford English Dictionary):
(v) To fasten, make firm; to deprive of volatility or fluidity
(v) To adjust, make ready for use
(v) To mend, repair
(n) Any arrangement through which laws rules or regulations are
circumvented.
(n) A dose of a narcotic drug
The CB's are meeting all the definitions at once and in the worst possible way with more to come. They don't understand 'Lord of the flies' was not a how to book.
Free electronic 'money' will prevent a rise in interest rates, much as it has suppressed interest rates. There is nothing to prevent the FED from sending every US citizen $100,000 and there is nothing to prevent them from creating $200 trillion to pay off the official and unofficial debt. Of course this is Jubilee or extinguishing Debt of a sort that instantly causes the currency to become worthless, but that is the path they are on and that is the path they will take.
Gold and Silver are blocking their path, but at some point they won't let the prices of the precious metals stop them.
"There is nothing to prevent the FED from sending every US citizen $100,000" -- sure, but that would lead to massive real inflation.
The Fed has been giving free money (QE + ZIRP) to the bankers and financiers for 6+ years. some of this money has made it to the political puppets, but none has really made it to an engineer or carpenter on main street.
At this point, it won't either until those engineers and carpenters start building and using guillotines.
Here's the weasel word line. "Until things get significantly worse, the rise in the US $ cannot be fixed." Then, they use political cover to counterfeit and tax more of the private economy.
They will steal, using ZIRP, everything not nailed down, or guarded! This is a hostile takeover of the economy by the banksters. What they can't get by counterfeiting they will get in higher taxes, IF they're not stopped (my weasel words).
"attention stupid countries..." ~ Mr. Panos
Global debt jubilee!!! Let's just zero everything out and start over.
That's what QE (money printing) is doing by making the debt (and our incomes) worth less each year. It's just default over an extended period of time like a few decades.
There won't be a jubilee because they will never admit they were wrong and by they are done there won't be anything left to jubilee.
If, as Krugy is wont to say, "we" owe the debt to "ourselves" then I'd say the U.S. taxpayer has also earned theirselves a default. Right Krugy? It's ours so we can do with it what WE want. Let's just clear the books and call it a day. Calling Dr Howard, Dr Fine, Dr Krugy...
Unleash the Kraken Nflx up 30% in 3 days.....
People thought they were buying the NFLx deflation balls ETF
This story is beyond my understand. But regardless the stock market goes up and up...that is the unreal reality
Stock market up, while real economy down.
EU QE is not US QE, it's even more impotent, which is why they're already jawboning for QE2. The more QE they do, the more deflation they cause.
Because, like all vampires, they'd rather suck the life out of the private economy than die themselves.
The numbers don't agree with reality so reality must be denied......
the central banks ONLY POLICY has been to WEAKEN CURRENCIES. That's it! That's all they have ever done.
except SNB. they finally said, enough.
when it's a race to deflate everyone's currency, does anyone win? So what, they're all deflating at the same time. Congratulations.
Somebody (one -1 so far) thinks that CBs strengthen currencies? LOL! Yellen posts here?
Pretty soon it won't matter what central banks do. The politicians will regulate, and we all know who owns the politicians.
Russel just gave Jim Grant a run for his morey. More, please.
Was thinking the same thing. I'm jaded enough these articles rarely have much impact on me, but this one was pretty good.
Bullshit! He's talking about outcomes [which we already know about ~ & which a 1st grader could predict], and hedging it by using words like 'REAL RATES' which doesn't mean anything except to say that they'll do whatever they want and if & when their stated goalseeking objectives aren't met, they'll come forth with fraudulent data which does not align with real world economics or that which doesn't exist except to say 'within the confines' of a fucking ivory tower in Davos.
Russel is right except for the Canadian housing exception. We're fucked.
Get this, if you own a house in Canada you're fucked, unless you bought it in 1997 or earlier. And if you don't own a house in Canada, you're fucked.
Russel is not right at the moment, he is playing the narrative, they can't raise rates short term. Ten year will be at 1% handle by end of year.
Like the money-men manipulating second-rate prize fighters, the owners of capital have been the key beneficiaries since the ‘fix’ came in from central bankers in 2009 to try to defeat deflation. History, however, is very clear that the owners of capital will not be the beneficiaries when the ‘fix’ is in from government.
Tax increases, bail-ins, confiscation next.
The SOTU was just tip of the iceberg.
The story remains the same: 50% cash and 50% PM's - in the mattress or equivalent
Crash the system on purpose. Dump & Pump to reallocate whatever assets are still held by the middle class to the elites. Then when the sheeple cry to the govt to save them, make it permanent by restructuring the system so the sheeple are completely dependent upon the govt/elites. Hello MyRA. Hello Feudal New World Order.
Bankers are much better at rigging markets than Central Bankers.
Until they get caught.
As rates rise it will kill the PMs.
if rates rise in this environment it will be because the system is becoming unglued and the pms will skyrocket.
So when does the narrative that this is all about economics finally come unglued, and we start talking about power and revolution?
....when the millenials get off their collective asses and do something about it. revolution was always been a young peoples' game with elder mentors. the elder mentors are here but the millenials can't hear it because there is no app for that.
haha, right cause all the older gens were paying attention throughout the 80's and so forth. I understand where you are coming from, but this won't be just one generation fighting for change. You're still stuck in divide and conquer, if only those damn millenials would stop snap chatting naked pics to each other we could get this ball rolling.
i am actually applauding the success of the state. there is no critical mass of informed youth neccessary for revolution to occur. don't expect 40 year old moms and dads to do anything. don't expect old fogies to do much. it has to be the youth who get this ball rolling and yet, after 6 years of economic and political punishment all that could be mustered was the "ghandi" inspired occupy movement, a weak imitation.
the state has scored a resounding victory! usa!usa!usa!
as for my generation we stopped a war, took down 2 presidents and cleaned up your water and air and tried to give some people their rights back. it is time for the millenials to step up.
"as for my generation we stopped a war, took down 2 presidents and cleaned up your water and air and tried to give some people their rights back. it is time for the millenials to step up."
I assume you're talking about vietnam, did you really stop that? If i remember correctly that ended in 71, and how much longer was it we were off the gold standard? 73 or 74 was it?
double post
Central Bank policies are keeping their member banks operating - RIGHT!
How do you achieve free markets?
When banks were de-regulated and bankers trusted.
They rigged every market the could.
You don't have to like it but that doesn't stop it from being true.
it really isn't about free markets or not. it is about the criminals who fill the void left by no regulation. what is effective remedy to criminals? regulations are the obvious answer. a lot of free marketers don't acknowledge the criminal variable.
True.
The regulatory nightmare is unfortunately the result of the businessmen’s endeavours to maximise profit by unscrupulous means.
In the early days things like the abolition of slavery and child labour impeded the profits of businessmen.
These days we see things like horsemeat being sneaked into the food chain to maximise profits.
The resourceful businessman has created a rod for his own back.
exactly. i have seen people do ridiculous things for the gain of a coupla bucks. imagine what they can come up with when billions and trillions are at stake.
There are no obvious answers, perhaps save one. I think Adam Smith mentioned competition somewhere along the line. OK, now what about the criminals in government? If an individual cannot be trusted, what makes large collections of unaccountable (bureaucrats) of said individuals any better? This is about what's least bad, and mathematical system theory indicates that centrally commanded solutions are suboptimal when compared to distributed, local, control. The key is always competition: set one's imperfection against another's to minimize both. A billion is alot of money, so make 'em work for it in a competitive environment, don't tell them what they must do with it as they earn it (taxes/regulation).
It isn't true: try Rolnick and Weber on the "wildcat" era, the paper circa 1978 or so.
the fed is destroying lives and destroying a once vibrant economy.
RIGHT
oh, my oh my - oh so many reason we all know...
time to go a brake job because i'm too poor to hire someone because my wages are at 2000 levels. wonder the fuck why? ha, (bang-got one!)...
MARKET CORNER IN CORN COMING UP!
The thing is I don't see prices lower on anything except the recent drop in oil/gas costs. Housing isn't down, just the opposite. Food isn't down, just the opposite (and big time), shipping costs are up -- what exactly is down? Some electronic gadgets and cell phone contracts? Wages are down, employment is down, so from that perspective demand is down but I just don't see where my daily cost of llving is down.
nonsense. they can print and buy 100% of the bonds.
We will probably get a raincheck on his prognostications after the Greek election on Sunday.
Tsipras will soon change his stance when he realises that the only way he can help the long term Greek cause is to fuck up the entire criminally insane Euro experiment.
Certainly will be worth following whether these leftists really buck the NWO and pull Greece out of the EU/Euro. I'm not betting on it but I hope they do.
what a maroon
....what an ULTRA maroon!
-there, fixed it!
“Let me issue and control a nation’s money and I care not who writes the laws.” Mayer Amschel Rothschild
For the psychopath banker, money cures all problems and is the root of all power.
Therefore printing money by the trillion must work (QE).
The fact that it is not working in the real world is something the psychopath banker cannot acknowledge.
Fun fact: you can get interest on your bitcoin too.
For all my CB and related friends, heres what Simply Red said when:-
I've been laid off from work my rent is due, my kids all need brand new shoes, so a went to the bank to see what they could do, they said son, looks like bad lucks got a hold on you.
Moneys to tight to mention, I cant get an unemployment extention, cos moneys to tight to mention.
I went to my brother to see what he could do, he said brother I'd like to help you but I'm unable to, so I called on my father, father, oh my father, he said, moneys to tight to mention oh money money money money, moneys to tight to mention, I acnt even qualify for my pension.
Welcome boys, welcome to the real world.
Cunts
;-)
What is this guy babbling about?
Wake me up when I can get a real 3% (taxable) on my passbook account like back in the good old days.
I am pretty sure they can print enough money to keep rates anywhere they want. They are powerless to save currency system. Hyperinflation remains the only possible outcome. No matter what you see on electronic charts, there is a real world of supply and demand. Either prices will reflect reality or goods will be unavailable.
And I don't care what anyone thinks about how banking is supposed to work. There is no method of forcing a a bank to remove currency from circulation once it is created in this system. Not even currency created from debt. When you pay off a loan of money, that a bank created for you out of nothing, they keep the interest and the principle. They don't loan deposits. There is no depositor to return loaned out money to anymore. They have to keep that money they created out of nothing in order to balance the debt asset they created out of nothing so their balance sheets look good.
Think about it. When the Fed bought those bad loans off of the banks, the banks kept all the principle. The money the banks created out of nothing to make the loan, when they created the loan to the customer balanced by a debt asset, went directly to their balance sheets when the Fed bought the loan from them. Every loan they make is 100% free money. In QE they just get it all up front and don't have to wait for your monthly payments.
Whoosh! That was like a Dana Carvey monologue.
If they raise rates, then how does fedgov service the US national debt?
Digame, por favor...
the first reaction to a realization of deflation in 1933 was to raise the value of gold in dollars.
they already said what they have planned for this dilemma. a republican congress could be convinced to give a massive tax break to the middle class fulfilling the bernank solution. i think japan is actually discussing the idea of giving cash cards to people. that won't work in japan because they will save it if they can. it could work in the usa because americans will spend it and more. no matter how they do it a concensus is building for some kind of helicopter drop, perhaps to tchaikovsky's 1812 overture. the cannons are perfect.
"The Swiss National Bank (SNB) failed to ‘fix’ the exchange rate between the Swiss Franc and the Euro."
Forgive a really naïve question, but ...did the SNB actually pegg the CHF to the EUR ? Yes. Did it work ? Yes. Was the rate roughly around 1.2 during those whole 3 years ? Yes.
So - where is the failure ?
The problem of the SNB was not of being unable to "fix" anything. The problem was that the process was damn too expensive, and would have been even more so with the European version of QE.
Had the Swiss not reacted the way they did, they would have been called village idiots by the whole world, including the people who will print ...how many ? 1 trillion euros out of thin air during the next year? 'cause the message would have been: "please feel free to print any amount of shit you want, we'll support your crappy euro at our cost".
Well, this didn't work indeed. What a failure.
Pff.
http://stockcharts.com/def/servlet/SC.pnf?chart=tlt,PGTLWANRBR[PA!B13][D][F1!3!!!2!20]&pref=G
You dont need high rates to attract money, falling rates make face value climb faster than any yield rate.
TLT shows it