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The Great Immoderation: How The Fed Has Sown The Seeds Of The Next Recession
Submitted by David Stockman via Contra Corner blog,
In February 2004 Ben Bernanke famously declared the business cycle had been tamed and took a bow in behalf of enlightened monetary management, claiming it was the principal source of this beneficent development. Exactly 55 months later, of course, he terrorized the Congressional leadership and a clueless President with the frieghtening proposition that a Great Depression 2.0 was just around the corner.
As to why he had been so stupendously wrong, Bernanke did not say. Nor did he explain why the brilliantly “stable” US economy had suddenly stumbled to the edge of an abyss despite the Fed’s energetic money printing in the interim. And the Fed had not been stingy in the slightest; its balance sheet had actually expanded by $150 billion or nearly 4.5% annually between February 2004 and the Lehman bankruptcy.
Indeed, six and one-half years on from the financial crisis—-events that made a mockery of the Great Moderation—–the monetary politburo and its acolytes on Wall Street have offered no coherent explanation as to why Armageddon loomed nigh and why the worst business cycle plunge since the 1930s actually materialized. Certainly their lame Monday morning claim that “prudential regulation” had failed doesn’t cut it.
Indeed, depicted below is the staggering growth of household debt in the US economy between the two signal financial events of this century—the dotcom bust and the Lehman meltdown. Households literally borrowed themselves silly during that period, extracting upwards of $3 trillion of MEW (mortgage equity withdrawal) from their home ATM machines, among other delusionary outbreaks. Yet to say that this borrowing binge was caused by inadequate bank supervision is an insult to intelligence. It might as well be argued that the “financial contagion” that fueled the crisis arrived on a mysterious comet from deep space!
In fact, the eruption of $7 trillion of new household borrowing during this period—-or more than all the household debt outstanding at the turn of the century—-is the work of the central bank. It was the Fed’s 1% interest rates and stock market puts that had already triggered the housing and mortgage frenzy, even as Bernanke boasted about its management prowess in February 2004.
Never having explained the causes of the Great Financial Crisis (GFC) or acknowledged its own evident complicity, the Fed has nevertheless energetically doubled down on the same monetary toxins that caused the last crisis. In fact, between the September 2008 plunge that Bernanke said couldn’t happen and the plunge lurking just around the corner once again in March 2015, the Fed’s balance sheet has soared by 4.5X or at a 27% CAGR for nearly seven years running.
So now the third immense financial bubble of this century has been fully inflated. And there are abundant signs that what we really have is a Great Immoderation—–a baleful, not beneficent, development that can be laid exactly at the door step of the central bank.
Specifically, yesterday’s abysmal data on the soaring wholesale sales/inventory ratio (I/S ratio) is not only a sharp stick in the eye to the “escape velocity” chatter that emerged in last year for the fifth year running; it also offers crucial insight into a issue that the Fed and its partisans incessantly gum about but never get right. Namely, the matter of monetary policy transmission—–or the pathways through which the Fed’s interest rate manipulations, balance sheet expansions and verbal guidance work their way into the wider financial system and macro-economy.
The long and short of it is this. The credit channel of monetary policy transmission has long been over and done because the US economy has reached a condition of peak debt. But since the posse of Keynesians who inhabit the Eccles Building refuse to acknowledge this cardinal fact and persist in pushing on a string of massive monetary stimulus, a new channel of policy transmission has been carved out of what was once a healthy financial and business system in the US.
Call that new transmission channel the “C-suite in bull market heat”. The obvious but never acknowledged fact of business life in today’s central bank dominated world is that top corporate executives no longer really manage their companies’ organizations and operations; they mostly manage corporate stock prices and their own option based incentive programs.
If you want some evidence, just consider the facts I cited Monday about the disposition of net profits by the S&P 500 companies. During the LTM period ending in Q3 2014, they generated $945 billion of net income and flushed fully $895 billion, or 95% of that total, back into the Wall Street casino in the form of stock buybacks and dividends.
In light of those stunning numbers, don’t you think CEOs have stock prices and option values constantly on their brains? Yes, they do. Otherwise you can’t explain the next number, either. By the end of the current quarter, CEOs and boards will have flushed the staggering sum of $4 trillion in dividends and stock repurchases back into the market or 85% of the earnings of the 500 largest companies domiciled in America since the March 2009 bottom.
So the truth is, the new channel of monetary policy transmission in this era of money printing madness runs through the C-suite. And after the giant financial bubbles and busts during this century—–it is also now evident that this new transmission channel is radically and violently pro-cyclical. That is, it does not level the business cycle—it drastically amplifies its oscillations.
As shown below, during the run-up to the GFC the amount of cash being flushed into the stock market soared; and this rise reflected an amplitude of gain far greater than the rate of earnings growth during the period. But almost immediately after the S&P 500 index peaked at about 1570 in October 2007, the level of buybacks and dividend distributions began to fall—–and then plummeted with a rush during the financial crisis and great recession of 2008-2009. By the bottom quarter in 2009, the amount of cash being pumped into the stock market was running at only $85 billion per quarter or just one-third of its peak rate.
Needless to say, history is now repeating itself, and the reason is not hard to find. During the third quarter of 2009, as the economy began to rebound, the S&P 500 companies distributed just 63 percent of their net income as dividends and buybacks. By contrast, five years later after a 200% increase in the stock index, the S&P 500 companies distributed $234 billion out of $244 billion of net income.
That’s right. Last fall the C-suite was in such intense bullish heat that it distributed 96% of earnings to the clamoring throngs in the casino. America’s corporate executives could think, apparently, of nothing else but their stock prices and bonuses.
Needless to say, when this big fat C-suite “bid” evaporates, the props are pulled out from under the stock market. And, most especially, the chart points used by the robo-traders and dip buyers fail—causing the kind of violent plunge that occurred in the NASDAQ during March-April 2000 and the broader market from Lehman event through the March 2009 bottom.
Unfortunately, however, that’s not the half of it. As the Fed reflates the financial market after each bust via free carry trade funding for stock speculators and massive liquidity injections into the canyons of Wall Street, the incessantly rising stock averages not only induce the self-reinforcing waves of stock buybacks and dividend payouts shown above, but also cause a second and equally counter-productive pro-cyclical behavior.
To wit, as stock market obsessed executives become ever more confident about the financial cycle, they succumb to the “this time is different” mentality that infects the entire casino—-not the least because their minds dwell in the casino most of the time. Accordingly, top management steadily loosens the corporate purse strings and permits their operating executives to accumulate excessive inventories of labor and production goods and supplies on the expectation that the real economy will soon follow the stock market into the stratosphere.
At some point, however, realty protrudes. When the boom in sales eventually fails to materialize, companies find themselves over stocked with labor and physical inventories—–and vulnerable to some confidence shattering event such as the Lehman bankruptcy—-that triggers a sharp liquidation of these excesses.
That’s essentially what is now emerging in the current I/S ratios. As Wolf Richter cogently pointed out in his post today, we have suddenly—-only a few months after “escape velocity” was a sure thing—-seen the I/S ratio soar to its October 2008 level.
In point of fact, the Great Recession was actually a short but massive burst of inventory liquidation emanating from the same C-suites that had reached a peak of bullish fever in late 2007. Contrary to Bernanke, the September 2008 plunge had nothing whatsoever to do with a relapse toward the Great Depression and an unstoppable downward spiral into an economic abyss.
Instead, shorn of their bullish enthusiasm owing to the collapse of their stock prices, business executives liquidated the excesses that had built up during the Greenspan-Bernanke bull run. Using the data on wholesale inventories as a proxy, the chart below shows that over 80 month expansion from the cyclical bottom in April 2002, inventories rose by $165 billion or nearly 60%.
But during the 12 months after August 2008, nearly half of that accumulation was liquidated. Then the slow process of rebuilding commenced once again. Moreover, the hook upward that became evident by November 2009 had virtually nothing to do with the Fed’s panicked money printing during this period. At the point in late 2009 when the inventory liquidation ended, business and household credit—–the only thing that ZIRP could directly influence——were still shrinking.
Stated differently, after having experienced the fear of god, the C-suite had sobered up and had recommenced running their businesses, not merely their stock prices. The recovery was owing to the regenerative capacity of capitalism, not the speed of the central bank printing presses.
The data for the excess inventories of labor are nearly identical during this cycle. During the period between September 2008 and September 2009, the frightened inhabitants of the C-suites off-loaded labor at a violent rate. During those months, the BLS establishment survey——dubious as it is—showed an average reduction of nearly 600,000 jobs per month. Yet by the last three months of 2009, it was all over but the shouting. The BLS job loss rate shifted down sharply to 100,000 per month until excess labor inventories had been full liquidated by early 2010. Again, money printing had nothing to do with the process of bottoming and reversal.
At that point, in fact, American capitalism might have had an opportunity to heal itself and commence on a long march toward sustainable growth and real wealth gains. But the monetary politburo would have none of it—–keeping the pedal to the metal until this very moment.
So the rest is history—–repeating itself. The Fed and the other central banks around the world have fomented a new and even more virulent and dangerous financial bubble. The C-suite has once again plunged into a fevered bullish heat, and has once again permitted excess inventories of goods and labor to build on company balance sheets. That’s why the BLS keeps reporting big job gains each month.
But those Jobs Friday gains are not evidence of escape velocity, sustainable recovery or the approach of the Keynesian nirvana of permanent full employment.
No, its just another outbreak of the Great Immoderation. And we already know what happens next.
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The Fed are stealing the land labor and resources from the American people. They ought to be in jail.
The Fed are stealing the land labor and resources from the American people. They ought to be EXECUTED, after trial and judgement of a jury.
FIFY
dear colonel, you have personally decided the punishment before a trial? what madness is this?
The only thing the 'Colonel' is going to do is eat his leftover lasagna, take out the trash after the wife nags about the smell, fart a couple times, and go to bed.
That's it, folks. :-)
Please. If you use the proper CPI, which is 3% to 5% higher than the official numbers then US GDP is 3% to 5% lower. So the last recession never really ended.
http://www.shadowstats.com/alternate_data/inflation-charts
The current US recovery is more mythical than an honest politician in the US. Or an honest bankster in New York.
Nearly At ‘Full Employment’? 10 Reasons Why The Unemployment Numbers Are A Massive Liehttp://theeconomiccollapseblog.com/archives/nearly-full-employment-10-re...
"The Next Recession"
I don't think there will ever be another officially declared recession. Just endless propaganda until the next major financial crisis. And THAT will probably NOT be reported in the MSM, but instead it'll be responded to by secret executive orders and secret meetings with congressional commitees.
We will float along till there is nothing left and no way out. then we'll wonder how the hell this happened.....
lookie at all the pretty graphs... should be "How the Fed is reaping the harvest of the current depression"
If you're a Supremacist, the economy is in fantastic shape.
A great opportunity to buy distressed assets.
I know a few people that have said to me "we still have time to fix this"
My answer has been the same for many,many years...No we don't , it can not be fixed, it has to and will crash under it's own weight. Just watch and see.
The point of no return was passed long ago.
Some people might say "OK, so it will crash again. But THEN it can be fixed."
I'd reply that it won't, because the power of central government is so vast now that nothing can lead to a fix. Instead, every crisis will be used to further consolidate power and further oppress the people.
the fed is independent they said
the fed brings liquidity and stability they said
is it any wonder that controlling the money supply and rates at which money is borrowed causes booms and busts? its simple cause and effect. its been as much as admitted in their politics. you dont even need a calculator or an ivey league degree to understand this concept.
however, you might need to bring a thesaurus to decode their bullshit nomenclature. money prinding/currency debasement is now convieniently called, "quantitative Easing" sorta like how you need lube to ease in.. well, you know, tax payers asses.
It's simple.
When you have a money system based on private fiat debt instruments, you must constantly create more paper in order to roll over the existing debt. Those who create the debt instruments end up using them to steal the real wealth of the population. They use all sorts of fraud to fool the people, who do you not realize that their wealth has been taken from them. Quite frankly, our attention on a day-to-day basis is on nothing but smoke and mirrors. (QE, Yellen, audit the fed, etc, etc) Anything/anyone that does not deal with the central fact that we are prisoners in a mental prison of illusions is nothing but a diversion.
When the people have been so impoverished that they begin to rebel, the fraudsters usually create a large war as a diversion.
I agree there is no way to fix it anymore....it will just fall apart on its own....and the key will be the dollar..when no one wants it anymore....
i used to believe that people would get sick of the dollar. i did wholeheartedly. but i realized that they have a speacial unit that had been created to grease the palms of key players in foreign office, called the council on foreign relations. keeps the ball rolling and has plenty of nailguns if it doesnt. its a speacial club and were not in it.
It is going to happen though, regardless. At some point it will just be necessity for foreign nations. A matter of survival. Everything will get more local.
All eyes on Venezula right now. Not just for the outside chance of moving away from the USD, but also for what it is like for the people there. Our future might look a lot like Venezula (times 10).
they want their gold and their oil for sure.
http://en.wikipedia.org/wiki/New_Development_Bank
http://redefininggod.com/nwo-schedule-of-implementation/
Inventories were the culprit of the Great Recession-I thought it was about crappy mortgages.
They just proved that the collateral had no real value.
All collateral.Very similar to right now.
Is anyone else exited by all the craziness...??
I know the haters on here like to chastise us for our fixation on "doom porn". But even THEY have to admit that we are witnessing something completely unprecedented in modern history (and really all of human history).
Whether you think it's going to blow in spectacular fashion (like me) or that we glide out of this safely with our heads still attached, it is still an absolute marvel to watch this whole thing play out (from about 2006 until today).
Personally, I am thankful to the feds for enriching my by pumping up the real estate bubble after I bought in 2010 (cashed out last November). But I am profoundly saddened by the death blow that our political leaders and the lapdog Fed have dealt to our country.
We are living in a historic time and those of us who are aware enough to pay attention are the ones with the TRUE front-row seats. Sadly, 90% of the people in our once great country will be completely blind-sided if (when) this grand experiment blows up.
Set yourselves up well, my friends. Come down to Dominical, Costa Rica, and set up your sustainable farm in my neck of the woods.
Enjoy the show...!!
Spent a couple nights in Dominical back in 2005. Nice surf bum area for American youth and old surfers. Took a scooter ride in the rain to Uvita and before we left the area, almost purchased some acreage up the hill a ways.
Not interested in CR anymore though. Too westernized and too much disdain for the gringos by the Ticos and Ticas now I hear. Chile is a better attraction now.
But we really did love CR and especially the Osa Peninsula and the altiplano region too.
How many Fer-de-Lance and/or Bushmasters have you run into? I stepped over a Fer-de-Lance while hiking one day - yikes!
I trust it goes well for you and that you are happy there.
I wish you luck in Costa Rica, Farmer Joe. Just pray you don't live to see the final outcome.
Let's be honest---nothing but Russian tanks will remove the banksters from power in Europe, assuming they go quietly and don't decide to turn Europe into a radioactive wasteland on their way out. Nothing but a hydrogen bomb will drive them from Wall Street---and any action of the sort would set off Uncle Sugar's doomsday weaponry, firing away with everything he's got and undoing not only the industrial but the agricultural revolution as well, sending us back to the Stone Age if he doesn't kill all life on earth. I hate to say it, Joe, but nothing worth eating will grow in a nuclear winter in cobalt-salted topsoil, even in Costa Rica.
We're all part of the greatest show on earth, Joe. When the curtain falls, few will leave the stage alive.
Mr. Stockman should substitute 1971 for 2010.
+1. Any notion that there was a point at which our trajectory could have been altered in 2010 is just plain stupid. Not even fancy stupid. Or wishful stupid. Just plain old stupid.
centerline: " +1. Any notion that there was a point at which our trajectory could have been altered in 2010 is just plain stupid. Not even fancy stupid. Or wishful stupid. Just plain old stupid."
+ 100
I really don't recall hearing from anyone that gets any mainstream attention, that the whole system itself is a criminal racketeering fraud & Ponzi scheme. Coulda saved it in 2010 ? The racket does exactly what it was designed to do and what is inevitable.
It's time to stop with the delusion that the FED is interested in anything except funneling all of the worlds wealth to it's global gangster consortium and shareholders.
When viewed according to what they are actually trying to accomplish, they get an A+.
We'll need a logrithmic chart to show the increase of FED assets after they "rescue" us from the next downturn. Is it possible for them to own 200% of all assets of any sort in the USofA?
Maybe, with 60 year mortgages and 13 year car loans.
The root cause is the unholy trinity of Fed Banks and their tribe owners, Corporate CEO's, and Congress Critters who have no courage to do the right thing or appoint the right people. Nothing will change until the trinity is broken.
The entirely Fed generated Stock market bubble is a gross violation of capitalism and free markets in general. The very idea that a hand full of Bankers at the fed can and do seek to totally manipulate where stock prices go, via a large bag of tricks like QE and ZIRP, means price discovery does not exist. For years now all the insiders have played the markets based on a Fed guarantee that the markets will only move up, and all corrections will be nipped in the bud.
The distortions are massive, the correction will be nothing short of a world wide depression lasting a decade at the least.
The seeds have been sown, no arguement there. Thing is they were sown long ago, and anyone with half a brain can see the disasterous results already coming to fruition. Biggest problem is there are too few folks anymore bereft of a good god damn to give about anything anymore to try and change things.