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The Financial Folly Lurking Beneath Yellen’s Patient Lack Of Impatience
Submitted by David Stockman via Contra Corner blog,
Janet’s Yellen’s pettifogging today about her patient lack of impatience was downright pathetic. Her verbal hair-splitting is starting to make medieval ritual incantations sound coherent by comparison.
But unlike the financial media’s dopey dithering about “dot plots”, Yellen at least has something to hide behind all the gibberish. Namely, she and her merry band of money printers are becoming more petrified each month that they will trigger a thundering Wall Street hissy fit if they move to “normalize” interest rates—-even as they are slowly beginning to realize that continuance of ZIRP much longer will only intensify the market’s addiction to rampant speculation, free money carry trades and the associated risks to financial stability.
But the Fed’s new found worry that it’s tsunami of liquidity might have untoward effects doesn’t even rank as a death bed conversion. It’s way too late to worry about a financial bubble that has become epic in scope and danger; and its especially too late to think that it can be weasel-worded down from its Brobdingnagian heights.
The reason the Fed is impaled in a monster trap is that history is closing in on it. We have now had upwards of three decades of increasingly aggressive monetary inflation—-a corrosive trend culminating in what will be 80 months of zero money market rates and a massive monetization of debt claims that originally funded the consumption of real labor and capital resources.
Needless to say, that has generated a dangerous and ever widening disconnect between the real main street economy and the nominal value of assets in the financial system. This rupture has been called “financialization”, but it amounts to this: Fed attempts at monetary stimulus are now short-circuited; added liquidity essentially becomes sequestered within the financial system where it generates persistent inflation of existing asset values. That is, stimulus never leaves the canyons of Wall Street.
There is no monetary policy transmission outward to the real economy because the credit channel to households and businesses is terminally busted. This condition is partially owing to peak debt among households, meaning that they can’t borrow any more money even if the interest carry cost is virtually free; and also due to financial arbitrage in the corporate sector, where equity is being systematically strip-mined by debt-financed financial engineering in the form of stock buybacks, M&A takeovers and LBOs.
Accordingly, the financial system has ballooned dramatically faster than the real economy over recent decades—–even when measured by nominal GDP, including the latter’s considerable element of pure price inflation on a cumulative long-term basis. The economic tether between the two, therefore, is now stretched like a rubber band to the breaking point. The possibility it might snap and cause a drastic implosion of the financial system is what the monetary politburo fears, even if it fails to realize the full extend of the danger.
A big picture approximation of this disconnect can be seen in the ratio of the market value of corporate equities compared to nominal GDP. Even on a pure read-the-charts basis, it is evident that at the current market capitalization-to-GDP ratio of 127%—-we are on the far edge of historical observation. In fact, during the 250 quarters since 1950 shown in the graph, the ratio has been higher only 4 times. And that was at the lunatic peak of the dotcom bubble in late 1999 and 2000!
Yet that’s only the half of it. Prior to Greenspan’s arrival at the Fed in 1987, and the subsequent evolution of the wealth effects doctrine and practice at the Fed under his superintendence, the mean ratio of market cap to GDP averaged about 60% and the cyclical amplitude fluctuated between 40% and 80%. Since 1994 when the Fed capitulated to Wall Street during the bond market bust and the Mexican peso crisis, however, the ratio has averaged nearly 100% of GDP and the amplitude of cyclical oscillation has widened dramatically.
The point is that this is not just about timeless chart cycles which rise and fall——although even in that context the current point is obviously precarious by all past experience. Instead, the reality is that we are in a new, central bank-driven serial bubble cycle that reflects the progressive radicalization of monetary policy.
Buffett Indicator- Click to enlarge
The implications of this financialization are vast. In no sense is the Fed any longer rationally or proactively managing the main street macro-cycle as in the pre-Greenspan era—-whether this really worked effectively and efficiently or not. Now it is simply racing ahead of the tidal wave of financial inflation that it unleashes in the canyons of Wall Street, hoping not to be overtaken by the inexorable bust which follows speculative booms.
As always, the bullish crowd in the casino thinks this time is different, but actually this time is more dangerous. Sooner or later the bubble will burst when the last sheep are herded into the casino, as has happened already twice this century. But now the financial system’s tether to the real economy is extended like never before in history, meaning that the Fed’s dithering and dissimulation—on full display once again today—–will only result in a more traumatic dislocation eventually.
On this score, the recent Q4 release of the flow of funds report, which showed household net worth has now vaulted well above it levels during the previous two market peaks, is telling. As shown below, net worth is soaring and now stands at $83 trillion as of Q4 2014. That compares to $68 trillion at the pre-Lehman peak and only $45 billion at the time of the dotcom bubble.
Needless to say, these dramatic gains have occurred not because households are saving and investing more or because the US economy has become dramatically more productive and profitable. In fact, it represents a vast inflation of financial and real estate assets.
Even if the current $83 trillion household wealth figure is adjusted for the GDP deflator, it still means that there has been a 40% gain in aggregate real household net worth since the turn of the century. By contrast, real wage and salary income is only up by only 17% and median real household income is actually down from $57k to $52k or by nearly 10%.
This latter figure highlights the double whammy of central bank driven financialization. One the on hand, financial asset valuations are unsustainably inflated; yet even the so-called wealth effects from these artificial and ultimately temporary gains have not trickled down to the 90% of households which account for only a tiny fraction of financial assets. As a result, there is no kicker to GDP outside of upper-income conspicuous consumption, even as the financial bubble steadily enlarges.
Not only is this a problem for financial stability, it may also eventually become an even more potent challenge to political stability. Indeed, the 7X gap between mean household net worth of $300k and median net worth of $45k suggests that the day of pitchforks and torches may not be all that far down the road.
Meanwhile, the financialization timebomb remains lodged in the markets. Aggregate household net worth has soared not because there has been any meaningful deleveraging since the financial crisis. In fact, household debt has declined only marginally—-after soaring for more than three decades.
And that gets to the heart of the danger. Notwithstanding this enormous rise in aggregate debt, net worth has continued to surge because asset values have been so dramatically inflated. Thus, the ratio of household financial assets to GDP now stands far above any prior history.
Household Financial Assets Ratio to GDP – Click to enlarge
When household real estate is added, which is also driven by financialization, the picture is even more extreme. In 1970 the combined value of household real estate and financial assets was $3.9 trillion and it represented just 3.5X GDP. Even after the fed induced inflation of the 1970s, the combined value was only $19 trillion or 3.9X GDP when Greenspan arrived at the Fed in 1987.
By contrast, household real estate and financial assets today total $92 trillion or 5.2X GDP. There is absolutely no explanation for this aberrant condition other than the radical monetary inflation fueled by the nation’s central bank. If anything, the efficiency, international competitiveness and growth capacity of the main street economy has eroded measurably since the early 1970s, meaning that valuation multiples should have been tempered, not dramatically enlarged.
Household Total Real Estate and Financial Asset Value Ratio to GDP – Click to enlarge
So we have learned once again yesterday that the Fed still has a lot of patience. Perhaps we will also soon learn that by cowering its way forward our monetary politburo is making the eventual day of reckoning all the more perilous.
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Remember way back five plus years ago when people declared the Fed will soon run out of bullets? What is rarely understood is the Fed has as many bullets as 'we' want to give them.
The bullets are called 'faith' and 'belief' and their power is derived from 'our' fear and greed.
Federal Reserve "Bank" policy formulation/discussion (secretly taped):
https://www.youtube.com/watch?v=wz-PtEJEaqY
Classic!
This post is the best summary of how we got into this mess. Starts slow but worth the read:
http://debtcrash.report/entry/history-and-introduction
Some of the other posts on the site are good as well.
Of Rocks and Hard Places
We are about due for a surprise pie hole opening.
It's only a surprise if your not expecting it......
Charlie Evans already pie-holed something about even MOAR accommodative monetary policy earlier today when he noticed stawks slipping & USD strength.
Indeed, the 7X gap between mean household net worth of $300k and median net worth of $45k suggests that the day of pitchforks and torches may not be all that far down the road.
And who will be carrying these pitchforks and torches? The fat ass members of the FSA? I don't think so.
I believe "7x Gap" was the product precursor to "Brawndo".
Nope, it'll be their carefully inbred mass of proles who have been indoctrinated to "fairness and equality" find out exactly what those words mean. Also you don't have to be in good enough shape to hump a ruck and a rifle in order to burn a neighboerhood to the ground.
Back in slavery days there were very few taxes. A slave could save up and buy themselves, or relatives, out of slavery. Many did. I had ancestors who did. Now, you cannot buy yourself out of tax slavery. Boehner and Obama have added Trillions to that burden since just 2011 (about $33,333 per taxpayer). Protect your savings while you still can.
Here are your slave masters.
http://upload.wikimedia.org/wikipedia/commons/thumb/f/f2/President_Obama...
A true scholar never confuses "it's" and its" [Ghordius take note.]
But the Fed’s new found worry that it’s [wrong] tsunami of liquidity might have untoward effects doesn’t even rank as a death bed conversion. It’s [right] way too late to worry about a financial bubble that has become epic in scope and danger; and its [WRONG] especially too late to think that it can be weasel-worded down from its [right] Brobdingnagian heights.
Like it or not, confusing it's (it is) and its (possessive) detracts from the message.
Par for the course on ZH.
Elsewhere gems like "phasing" instead of "fazing" - can't remember which thread but they are all full of them.
I like it when numbers jive.
"Instead, the reality is that we are in a new, central bank-driven serial bubble cycle that reflects the progressive radicalization of monetary policy".
This "progressive radicalization" is one reason why they can not and will not stop the pump. Hell they can't even tap the brakes!
This thing is going to run full...full cycle. Until the financial system becomes so twisted no one will recognize it, not even it's creators.
Yup, they're in too deep and there's not enough will, whether from straight up ignorance or not, to turn it around. Full cycle indeed.
the recession we're entering will be the "emperor has no clothes" moment for federal reserve
Why?
Mr. Woody Yellen can drop the fed funds rate an entire .25% and get NIRPY after that...
You kinda make the man's point for him. The further the FED goes down this road, the more obvious it becomes that not only does it not fix the problem, it makes it worse. The reason I believe they will tighten sooner than later is because the member banks cannot make $$$ without the bust following the boom. The cycle is the base of their power. Going full retard destroys the FEd as an institution. This is demonstrable by the mini-boom of around 2009/10. Those tax and housing credits were making it into the real economy. Things were getting better on Main St. People were buying houses at reasonable prices and things were picking up somewhat organically. Then the GOP congress comes in to play useful idiots (because it would've been political suicide for the socialist Dems) and helps shutdown what was a successful consumer stimulus. even Ron Paul has said, even though he does not agree with federal stimuli, that if you're going to do it and get the desired result the money has to go to the consumers. He said this in a critique of the Wall Street capture of congress.
The FED serves their member bank masters. We all agree on this. So tell me how with lending at a stand still that ZIRP helps BofA, Wells, Chase and Citi???
Banking by traditional models is dead.
The latest "thing" is for publicly traded (and even closely held/owned) companies to borrow nearly free money by selling bonds at a coupon that is a measly few basis points above what treasuries are yielding, and use the revenues from the sale of such debt to buyback their own stock.
This is being done not just by indebted companies, but, even by - wait for it - Apple, and other companies absolutely flush with cash.
It's a free gift from the central banks to the shareholders, underwriters of the bond sales, executives of the company (whose compensation is heavily tied to share prices & buybacks) and others in the entire financial sector.
Banks don't have a business model of making interest off of loaning fiat to consumers & small & medium sized businesses anymore.
Of course this is what's happening. But the banks know as well as you do that this is unsustainable. I mean I'm sure it's technically possible we get to a world where the .000015 rule all and the 5% below them in military/police hold the power structures together, but I doubt it. Sure didn't work for the Soviets... It's so much easier for them to maintain power by running these serial bubble games. I think the only thing that has been different since 2000 is that the maestro overplayed his hand and they're still trying to course correct through the disaster he made. If we get back to any semblance of real lending and a fuctional economy the big 4 banks have the opportunity to make even more money given the growth they've achieved during this recession. Why would they not want to take advantage of their grown monopoly?
The timeline may not be perfect, but this makes sense. Especially, after the 'annointed one' is replaced.
http://redefininggod.com/nwo-schedule-of-implementation/
Horses led to water won't drink - no matter how big the lake - if they are not thirsty.
And peak debt = drowning.
If you suck on their ass they will.
When a company sells bonds to pay a dividend or to buy back their stock....then you know we are really really stupid....
They can come up for different ideas. I mean everyone knows QE now so they can change the name and format of it like MT 1 (Monetary Teasing part 1 ) We will soon hear news how things going so well in Europe not just because QE but also negative interest rates. We will hear tons of pundits that how rates should be negative. if you dont spent you should be punished. if you dont want to be punished either spent it or risk it to buy stocks buy a home you dont need for investment.Wellcome to heaven.
every time i read stockman i get whopping angry and think it is about the best said thing i have ever read. so query why no one in a position of authority listens? People like to be lied to is my theory
if the fed disappeared what would happen? treasury would take the feds assets and place them off balance sheet. and everyone would go ho hum. all of the things the fed does can be replicated by some other government agency. everyone on ZH would scream centrally planned economy! (and the low brow types are right ho hum). you see the big lie has moved on to other things, the fed as an independent central bank is like area 51, they moved out all their top secret stuff years ago. then one day they throw open the gates to area 51 and, ho hum, nothing to see. the next big lie is our governments constitutional requirement to defend the nation, which is called into question by the collusion of these not so independent central banks. they're trading your currency, and your economy for a new world order, but you saw that coming when WTO for China went through. they keep moving the goal posts, try to keep up
Her first sentence - explaining that removing "patience" did not imply "impatience" - was all that was needed to see how far down the rabbit's hole of Woderland we are.
Central Banks: prop corrupt banks, bankers, and the equity casinos they operate - while punishing savers and robbing the public treasury. Period.
Another great rant! Now what?
Arrest her. She's a criminal. I once made a beautiful goddess out of teracotta clay but it had an air bubble in the center. When it came out the kiln it looked like Janet Yellen. Thing frightened me to point of thowing it to the floor. I'd rather see a clump of clay than look at her face. Get rid of her.
And one wonders why Bernanke quit when he did. Right....
"Here Janet, hold this bag."
Again...she must continue to normalize.
In order to support these incredible p/e's (AT&T at a thirty right now) the Fed must support the dollar.
Of course this means she's putting the poo in party pooper...but that is the Fed's job.
She still seems wobbly to me....though less so today apparently.
Right or wrong (he's right), Stockman's gotta be the all-time best writer of bear p0rn around.