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If You Doubted The Central Bankers' Brave New World, You Were Right
Submitted by Lee Adler via The Wall Street Examiner,
Ben Bernanke and his cohort central bankers built a Brave New World (SOMA, SOMA, SOMA!) where central bank money printing would boost stock prices and the wealth created would trickle down to workers and cause a booming economy. If you doubted that, you are now seeing proof that maybe this world was a little bit of Lewis Carroll’s Alice in Wonderland along with the Aldous Huxley. Here’s what that could mean for your trading and investments now.
The Fed’s balance sheet remained virtually unchanged last week as the central bank finished up its regular mid month MBS purchase settlements, offsetting some creative and mysterious spaghetti pushing that cut assets. The Fed recorded a $15 billion drop in other assets, along with a long footnote about a few of the old alphabet soup programs that were instituted in the wake of the financial crisis. Most of these have been consolidated into the Fed’s standard balance sheet line items. The $15 billion reduction in “other assets” smells like a write down of the dregs of those special purpose programs that were never repaid. In today’s balance sheet terms, that’s not even a rounding error.
And so the games go on. The Fed entices the banks to move money from their regular deposit accounts (aka reserves) to RRP accounts or Term Deposits with the incentive of an extra basis point or two above the interest paid on excess reserves (IOER). They are supposedly testing the “operational readiness” of these programs as tools to raise interest rates. In reality, shifting excess funds from one balance sheet line item to another, with only difference between them being an infinitesimal difference in the required holding period, is a shell game. To the holders of the funds it’s all short term money, readily accessible, if not in an instant, in a day. And since they are excess funds for which they have no use, what difference does it make what they are called or whether they are demand deposits or 7 day term deposits?
If the FOMC really thinks these measures will work to raise interest rates by PAYING banks more income on excess funds, then the Fed is even crazier than I thought. Of course, the stock market seems likely to make the whole question of raising rates moot for the foreseeable future as stocks plunge and Treasuries rally.
Once the Fed stopped outright purchases last October, stock prices started to top out. But the BoJ continued to print, and the ECB started printing in March. Since all major central banks pump into one worldwide liquidity pool, and all the plumbing leads to the US sooner or later, we had wondered whether that would be sufficient to bolster US stock prices.
Since this long term QE business is all historically new, we had no basis on which to judge. We also wondered whether after 6+ years of seeing QE send stock prices higher, if at some point that would no longer work. I viewed the collapse of gold and oil as templates or signals that at some point the same thing might happen to stocks, but we couldn’t be sure.
It was the same when the Fed started outright purchases of Treasuries in March 2009. I thought it would work to push stock prices higher, but couldn’t be sure until we saw it working. By April 2009 it was clear to me that the fix was in, that it was working and would continue to work. The technical analysis told us that.
Now we are seeing the mirror image. We had wondered whether central bank money printing by two of the Big Three, with the Fed sitting on the bench, would be enough to keep stock prices bubbling away. The answer is now clear. They are not. The technicals are unequivocal, as I have chronicled in our Daily Market Updates. The money created by the BoJ and ECB isn’t sufficient to counter the capital destruction being forcibly exported out of China by the Margin Call Heard Round The World.
The biggest players in the China pool are outlawed from selling there so they use the rest of the world as a liquidity sink. The margin calls that have already happened have extinguished massive amounts of margin debt, and margin debt is money. That’s money that is no longer available to goose markets. The illusionary collateral that backed it has disappeared.
Regardless of how long the actual margin destruction goes on, the mindset of the major dealers and leveraged speculators around the world has shifted from generating bubble profits by marking up prices, to generating profits on the short side, and if conditions are adverse enough, to self defense. That entails deleveraging, thereby extinguishing money.
With collateral devaluation and diminished appetite for risk on the upside the world has changed. QE has been defanged. The players who have access to it will now use it largely to pay down other debt, and thereby extinguish the money that came into being when that debt was issued. At best we will be on a treadmill but the potential is great for the unfolding of the worst bear market in modern history.
The game of central bank market rigging has run its course. This brave new world we have witnessed is really the same old world, only stretched and distorted beyond recognition. We who have believed that when you stretch conditions too far, they revert violently, are probably in the process of being proven correct.
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collateral? What is that? Some sort of mythical thing that exists in the physical realm?
yeah... and how come we never talk about rehypothecation any more ?
The Author says: "Since this long term QE business is all historically new ..."
New, my ass. Theft of the public treasury has been going on for thousands of years.
The cumulative size of the bilateral and tri-party repo markets are estimated to be up to $10 Trillion dollars. US Treasury securities used as collateral for these transaction may account for about two-thirds of that repo market (and much of the rest is government-guaranteed Agency debt and Agency Mortgage-Backed Securities (MBS). The Fed has painted itself into a corner concerning interest rates due to the fact that a hike in rates will have a cascade effect in the repo markets as bond prices begin to fall as yields rise. This will cause a calamitous chain reaction, as collateral value will erode and institutions will need to provide more collateral to maintain positions. The Fed cannot raise rate and it knows it.
If your going to try financial engineering, You might want to use real engineers instead of Keynesian crack dealers.....
Nice, but you'd have to establish real numbers first.
As an old tech, I wouldn't trust or touch any thing available with your fingers.
The real numbers are out there. but you have to look for them. All the raw data they use is not hard to find. but sheep attention span's are too short to look for them.....
mr knuckledragger 10--- is that the same as a queer kenyan krackhead?
QE has been defanged.
I'll believe it when I see it. They'll probably just put a new name on the same old tactics. Perhaps "MS" - Monetary Soothing - will be the next idiotic acronym. Whatever it is, it will be a continued debasement of the doomed fiat currency. Bring it on - the sooner the better.
What we need is deficit spending for a good war to provide plenty of collateral for the system. Who cares how many proles are killed as long as the portfolio looks good?
Ben Bernanke and his cohort central bankers built a Brave New World (SOMA, SOMA, SOMA!)
For the semi-literate:
Fictional Soma
Fed SOMA
I was expecting a link to Huxley, not Zoroastrian and Hindu hallucinogenic history.
So, do you think were they being ironic with the acronym?
According to Guggenheim Partners:
http://www.guggenheimpartners.com/perspectives/media/the-monetary-illusion
As economic growth returns again to Europe and Japan, the prospect of a synchronous global expansion is taking hold. Or, then again, maybe not. In a recent research piece published by Bank of America Merrill Lynch, global economic growth, as measured in nominal U.S. dollars, is projected to decline in 2015 for the first time since 2009, the height of the financial crisis.
In fact, the prospect of improvement in economic growth is largely a monetary illusion. No one needs to explain how policymakers have made painfully little progress on the structural reforms necessary to increase global productive capacity and stimulate employment and demand. Lacking the political will necessary to address the issues, central bankers have been left to paper over the global malaise with reams of fiat currency.
With politicians lacking the willingness or ability to implement labor and tax reforms, monetary policy has perversely morphed into a new orthodoxy where even central bankers admittedly view it as their job to use their balance sheets as a tool to implement fiscal policy.
One argument is that if central banks were not created to execute fiscal policy, then why require them to maintain any capital at all? Capital is that which is held in reserve to absorb losses. If losses are to be anticipated, then a reasonable inference is that a certain expectation of risk must exist. Therefore, central banks must be expected to take on some risk for policy purposes, which implies a function beyond the creation of a monetary base to maintain price stability.
What kinds of risk are appropriate for a central bank? Well, the maintenance of a nation’s banking system would plainly be in scope, given the central bank’s role as lender of last resort. The defense of the currency as a store of value and medium of exchange is another appropriate risk. This was the apparent motivation of Mario Draghi, European Central Bank president, for his famous promise to defend the euro at all costs in the summer of 2012. The central bank balance sheet has proven a flexible tool limited in use only by the creativity of central bankers themselves.
In response to those who argue against the metamorphosis of monetary policy into fiscal policy, one need only point toward the impact of quantitative easing (QE) on interest rates. The depressed returns available on fixed-income securities, largely as a result of QE, are acting as a tax on investors, including individual savers, pension funds, and insurance companies.
Essentially, monetary authorities around the globe are levying a tax on investors and providing a subsidy to borrowers. Taxation and subsidies, as well as other wealth transfer payment schemes, have historically fallen within the realm of fiscal policy under the control of the electorate. Under the new monetary orthodoxy, the responsibility for critical aspects of fiscal policy has been surrendered into the hands of appointed officials who have been left to salvage their economies, often under the guise of pursuing monetary order.
The consequences of the new monetary orthodoxy are yet to be fully understood. For the time being, the latest rounds of QE should support continued U.S. dollar strength and limit increases in interest rates. Additionally, risk assets such as high-yield debt and global equities should continue to perform strongly.
In the long run, however, classical economics would tell us that the pricing distortions created by the current global regimes of QE will lead to a suboptimal allocation of capital and investment, which will result in lower output and lower standards of living over time. In fact, although U.S. equity prices are setting record highs, real median household incomes are 9 percent lower than 1999 highs. The report from Bank of America Merrill Lynch plainly supports the conclusion that QE and the associated currency depreciation is not leading to higher global output.
The cost of QE is greater than the income lost to savers and investors. The long-term consequence of the new monetary orthodoxy is likely to permanently impair living standards for generations to come while creating a false illusion of reviving prosperity.
They are talking about averages. Don't be average. They're clueless.
What do you mean by, "Bank"?
Sorry Lee Adler, glad you got it published.
Too many loose terms for this crowd.
'Banks' need to have some measure of 'reserve'.
You 'devalue' whatever equity holdings they have and you've got a regulation vs realism corundum that is un solvable, never mind insoluble.
US stocks can't crash. Markets are on a short leash. Will go up forever, though possibly eventually under Zimbabwe-type circumstances. Hyperinflation for the usd is hard to imagine though, with an entire global population knowing nothing but fiat, but Zimbabwe, Venezuela and others show that it is very possible. But they have been awfully good at making sure not one dime of that thin-air money ever makes it to Main St.