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Fed's Full Normalization Will Crush The Casino

Tyler Durden's picture




 

Submitted by Adam Hamilton via GoldSeek.com,

The US Federal Reserve has been universally lauded for the apparent success of its extreme monetary policy of recent years.  With key world stock markets near record highs, traders universally love the Fed’s zero-interest-rate and quantitative-easing campaigns.  But this celebration is terribly premature.  The full impact of these wildly-unprecedented policies won’t become apparent until they are fully normalized.

Back in late 2008, the US stock markets suffered their first full-blown panic in 101 years.  Technically a panic is a 20% stock-market selloff in a couple weeks, far faster than the normal bear-market pace.  In just 10 trading days climaxing in early October 2008, the US’s flagship S&P 500 stock index plummeted a gut-wrenching 25.9%!  It felt apocalyptic, the most extreme stock-market event we’ll witness in our lifetimes.

This once-in-a-century fear superstorm terrified the Fed’s elite policymakers on its Federal Open Market Committee.  As economists, they are well aware of the stock markets’ powerful wealth effect.  With equities cratering, Americans could dramatically slash their spending in response to that devastating loss of wealth and the crippling fear it spawned.  And that could very well snowball into a full-blown depression.

Consumer spending drives over two-thirds of all US economic activity, it is far beyond critical.  So the Fed felt compelled to do something.  But like all central banks, it really only has two powers.  It can either print money, or talk about printing money.  The legendary newsletter guru Franklin Sanders humorously labels these “liquidity and blarney”.  With stock markets burning down in late 2008, the Fed panicked too.

Led by uber-inflationist Ben Bernanke, the Fed embarked on the most extreme money printing of its entire 95-year history to that point.  The FOMC cut its benchmark Federal Funds Rate by 50 basis points at an emergency unscheduled meeting on October 8th.  It lopped off another 50bp a few weeks later on October 29th.  And then on December 16th, it slashed away the remaining 100bp to take the FFR to zero.

The federal-funds market is where banks trade their own capital held at the Fed overnight.  It’s that supply and demand that determines the actual FFR, so the Fed can’t set it directly by decree.  Instead the Fed defines an FFR target, and then uses open-market operations to boost funds supplies enough to force the FFR down near its target.  The Fed creates new money out of thin air to oversupply that market.

When central banks force their benchmark rates to zero through money printing, economists call it a zero-interest-rate policy.  Once ZIRP is implemented, a central bank’s conventional monetary-policy tools are exhausted.  Once zero-bound, central banks can’t really manipulate short-term interest rates any lower.  So they continue printing money, but use it to purchase bonds to force long-term interest rates lower as well.

Historically this was called monetizing debt, and was only seen in small countries that were economic basket cases.  Expanding the money supply so rapidly to buy government bonds naturally led to ruinous inflation.  But today this exact-same practice is euphemistically known as quantitative easing.  QE is truly the last resort of central banks once they succumb to ZIRP, the treacherous final frontier of money printing.

The Fed formally launched QE for the first time ever on November 25th, 2008.  That was several weeks before ZIRP was born.  Because of intense political opposition to direct monetization of US government debt, the Fed initially started with mortgage-backed bonds.  But what later became known as QE1 was expanded to include US Treasuries in mid-March 2009.  This marked a watershed event in Fed history.

By conjuring money out of thin air to buy up US Treasuries, the Fed was directly subsidizing the Obama Administration’s record deficit spending.  As it purchased Treasuries and transferred brand-new dollars to Washington, the federal government spent this money almost immediately.  That injected this vast new monetary inflation directly into the underlying US economy, creating tremendous market distortions.

Nowhere was this more pronounced than in the US stock markets.  As the Fed expanded the money supply to buy bonds, its holdings rapidly accumulated which ballooned its balance sheet dramatically.  Even though this new inflation was flowing into the bond markets, it had a dramatic impact on the stock markets.  Since mid-2009, the S&P 500’s powerful bull market has perfectly mirrored the Fed’s balance sheet!

Whenever one of the Fed’s three QE campaigns was in full swing, the stock markets rose in lockstep with bond purchases.  But whenever the Fed’s debt monetizations slowed or stopped, the stock markets consolidated or corrected.  This tight relationship between stock-market levels and the Fed’s balance sheet is incredibly important for investors and speculators to understand, as it has serious implications.

In the coming years, the Fed is going to have to normalize both ZIRP and QE.  If the Fed drags its feet too long, the global bond markets will force it to act.  Normalizing ZIRP means dramatically hiking the Federal Funds Rate, and normalizing QE means selling trillions of dollars of bonds.  And only after both interest rates and the Fed’s balance sheet return to normal levels will ZIRP’s and QE’s impact become apparent.

Today’s euphoric and complacent stock traders assume that the first measly quarter-point rate hike will end ZIRP, and that QE concluded in late October 2014 when the FOMC ended its QE3 campaign.  But nothing could be farther from the truth!  We are only at half-time for the most extreme experiment in US monetary policy in the Fed’s entire history.  The fat lady won’t have sung until ZIRP and QE are fully unwound.

This full normalization is epic in scope, and will take the Fed years to accomplish.  Stock traders don’t appreciate how extremely anomalous both interest rates and the Fed’s balance sheet are today.  This chart reveals the scary truth.  It looks at the Federal Funds Rate and yields on 1-year and 10-year US Treasuries over the past 35 years or so.  And the Fed’s balance sheet since it was first published in 1991.

The inflection points in interest rates and money supplies driven by the advent of ZIRP and QE are just massive beyond belief.  Short rates totally collapsed near zero, and the Fed’s balance sheet skyrocketed into the stratosphere.  The most extreme monetary policies in US history aren’t going to normalize easily.  And this process is going to cause great financial pain as stock and bond markets are forced to mean revert lower.

Through its overnight Federal Funds Rate, the Fed utterly dominates the short end of the yield curve.  Note above how yields on 1-year US Treasuries track the FFR nearly flawlessly.  So just like during past Fed rate-hike cycles, the rising FFR is going to push up the entire spectrum of short-term interest rates.  And this normalization process will require a long series of rate hikes, not just today’s popular “one and done” fantasy.

The very word normalization denotes something manipulated away from norms returning back to those very norms.  So defining “normal” FFR levels is important to get an idea of how high the Fed is going to have to hike.  Since late 2008’s stock panic scared the Fed into going full-on ZIRP for the first time ever, everything since is definitely not normal.  Nor were the super-high rates of the early 1980s, the opposite extreme.

But between those two FFR anomalies was a 25-year window running from 1983 to 2007.  This quarter-century span is the best measure of normal we can get in modern history.  It encompasses all kinds of economic and stock-market conditions, including multiple severe crises.  Throughout all of it, the Federal Funds Rate averaged 5.5% on a weekly basis.  That is normal, where the Fed will eventually have to return.

While today’s hyper-complacent stock traders are fixated on the Fed’s first rate hike in 9 years, that’s only 25 basis points.  The Fed needs to do a full 550bp of hikes!  At a mere quarter-point at a time, a full normalization would take 22 hikes!  And that’s probably how it will play out, as the Fed is too scared of roiling stock traders to hike faster.  The last Fed rate hike exceeding 25bp happened way back in May 2000.

The Fed’s policy-deciding Federal Open Market Committee meets 8 times a year, and only raises rates at those scheduled meetings to minimize the risk of shocking the markets.  So the 22 quarter-point rate hikes required for full normalization would take nearly 3 years without any interruptions!  That’s an awfully-long time for higher rates and the resulting bearish psychology to weigh heavily on lofty stock markets.

Despite the one-and-done hopes of stock traders today, it’s really risky for the Fed to start and stop rate hikes in an erratic fashion.  The more unpredictable any tightening cycle is, the more damage it will do to stock-market sentiment.  So this coming rate-hike cycle is likely to play out like the last one between June 2004 to June 2006.  Over that 2-year span the Fed hiked 17 times more than quintupling the FFR to 5.25%!

While slashing the FFR to zero manipulated the short end of the yield curve, the Fed’s utterly-monstrous purchases of US Treasuries actively manipulated the long end.  The FOMC was very open about this mission, including a sentence about QE in its meeting statements that read “these actions should maintain downward pressure on longer-term interest rates”.  Excess bond demand forces long rates lower.

Since the dawn of the ZIRP and QE era in early 2009, the yield on benchmark US 10-year Treasuries has averaged just 2.6%.  This rate is exceedingly important to US economic activity, as it determines the pricing of mortgages.  Artificially-low long rates have led to artificially-low mortgage rates, which fueled a boom in housing-related activity just as the Fed intended.  A full normalization will totally wipe this out.

In that quarter-century span between the early 1980s rate spikes and the 2008 stock panic’s introduction of ZIRP, yields on 10-year Treasuries averaged 6.9%.  That is fully 2.6x higher than today’s manipulated levels!  As the Fed normalizes its balance sheet by letting its QE-purchased bonds mature and roll off, long rates will absolutely return to normal levels.  And the market and economic impacts will be adverse and vast.

In mid-June, 30-year fixed-rate mortgage pricing climbed back over 4.0% as 10-year Treasury yields regained 2.4%.  That’s a 1.6% premium over what the US government can borrow for.  So when 10-year Treasury yields are fully normalized in the coming years, 30-year mortgage rates will likely soar to at least 8.5%!  That’s certainly not unprecedented, these rates averaged 8.1% throughout the entire 1990s.

That wealth effect the Fed fears slowing consumer spending applies to housing prices even more so than stock-market levels, since far more Americans have most of their wealth in houses than in stocks.  Mortgage prices more than doubling would have a drastic impact on house prices, since people could only afford to borrow much less.  So the debt-fueled real-estate boom is going to collapse as rates normalize.

Bond prices will crater too.  Regardless of the yields bonds were originally issued at, they’re bought and sold in the marketplace until their coupon yields equal prevailing rate levels.  So traders will dump bonds aggressively as rates mean revert higher, leading to steep losses in principal for the great majority of bonds that are not held to maturity.  And the Fed’s selling as it normalizes its balance sheet will exacerbate this.

As the chart above shows, the Fed’s balance sheet naturally rises over time as this central bank inflates the supply of US dollars.  But its pre-QE trajectory was well-defined and relatively mild.  Once the Fed reached ZIRP and could cut no more, it launched QE which led to a balance-sheet explosion.  This too will have to mean revert dramatically lower in the Fed’s full normalization, with terrifying bond-market implications.

In the first 8 months of 2008 before that once-in-a-century stock panic, the Fed’s balance sheet was averaging $849b.  At its recent peak level in mid-February 2015, all those years of QE bond buying had mushroomed it to $4474b!  That’s a 5.3x increase in just 6.5 years.  The great majority of that has to be unwound, or that vast deluge of new dollars will eventually lead to massive and devastating inflation.

If the normal trajectory of the Fed’s balance sheet before the stock panic is extended to today, it suggests a normal balance-sheet level of around $1100b.  To return to there from today’s incredibly-high QE-bloated levels would require a staggering $3329b of bond selling from the Fed!  Even though it will take years for this to unfold, $3.3t of central-bank bond selling will force bond prices much lower.  And thus rates higher!

Higher rates won’t just decimate the bond markets, but also wreak havoc in today’s super-overvalued and radically-overextended stock markets.  Higher rates hit stocks on multiple fronts.  They make shifting capital out of stocks into higher-yielding bonds more attractive, leading to capital outflows from the stock markets.  The higher debt-servicing expenses also directly erode corporate profits, leaving stocks more overvalued.

But today’s main stock-market threat from rising rates is their impact on corporate buybacks.  These are the primary reason why the S&P 500 level so perfectly mirrored the ballooning Fed balance sheet of recent years.  American companies took advantage of the artificially-low interest rates to borrow vast sums of money not to invest in growing their businesses, but to use to buy back and manipulate their stock prices.

Last year for example, stock repurchases by the elite S&P 500 companies ran a staggering $553b!  That was their highest level since the last cyclical bull market was peaking in 2007.  Since these buybacks are largely financed by cheap money courtesy of ZIRP and QE, the Fed’s normalization is going to just garrote buybacks.  And they are the overwhelmingly-dominant source of capital chasing these lofty stock markets.

So the massive coming normalization of interest rates and the Fed’s bond holdings are very bearish for stocks as well as bonds.  That’s one reason why traders are so pathologically fixated on the next rate-hike cycle.  The smart ones know full well that it will end this Fed-conjured market fiction and lead to enormous mean reversions lower in both stock and bond prices.  Full normalization will spawn a bear market.

Ironically the asset class that will benefit most from rate hikes is the one traders least expect, gold.  The conventional wisdom today believes gold is going to get wrecked by rising rates since it has no yield.  But just the opposite has proven true historically!  Gold is an alternative asset, and demand for these critical portfolio diversifiers soars when conventional stocks and bonds are struggling.  Like during rate hikes.

During the Fed’s last rate-hike cycle between June 2004 and June 2006 where the Federal Funds Rate was more than quintupled to 5.25%, gold actually soared 50% higher!  And in the 1970s when the Fed catapulted its FFR from 3.5% in early 1971 to a crazy 20.0% by early 1980, gold skyrocketed an astounding 24.3x higher!  Higher rates really hurt stocks and bonds, rekindling investment demand for alternatives.

The Fed’s inevitable coming full normalization of ZIRP and QE is going to be vastly more impactful than traders today appreciate.  When interest rates rise and the Fed’s bond holdings fall, there’s no way that stock and bond prices are going to remain anywhere near today’s lofty artificial central-bank-goosed levels.  The full normalization is going to greatly alter the global investing landscape, creating a minefield.

The bottom line is the Fed’s post-stock-panic policies have been extreme beyond belief.  They have led to epic distortions in the global markets.  These markets are going to force the Fed to fully normalize the wildly-anomalous conditions it created with ZIRP and QE.  And with interest rates and the Fed’s balance sheet at such extreme levels today, the coming normalization will be very treacherous and take years to unfold.

Today’s euphoric stock traders believe ZIRP and QE have been huge successes, but the jury is still out until they’ve run their courses and been fully unwound.  The most-extreme monetary experiment by far in US history is just at half-time now, the fat lady hasn’t even taken the stage.  The full normalization of ZIRP and QE is likely to be as negative for stock and bond prices as its ramping up proved positive for them.

 

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Sat, 07/04/2015 - 16:12 | 6269690 Pinto Currency
Pinto Currency's picture

 

 

The Fed has destroyed the US economy.

Sat, 07/04/2015 - 16:28 | 6269724 Captain Debtcrash
Captain Debtcrash's picture

That’s why they won’t normalize, they will either stay on the same path till the markets break or usher in a new system, like these. There is no return to the economy of 20, 40 or 60 years ago.

Sat, 07/04/2015 - 16:43 | 6269755 rccalhoun
rccalhoun's picture

rate normalization?  lol.  zero chance.

Sat, 07/04/2015 - 17:18 | 6269831 two hoots
two hoots's picture

I think: The Fed will change/morph itself into something, not restricted by US jobs/inflation, that has a larger global role/oversight to base its decisions and demonstrate its power.  Today's article on the BIS gave me the idea after reading that 60% global economic stuff is $ based.   With China/Russia flexing their currency on the world stage I see the Fed taking on this challenge (which will lead to no good).   The BIS must feel somewhat threatned with challenging currencies that go against their $/EURO contorlled interest.  I am just making this up but the peices are real.  Like the TPP, it will be secret legislation but considered a necessity given financial wars being waged.  Taxpayers will again pick up the tab and have to repair the $4T+ carnage the Fed left us.  Telling myself......come'n back....come'n back.

 

Sat, 07/04/2015 - 17:41 | 6269880 Captain Debtcrash
Captain Debtcrash's picture

Two hoots, 

You need to determine what you think will happen, and what the powers that be will do, based on the facts you see before you and history.  Because one thing is for sure THEY are not going to tell you what's going to happen.  They will call your rational conclusions Conspiracy Theory, and while your conclusions might be wrong, the proper research in developing them will keep you more informed than the main stream media, who are more likely to not just give you the wrong information, but lead you in the complete opposite direction from the truth. 

Sat, 07/04/2015 - 18:57 | 6270086 two hoots
two hoots's picture

I know:   I need a spell checker.

Sat, 07/04/2015 - 19:10 | 6270113 Kaervek
Kaervek's picture

They have the choice between hyper-inflation and hiking rates. Maybe a combination?

There is no escape from the fundamentals, the human race would have to grow faster than they can print money.

Sat, 07/04/2015 - 19:35 | 6270182 elephant
elephant's picture

Then I say they will have to raise rates. If hyper-inflation is the endgame, the central banks' assets would become worthless. Meanwhile, the typical in-debt-up-to-their-eyeballs Americans would be granted debt jubilee.  I don't see such altruism in central bankers' hearts.

Is my reasoning flawed?

Sat, 07/04/2015 - 19:41 | 6270196 pitz
pitz's picture

Yes, because the debt of most Americans is short-term in nature.  Even the government has swapped most of its long-term T-Bond issuance for short-term T-Bill issuance.  Only long-term debt is diminished in hyperinflation. 

Interest rate sensitive assets, namely RE, crashes during a hyperinflation. 

Sat, 07/04/2015 - 23:46 | 6270817 Nexus789
Nexus789's picture

More like central planning fail... they should blindfold Yellen and throw a dart at a dartboard and pick the number that comes up.

Sat, 07/04/2015 - 18:25 | 6270016 razorthin
razorthin's picture

Or the people will usher in their own new systems.  Enter BitCoin and BitGold.

Sun, 07/05/2015 - 10:12 | 6271554 fattail
fattail's picture

That's what happens when the solution for overcapacity and lack of demand is to lower interest rates so that the overcapacity can be maintained and aggregate demand can be pulled forward.  Of course you have to borrow money to do this, because tax revenues have crashed along with the economy.  Which isn't a problem because rates are low but cashflow hasn't really improved much except for the extra trillion a year the government spends that goes write into the gdp calculation.  Of course all of the future demand that is pulled forward just leaves a dearth of demand in the future, exacerbating the economic problems, but that is someone else's problem at a later date.  Can successfully kicked.  But once rates rise the debt must be repaid and the government spending curtailed and that comes right off the top of GDP.  Commence can kicking exercise version 2.

The deflationary death spiral has not been avoided, only delayed.  Which I am grateful for, because I have been able to get my financial house much more in order.  

The key to timing seems to be when the marginal return on the debt drops below 0, which it has.  However, that does not take into account the volume of money being thrown at the economy, or the misinformation from the MSM, BLS, NAR, and other contributors to the ministry of truth. 

I don't understand how he wrote that entire article with out mentioning the $18trillion abomination.

Sat, 07/04/2015 - 16:14 | 6269692 JustObserving
JustObserving's picture
Fed's Full Normalization Will Crush The Casino

Pigs will fly and Hillary will speak the truth before rate normalization in the land of the fiat.

No rate normalization during my lifetime Bernanke

Sat, 07/04/2015 - 18:45 | 6270058 Tall Tom
Tall Tom's picture

Then can we shorten Bernanke's lifetime to solve the problem?

Sat, 07/04/2015 - 16:15 | 6269697 junction
junction's picture

IN ZIRP WE TRUST

-NWO, SEC, Warren Buffett, Satan

Sat, 07/04/2015 - 16:23 | 6269709 rbg81
rbg81's picture

We are going to NIRP.  It's inevitable.  While Greek depositors may be taking an immediate 30% haircut, American depositors will be treated to a 1-2% annual haircut forever.  The "bond vigilantees" will do nothing.

What most people fail to understand is that we are now in the post-Capitalist era.  It is no longer about traditional economic growth--that is dead.  It is about keeping the Entitlement State going.  Or, more to the point: maintaining the illusion that the Entitlement State promises are being kept.  

With NIRP, in theory, borrowers get PAID to borrow, especially AAA ones.  So instead of paying for the deficit, the goal is for the Government to make $$ off the deficit.  The bigger the deficit, the more it will make.  How convenient, huh?  It will allow the Socialists to hand out ever more goodies (on paper anyway).

And business will lap it up.  Why?  Because they want MOAR customers.  They have ceased to care if those customers are actually productive citizens.  In fact, they may prefer that they're not, because productive citizens will need to make a LIVING WAGE.  It's probably better for them to have Welfare zombies buying their products with $$ given to them by the Government.  Simultaneously, the Government can pretty much provide all the bennies for their employees, including healthcare and EBT cards.  It's a win-win.

An increasingly small handful of elite companies (Apple) will still churn out the products that to keep the sheeple occupied & distracted.

It's the Nu-Nurmal.

Sat, 07/04/2015 - 17:05 | 6269807 pitz
pitz's picture

Exactly.  Only thing is, nobody will actually lend at negative interest rates.  So effectively the economy will de-leverage, and eventually the supply side will be destroyed enough through such de-leveraging (ie: no investment) that it will tip from deflation into strong inflation.  Especially if foreign demand, ie: the trillions in US T-Bond issuance, starts flowing back to the US to buy US produced goods and services. 

 

Sat, 07/04/2015 - 18:08 | 6269969 rbg81
rbg81's picture

Nobody will actually lend at negative interest rates.

----------------------------------------------------------------------

Not quite.  The banks will increasingly have one primary set of customers:  Governnments, especially the US Government.  In turn, Government bureaucrats will distribute funds to favored companies using loans, contracts, ane even outright grants.  There will be a few nominally consumer companies (eg., Apple, GM, etc), but this will just be to maintain the illusion of free enterprise around the Socialist behemoth.  

And its all probably inevitable. AI, automation & other disruptive technologies (3D printing) are increasingly replacing the traditional workforce.  In the end, the only people working will be the engineering elite, the people at the bottom (wait staff, physical laborers for hard-to-automate tasks, and sex workers), some skilled professions (plumbers, electricians), law enforcement/military and (of course) bureaucrats/politicians.  But companies will still need to sell their products, so the only way for most people to buy them will be through entitlement payments.  So, NIRP will be an effective tax on the productive to keep the rest of society afloat.

Sat, 07/04/2015 - 19:27 | 6270158 Kaervek
Kaervek's picture

This can't work for a very long time, can it?

All the wealth you transfer out of the working and middle class will at some point manifest as a massive loss of buying power and/or massive devaluation of virtually any assets they might possess forcing your so called "economy" to implode. Unemployment is already out of control, yet it will get worse if they continue this farce.

We will either have to tax the rich on their stolen wealth or let the poor starve to death. (Probably a combination)

There is enough for everyone, only not in our current system. Long european luxury car manufacturers?

Sat, 07/04/2015 - 19:53 | 6270221 rbg81
rbg81's picture

If the Government can keep printing and distributing $$ with impunity, then it can last generations. Of course, there is the boogeyman of hyperinflation.  But all the Western governments are essentially in the same fix:  they have made too many promises that they can't afford.  So, there will be massive collusion to prevent hyperinflation.  The only fly in the oinment is BRICS....and maybe the Black market.

Remember, the old Soviet Union lasted for 70 years and might not have fallen if it were not competing with the West.  The long(er) term goal is a ingle, Global, Bureaucratic State for which there is no escape.  On the flip side, the vast majority will be poor & unemployed, but relatively comfortable with free housing, food, healthcare, and all the entertainment choices you could dream of.  All they will really have to do is eat (consume), shit and watch Internet porn.  Docile as Hindu cows--especially in the voting booth.

Sat, 07/04/2015 - 19:54 | 6270226 FredFlintstone
FredFlintstone's picture

Will we have golf courses to play on?

Sat, 07/04/2015 - 20:33 | 6270326 rbg81
rbg81's picture

My Magic 8 Ball says:  Try Again Later.

Sat, 07/04/2015 - 20:49 | 6270359 daveO
daveO's picture

The USSR was taken down due to a lack of western currency, after the oil price collapse in the mid-80's. They were importing too much and owed too! Hmm, sounds familiar. 'Cept this time the MSM will label it the death of Capatilism, lol. It's always the debt. The banksters suck one country, after another, like vampires. The US debt has already gone parabolic. US, what do you want on your tombstone?

http://www.youtube.com/watch?v=vKspf06XuaQ

Sun, 07/05/2015 - 08:12 | 6270411 rbg81
rbg81's picture

You see the Government facilitating massive immigration of people who really have no skills for a modern economy.  Many are also security risks.  As such, they will be a net drain on Government resources for the foreseeable future.  So, while we are effectively BROKE, we continue to import clients of the Entitlement State (and prison system) by the millions annually.  There are four (4) solid reasons that explain this counter-intuitive phenomenon:

1.  The Govenment will give these people $$ to shop at places like Walmart, causing the economy to be stimulated.  That is, they are mechanisms to ensure the velocity of money.  The fact they don't actually earn the $$ they are spending is of no concern to the corporations that profit from their business.

2.  Form a political power block.  Legal or not, these people WILL vote to ensure their benefits continue to flow.

3.  Drive down wages for the low end of the labor force.  This will impoverish even more working poor.  But no worries:  as newly minted clients themselves, they will start voting Democratic.

4.  Ensure the continued growth & power of the Entitlement State.

Sun, 07/05/2015 - 10:41 | 6271660 fattail
fattail's picture

it does not matter who they vote for red or blue, D or R,  they are all owned by the same set of corprate masters.  Agree with the rest of what you say.

Sat, 07/04/2015 - 23:57 | 6270834 Nexus789
Nexus789's picture

Printing could have continued indefinitely. This strategy has a limit now with the emergence of the Russo/China trading block. There will be a point in time when holders of US denominated assets move out of those assets to the new economic block as sentiment changes and especially if its currency is backed by gold. The Dollar could lose a significant percentage of its value very quickly.

Sun, 07/05/2015 - 07:51 | 6271214 rbg81
rbg81's picture

Concur.  As I stated, BRICS is definitely a fly in the ointment.  It is one of the few wildcards that could unravel the whole thing.  Ironically, Russia and Chine could be the bulkward to keep us from going full Commie.

Sat, 07/04/2015 - 17:49 | 6269912 OC Sure
OC Sure's picture

Of course we are going to Nirp. That breakaway gap in equities and pregnant lady in bonds on the weeklies didn't just appear for no reason. 

Sat, 07/04/2015 - 18:49 | 6270064 lasvegaspersona
lasvegaspersona's picture

Problems will become obvious when the goodies can't be delivered.

The US government relies upon the kindness of strangers (like China and the Saudis) to keep the socialist paradise going. Anyone can buy our bonds but unless we can get stuff with the purchasing currency...it is useless. 

Imagine Zimbabwe buying bonds in 2006...

Sat, 07/04/2015 - 19:59 | 6270242 pitz
pitz's picture

Not only the kindness of strangers, but even the kindness of certain US corporations (such as Apple) who basically are hoarding USD$ instead of paying out to their shareholders to be promptly spent. 

 

Sat, 07/04/2015 - 20:38 | 6270334 rbg81
rbg81's picture

Both China and Saudi Arabia depend on the Western world:  we are their biggest market.  Sure, they could call Bullshit, but that would cause massive problems for them too (neither China nor Saudi Arabia are all that stable).  Ultimately, they will keep on pretending that our $$ is worth something because its the past of least resistance.  

Sun, 07/05/2015 - 11:32 | 6271854 fattail
fattail's picture

That is the key.  China and Saudi playing nice.  Lately though, they don't seem to be playing so nice.  Especially if we cut a deal with Iran...  

Sat, 07/04/2015 - 16:26 | 6269711 Soul Glow
Soul Glow's picture

QE4 EVA and ZIRP 4 LIFE QE$$$$$EEEE BITCHEZ!

:)

Sat, 07/04/2015 - 16:23 | 6269716 Roanman
Roanman's picture

Skip Goldseek. Go to Zealllc.com for Alexander Hamilton. He does good work. Personally, I'd have gone with Andrew Jackson for my psuedonym, but maybe he really got hung with it from misguided parents. You never know.

Sat, 07/04/2015 - 16:38 | 6269744 JohnGaltsChild
JohnGaltsChild's picture

The fat lady has been singing since 1971.

It's just a long ending.

Sat, 07/04/2015 - 20:56 | 6270380 daveO
Sat, 07/04/2015 - 16:47 | 6269765 XRAYD
XRAYD's picture

The people who made the money by creating the financial crisis, are doing so now with the Fed "extreme intervention" - and whenever "normalization" happens in any form, they will make money once more and come out on top.

The "everyday" Americans are already their slaves!

Sat, 07/04/2015 - 16:55 | 6269786 disabledvet
disabledvet's picture

Slaves to the Taxman would appear.

But again..."swimming in dollars in dollar land." Withou any growth in the economy...and indeed outright BANKRUPTCY in a time of plenty "who knows what Wall Street is up to?"

But of course...who gives a fuck?

If interest rates explode higher so much the better would a appear...

Sat, 07/04/2015 - 17:01 | 6269792 falak pema
falak pema's picture

zero sum games are in fact more "everybody loses" games; as they destroy more than the face value of their wealth : the money line; they destroy the fabric of society.

Anybody who thinks that the human condition is not central to the workings of society is a fool. Money has one master : power.

the only question is whose human condition do we try to ameliorate; those of the 1% and their henchmen; the neo-feudals now crawling out of the woodwork;  or those of the 99% and their faceless wonders?

And that is the stuff of social fracture and conflict. It is supposed to be a game of debate and voting, this conflict. But when the stakes get too high then "we all have to cheat" and zero sum becomes "out come the guns". And that is a return to eternal Troy.

We are heading to one big one after the last big one of WW2.

To pretend the people are sheeple is to admit we are above reproach if we don't identify with them. We consider ourselves as unattainable as Achilles.

We even forget his heel. Ha! 

Sat, 07/04/2015 - 17:03 | 6269801 pitz
pitz's picture

The economy hasn't, and won't justify any interest rate hikes for many years to come.  However, in the absence of future interest rate cuts, the FIRE economy is basically doomed.  It can't really survive on just spreads alone -- it needs the capital gains from the constant upwards repricing of interest rate sensitive assets.  Raising short term interest rates would likely just invert the yield curve at this point, requiring loosening.

 

Sat, 07/04/2015 - 17:31 | 6269865 NoPension
NoPension's picture

It's been a good run. All in all, a great time and place to have been born. The USA, from the 60's to now. Prosperous, peacefull, food, amenities once only available to kings.
I'm going to try to start to chill out. My wife is a clueless moron, could not give a shit. Bless her. Ignorance is truly bliss. And why should I ruin it?

We are on a road to ruin. Have been. CNN special was on, I had to leave the room. Poppy Harlow. I'd do her. Anyhow, " Why, if the economy is Sooo good, are so many on food assistance?"
Then they start. And I just want to shoot the fucking TV. 31 yo obese mother. 4 kids, between 8 months and 12 to. No father. Not even a mention. She lost her job, last year. Yeah, right. Boo, fucking hoo.
And I can't help it. I'm thinking, first, sterilize this beast. And as they go on, you realize, it's a whole industry ,gov supported, to maintain these useless fucking people and their useless fucking halfwit kids. Feed them Brawndo, it's got electrolytes. I'm goin' fuck all y'all.

Is something wrong with me?

Sat, 07/04/2015 - 18:54 | 6270074 Tall Tom
Tall Tom's picture

 My wife is a clueless moron, could not give a shit. Bless her. Ignorance is truly bliss. And why should I ruin it?

 

Because you are not going to be around forever...

 

You do not express any respect for her by calling her a clueless moron. How can you love somebody you do not respect?

 

You may die prematurely. You have no clue as to what is in the cards of fate...for you...for her...and more importantly for your children...your future.

 

It is your DUTY to awaken her to the cruelty and wickedness that is forthcoming. I know that it may be painful for her to see it. But she really needs to be able to weather the storm especiallyif you are not around.

Sat, 07/04/2015 - 19:16 | 6270128 Jumbotron
Jumbotron's picture

Sorry Tall Tom.  I have to agree with the fella.  I have a clueless wife as well.  Clueless friends and family.  Clueless job mates.  Only my kids are left that are heeding my message when I give it to them in age appropriate measures.  And who knows how it will stick.

Sometimes.....you just have to let go like Lot and let them burn to salt.  If you don't save yourself.....you can't save someone who truly deserves it and comes to you in their direst need full of revelation in their minds and true change in their hearts.  For the rest who want to look back or even stay in Sodom and Gommorah.......screw em.   But for you......you'd better run.  And if they don't take the hint.......screw em.

Sat, 07/04/2015 - 21:50 | 6270521 Arnold
Arnold's picture

One must make accommodations to move through the New World.

I am reminded of Burgess Meridith  on the library steps without his glasses by the Three of you.

https://en.wikipedia.org/wiki/Time_Enough_at_Last

Sat, 07/04/2015 - 20:09 | 6270265 FredFlintstone
FredFlintstone's picture

If so, then I have the same ailment. I have an employee who has a morbidly obese wife who can't stop eating ice cream, Sonic milkshakes. She had both knees replaced. I doubt she ever really had to work a day in her life. Never really contributed to society in a productive way. We all had to pay for her fucking over-priced surgeries. Why can't we at least require her to get to say a BMI of 40 or so before wasting that kind of national resources?

You see a 70 year old, obese woman on the front page of the paper holding two handfuls of pills with the sob story of how she can't afford all of her "meds". What sorry souls. Some are getting rich off this shit and the government loves it because they get their cut as it keep this fake economy going. I go in for a physical maybe every 5 years for some reason (mostly my wife bitching, not it may become an incentivized health insurance thing soon) and I see a waiting room full of old people sitting there for some reason. Are they lonely and seek the attention of medical professionals? I feel like standing up and announcing that they should all go home and enjoy what few years they might have left and quit fretting about any perceived ailments. "Doctor, my body aches"...no shit you are 80 years old. We all subsidize this bullshit through medicare and medicaid.

Sun, 07/05/2015 - 11:11 | 6271765 fattail
fattail's picture

No there is nothing wrong with you.  

Critical thinking skills have been disparaged as mean spirited because they don't account for the endless excuses the useless eaters have for their pitiful plight and lot in life.  That's why you question if there is something wrong with you.  

Ask yourself what happens to that beast and her useless loser spawn when the ebt card goes dry.  See....  there is something wrong with her, not you.

Sat, 07/04/2015 - 17:39 | 6269888 GotGalt
GotGalt's picture

Rate normalization?  LMMFAO

 

World War III will start and nuclear weapons will be flying all over the place before full rate normalization happens in ANY of the developed nations with massive debt obligations.

Sat, 07/04/2015 - 17:49 | 6269913 fowlerja
fowlerja's picture

Wow...that was alot of information to suck up and digest...any way to kind of summarize the big picture?

My eyeballs and brain say thank you...

 

Sat, 07/04/2015 - 21:41 | 6270407 daveO
daveO's picture

I like his charts, but he always types too way many words. The chart says more than he does, anyway, so I usually just scan the first sentence of each paragraph. The debt has gone parabolic! Therefore, normalization won't happen.

http://www.mvass.com/wp-content/uploads/2012/07/publicdebtchart68.bmp

http://1.bp.blogspot.com/-afBLqb8OMYs/UVr1VZIcFOI/AAAAAAAAAKg/OrfU9-clY5...

And it ain't your father's debt. Gov./GDP has jumped;

http://blogs-images.forbes.com/joshbarro/files/2012/04/spending-GDP-char...

Sat, 07/04/2015 - 17:58 | 6269936 VW Nerd
VW Nerd's picture

I hear lots of MSM commentators calling 16000 a buying opportunity.  Until it drops below 6000, I'll watch.  I don't consider an honest PE above 10 a good investment.  Sorry....

Sat, 07/04/2015 - 18:52 | 6270069 Hohum
Hohum's picture

UST 10 year won't be over 3% for more than six months.  Forever.  Depression will take hold.

Sat, 07/04/2015 - 18:55 | 6270073 honestann
honestann's picture

BS!  What you call "normal" has been completely destroyed, and shall never return again.  The "new normal" will just get worse, until the dollar no longer exists.

Any "new dollar" will have no semblance to the current dollar, just as the current dollar has no semblance to the original dollar (which was a SILVER dollar coin).

Sat, 07/04/2015 - 19:04 | 6270099 lotsoffun
lotsoffun's picture

The fed iis never going to normalize anything. The game is over, now just when do all the drunks go home. Question is after the orgy, who smashes their car first on the way home.

Sat, 07/04/2015 - 19:23 | 6270148 Herdee
Herdee's picture

Bernanke himself openly said that he never expects interest rates to normalize during his lifetime.At his age,I'm guessing that he has at least 30 years left to live.

Sun, 07/05/2015 - 08:56 | 6271357 d edwards
d edwards's picture

barring any nail gun accidents.

Sun, 07/05/2015 - 08:10 | 6271241 eishund
eishund's picture

what does normalize mean? not in my dictionary.

Sun, 07/05/2015 - 08:27 | 6271270 22winmag
22winmag's picture

I didn't witness any bread lines or sidewalk soup kitchens during 2008, did you?

 

Best chart ever by the way.

Sun, 07/05/2015 - 09:51 | 6271499 fattail
fattail's picture

Did I miss it or did he write that entire article and not mention the $18 trillion of debt that will be getting rolled over at higher rates increasing interest expense and the budget deficit every year until they stop reporting it?

Sun, 07/05/2015 - 10:41 | 6271659 Hope Copy
Hope Copy's picture

There is no reason other than the US Congress turning against the Federal Reserve Bank (Nationalising it and in other words communism) to sell back any bonds or T-Bills.  The results are unavoidable in the long run.  Stagflation.. like any nation that has tried this monitary stunt.

Mon, 07/06/2015 - 09:05 | 6275910 PleasedToMeatYou
PleasedToMeatYou's picture

"...Congress turning against the Federal Reserve Bank (Nationalising it and in other words communism)"

Down arrowed for that one.  I don't think we were commies before 1913, but we swing in that direction now as the bankers control ever more of our economy and governments globally. 

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