"We Should Have Known Something Was Wrong"

Tyler Durden's picture

Remember when stuff such as the following was written exclusively on "conspiracy" tin-foil blogs by deranged lunatics who could not appreciate the brilliance of the neo-Keynesian system and central-planning by academics, in all its glory? Good times.

Here is Bank of America's Athanasios Vamvakidis channeling Tyler Durden circa 2009

The real cost of QE

QE was not a free lunch after all

If only it was that easy to print our way out of a global crisis. Eight years after the crisis, we are still debating about whether the recovery has gained enough of a momentum to allow exit from crisis-driven policies and start hiking rates from zero. The world economy has actually lost momentum this year (Chart 1), deflation risks have increased (Chart 2), and EM indicators and overall market volatility have reached crisis levels (see Chart 3). All this is despite unprecedented expansion of central bank balance sheets (Chart 4). Things may have been worse otherwise, but in hindsight we believe relying too much on unconventional monetary policies was not a free lunch after all.

We should have known something was wrong

The Fed “taper tantrum” could have been the first warning that QE had gone too far. The Fed’s announcement in June 2013 that they would consider tapering QE, contingent upon continued positive data, triggered a sharp market sell-off, particularly in EM. The aggressive search for yield, which intensified after the Fed announced QE3—or QE infinity as markets called it—came to a sudden stop. QE was not for infinity after all. The Fed tried to reassure markets that QE tapering was still policy easing and that its end would not imply rate hikes immediately, but the markets apparently thought otherwise. A key takeaway was not that QE had already gone too far, but that announcing its tapering may have been a mistake. The Fed waited until December to start tapering, although the market had already priced its beginning in September.

The second warning sign may have been the across-the-board EM sell-off that started in mid-2014, as QE tapering was coming to an end and the market started pricing Fed tightening, a sell-off that intensified substantially this year. EM FX tends to underperform when the Fed tightens and the USD strengthens, but by early 2015 the EM FX index had reached a level below that during the global financial crisis (Chart 3). China’s devaluation made things worse in August, but the EM sell-off started much earlier. Risk assets more broadly have reached oversold levels. The market has been anxious about Fed hikes, despite pricing a very slow tightening and expecting interest rates to remain historically very low for years to come.

The point when things started going wrong

The Fed and other major central banks were the first to act when the global crisis started, and we believe their actions helped avoid another great depression. Political disagreement and brinkmanship led to a messy fiscal policy in the US and a neverending Eurozone crisis. The Fed and the ECB, successfully, came to the rescue a number of times in recent years. In Japan, the BoJ has delivered the strongest arrow from the three arrows in Abenomics, with mixed progress in the arrow on structural reforms and no progress in the arrow on fiscal sustainability. However, monetary easing is not the solution to every problem and risk in an economy – and we believe that using it when other polices may have been better used has its own costs.

At some point during Fed QE, the markets started reacting positively to bad news. In our view, this is when things started going wrong. Bad news became good news for asset prices, as markets expected more QE by the Fed. Asset prices were increasingly deviating from fundamentals, as the markets were trading the Fed instead of the economic reality. This was clearly not sustainable.

We believe QE1 by the Fed (Nov 2008) was a necessity. Without it, the world economy was heading to a new global depression. The Fed, led by the world’s expert on the great depression, did what needed to be done. The ECB took the opposite approach, avoiding QE and even hiking rates in the midst of the global crisis and again in the midst of the Eurozone crisis. The crisis got worse, the Eurozone economy still had the largest output gap in the Q10 group, and deflation forced the ECB to finally start QE this year. We are more skeptical about QE2 (mid 2011). The world had avoided a second great depression by that point. The justification was to address deflation risks and support the recovery during deleveraging. It was not clear cut—US inflation was above 2% and core inflation only slightly below—but one could see the Fed’s point taking into account the risks and empirical evidence that recoveries from balance sheet recessions are very slow. QE2 was not trying to address depression risks, but to avoid a Japan scenario. As such, we think QE2 was needed, albeit less so than QE1.

However, we are less sure about QE3. We believe this round was intended to support asset prices, with the idea that high asset prices would lead to a stronger recovery. Instead, Wall Street was increasingly deviating from Main Street, inflating asset prices. Equity prices started pointing towards a strong recovery, while bond prices were flagging a Japan scenario for the next decade. Both could not be right, and both turned out to be wrong. The recent sell-off suggests to us that the Fed underestimated the risks from strong EM inflows because of QE.

While we will of course never know what would have been had other policies been pursued, we believe that excessive reliance on unconventional monetary policies in recent years has had side effects. The recent market turmoil has shown that macroprudential measures have limited ability to deal with such side effects. Indeed, despite continued central bank balance sheet expansion (Chart 4) and further easing by most G10 central banks from already historically low policy rates (Chart 5), monetary conditions have tightened in most G10 economies (Chart 6) and global liquidity conditions have worsened this year (Chart 7). No macro-prudential measures could prevent this from happening, in our view.

We wouldn’t necessarily look at QE as the root of these issues. Less QE might have been necessary if US fiscal policy wasn’t so fractious, Europe had been faster to respond to the crisis, global policy coordination was stronger, and governments worldwide had grasped the “opportunity” of the crisis to implement structural reforms and progress in trade agreements. As the IMF has warned, we believe the world put too much burden on monetary policy. We have started seeing the consequences this year.

The above has lessons for both the Eurozone and Japan looking forward:

  • ECB QE has led to historically low periphery yields, which are not pricing sovereign risks—just think where Greek yields are going to be if the ECB starts buying GGBs. When at some point in the (likely distant) future the ECB stops QE, the adjustment in the periphery yields is unlikely to be smooth, particularly if the countries in the region have not taken advantage of the ECB easing to implement reforms. These concerns would not justify stopping ECB QE early, but we believe they do point to consequences when central bank policies force markets to ignore risks for too long and governments are not addressing these risks in the meantime—recent reform progress in Italy is encouraging from this point of view.
  • Japan could face challenges if delivery of the non-monetary “arrows” in Abenomics remains so weak. In our opinion, Japan needs structural reforms to grow and a credible long-term fiscal consolidation plan to ensure debt sustainability. We believe aggressive BoJ QE is currently kicking the can down the road, but these problems could eventually come back to haunt Japan.

Now what?

The story of the year so far may be that of a negative feedback loop leading to a bad equilibrium. First, risk assets sold-off expecting the Fed to tighten. Then, the sell-off went too far and started affecting the real economy, including in the US. Now, the Fed is not tightening as a result. However, postponing Fed tightening does not necessarily increase the demand for risk assets. We are oversimplifying, and there are certainly many other things going on, but it helps make the point.

This appears to be a new regime, in which bad news is bad news, as we wrote a year ago and reiterated recently. Fed QE does not appear to be coming to the rescue anymore. The Fed staying on hold can support risk assets in the short term, but is not as strong as QE. This is an environment with high market volatility, as the so-called central bank put is less powerful without Fed QE. ECB and BOJ QE apparently cannot do the trick. Bad news is supposed to be bad news and this should be a healthier market than before, but the adjustment back to normal has not been, and in our view is not going to be, easy.

Risk-on recommendations are only tactical. If the US data improves in the months ahead, the Fed will likely tighten and risk assets could sell-off again. If the US data remains weak, or weaken even further, we would expect risk aversion to increase, as the threshold for QE4 by the Fed appears high—and more QE may not be as effective anymore.

* * *

And that, dear Janet Yellen, is how you trapped yourself in reflexivity from which there is no way out. Now if only someone could have possibly foreseen all of this years ago...

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order66's picture

Just reset the whole fucking carnival already. So it sucks for a decade. Maybe all this monetary fantasy will be replaced by some fiscal sanity. Fuck.

SuperRay's picture

"A key takeaway was not that QE had already gone too far, but that announcing its tapering may have been a mistake. "

These morons remain deeply out of touch with reality.  I don't think they possess the cortical connections to see reality - that critical period is over.  They just can't step out of their fantasy world and join the rest of us in the real world.

Fahque Imuhnutjahb's picture

 

 

I'd feel better if they were morons in a fantasy world; however, in my mind's eye, I see them high fiving, and congratulating each other.

Dimon and Blankfein are now billionaires, gorged on middle class blood, sweat and tears.  Now with an asset deflation, they can deploy

their gravy train fiat to scoop up fire sale assets on the verge of default.  Front running the oscillations of inflation/deflation waves can

be very lucrative when you are in "click".  The .001 % own the Fed., and the Fed. has been very good to them.  If we have a major

down turn then they will simply add to their wealth.  If we suddenly sprout green shoots, then they'll pluck them.  Just because we don't

get the result we would prefer, doesn't mean the Fed. failed; it simply means they have another agenda.

Shocker's picture

All this money printing and things still haven't turned around.

Layoff List: http://www.dailyjobcuts.com

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. . . _ _ _ . . .'s picture

Wait... are you saying that everything is NOT awesome?

Short LEGO and Warner Bros.!

Keyser's picture

Not to worry, the PPT has this... Now warm up those presses and to hell with the balance sheet... 

espirit's picture

Mr. Yellens is still on every ones hit list, as well as all the other surviving FED chairmen's.

fleur de lis's picture

After that last show of instability why is senior citizen Yellen still running around loose outside a nursing home? Why is anyone still listening to her babbling like a crazy old lady? She is a direct threat to our finances. She should have been committed weeks ago but instead they give her more power.Typical.

Stuck on Zero's picture

The damage from the money printing will continue for decades.  It has destroyed our Republic, it transferred power to the psychopaths, and will end up in war and suffering for all.

All Risk No Reward's picture

QE worked fabulously. If you don't comprehend this then you don't comprehend the real reasons for QE. Oh, you thought the "good" articulated reasons were real?

"Everyone man has two reasons for doing a thing: The good reason (lie) and the real reason (occulted truth)"
~JP Morgan

They even tell us exactly how they will manipulate us, but we still can't "figure" it out. No wonder we are Muppets who don't even know who's hand is up our...

QE stands for quantitatively easing oligarch losses. They did this by offloading their debts onto society - by the trillions. They did this by siphoning off trillion in cash for themselves, while leaving trillions more in debt to society.

Payable with interest back to the oligarch controlled bankrupt corporate fronts that were bailed out.

For those that can't read for comprehension, it is like you giving me a kidney a transplant to save my life and then I send you the bill for the surgery and demand your heart as well (the brain isn't worth the effort - it doesn't function).

QE boosted the stock market and real estate so that the oligarchs and their close nit buddies can bail out at probably 100-200% of the value of what they could have otherwise done.

In addition, they saturated society with even more debt to go with their less cash such that when the asset stripping commences in earnest, there is more for them to steal.

If you think that the Banksters are going to hyperinflate and bailout debtors, then you 1. Don't know what TBTF&Jail means, 2. You don't comprehend basic Econ 101 psychopathic self-interest, and 3, You need to chomp that red pill because the Matrix is still concealing reality from you.

The Juggernaut's picture

Keynesian Monetary policy (executed by the Rothschilds, Warburgs, Lazards etc...) simply exaggerates Austrian economic laws making everything much more volatile.  The Fed finally figured out that they were toiling around.  Audit and then END THE FED!

macholatte's picture

 

QE worked fabulously.

 

Yes it did.

 

"The Party seeks power entirely for its own sake. We are not interested in the good of others; we are interested solely in power. Not wealth or luxury or long life or happiness: only power, pure power. What pure power means you will understand presently. We are different from all the oligarchies of the past, in that we know what we are doing. All the others, even those who resembled ourselves, were cowards and hypocrites. The German Nazis and the Russian Communists came very close to us in their methods, but they never had the courage to recognize their own motives. They pretended, perhaps they even believed, that they had seized power unwillingly and for a limited time, and that just round the corner there lay a paradise where human beings would be free and equal. We are not like that. We know that no one ever seizes power with the intention of relinquishing it. Power is not a means; it is an end. One does not establish a dictatorship in order to safeguard a revolution; one makes the revolution in order to establish the dictatorship. The object of persecution is persecution. The object of torture is torture. The object of power is power."

-- Orwell  1984

 

TongueStun's picture
TongueStun (not verified) Four chan Oct 10, 2015 7:24 AM

WHO will the greedy lying socialist jews blame this time?

All Risk No Reward's picture

Most "socialist Jews" have no clue as to how the debt-money system operates.  In fact, they will ultimately be victims of this system as well.

The Big Bad = The Debt-Money Monopolists.

BTW, this includes European Royalty and Rockefellers, among others.

All Risk No Reward's picture

Blair was dead within in a year of publishing that book.  Me think the insiders didn't like his revelation of their method being exposed by an insider - and publishing under a pseudonym didn't help.

Sure, there is a story about how he died of natural causes, but Dr. Mary's death narrative was obviously faked - so faking death narratives is trivial.

Dr. Mary's Monkey
https://www.youtube.com/watch?v=GZ5-liXcXLI

Groundbreaking Interview With Lee Harvey Oswald's Girlfriend Judyth Vary Baker
https://www.youtube.com/watch?v=_gv2uj10CO0

Dr. Mary's Crime Scene Photos - with opt out
http://doctormarysmonkey.com/Crime_Scene_Photos/Content_Warning.htm

It is impossible for a fire to have burned her arm bones completely away, therefore, the claim she was burned in her apartment is 100% probably false.

It is that simple.

BeanusCountus's picture

So Appl is a strong buy? Kidding. I think you are on the money. This is calculated by people that have influence. No reasonable student of economics (Keynsian included) could support this policy for this long. Moving more to cash on every uptick.

TheReplacement's picture

Nice rant.  I find your point of view interesting.  TY.

Squid-puppets a-go-go's picture

agreed, all risk, good rant. But" There will be hyperinflation because the politicians will realise the oligarchs have thrown them under the bus and weimar style printing will  be the politicians alternative. 

All Risk No Reward's picture

Squid, and this is KEY, the politicians are vetted, financed, and promoted by the Debt-Money Monopolists.

They are NOT indepedent endities.  They are chosen because they will DO WHAT THEY ARE TOLD.

They actually have no effective power should they go against the Debt-Money Monopolist agenda.

They oligarchs have dirt on them and can destroy them publicly.  Even if they didn't have dirt on them, they could make it up and the Muppets would believe them.

Politicians the world over are merely quislings of the Debt-Money Monopolists.

The oligarchs prefer to buy their complioance with insider trading and insider deals, but they will blow their heads off in broad daylight with "magic bullets" if need be.

Note that they could've killed Kennedy (or his brother, or his son, no Kennedy will ever be President to have access to the CIA files) in less public ways.  Maybe a cancer virus or a car accident.

But they didn't.  Why?  I believe to send a message to others that they are vulnerable if they go along with the Debt-Money Monopolist program.

"Money Power Seeks to Create a World System of Financial Control in Private Hands Able to Dominate Every Nation on Earth

The powers of financial capitalism had [a] far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations.

Each central bank, in the hands of men like Montagu Norman of the Bank of England, Benjamin Strong of the New York Federal Reserve Bank, Charles Rist of the Bank of France, and Hjalmar Schacht of the Reichsbank, sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

~Carroll Quigley, Tragedy and Hope, CFR Historian and Bill Clinton mentor (handler?)

Read Chapter 19 of Tragedy and Hiope

https://archive.org/stream/TragedyAndHope/TH_djvu.txt

World government, banks using debt-free money for themselves but not for society, pretending to care about ordinary people, central bank head lackies, world oligarch control over economies, bought and paid politicians...  it is all thee in that one chapter.

And he's an insider.  He doesn't reveal it all, but what he does reveal is astounding IF one is willing to COMPREHEND it.

 

MEAN BUSINESS's picture

"Politicians the world over are merely quislings of the Debt-Money Monopolists."

My question is to what degree are scientific academies merely quislings due to funding by politicians? Specifically, climate scientists. Any thoughts?

Squid-puppets a-go-go's picture

Asset prices were increasingly deviating from fundamentals, as the markets were trading the Fed instead of the economic reality. 

but Bernanke told me they were one and the same waaaaahhh

booboo's picture

"We are oversimplifying, and there are certainly many other things going on, but it helps make the point."

Oh please do by all means, the problem with MMT it is a complicated bullshit fairy tale with too many knobs and levers, wheels and buttons. turn this, tweak that, spin this one before that one and at the same time you have to lie through your teeth and make up phoney stats.

You used to hear this shit all the time in 09, "a nation with the reserve currancy cannot go bankrupt" No technically they can't but they will definitly lose that status in short fucking order with that frame of mind. Modern banking is a confidence game and guess what bub, nobody but you believes you can print your stupid ass out of a ditch

Puuuulease, "5.1% unemployment", "wealth effect" "transitory" and college educated people would be the ONLY stupid mother fuckers that would buy into such horse shit. Fuck, the common blue collar stiff beating a fender all day could tell you more about street economy that the whole of Fraud Street.

 

espirit's picture

Yep, pretty much FED Up.

slobbermut's picture

Exactly.....they are grinning from ear to ear; funny thing is - nobody gets away with anything in the end, they just don't know it yet but their payback is of the eternal type and damn scary.

TheReplacement's picture

Even if you are wrong, we all die just the same. 

Logic sucks for atheists.

stocktivity's picture

I see Janet and Ben down arrowed you

HowardBeale's picture

"I'd feel better if they were morons in a fantasy world; however, in my mind's eye, I see them high fiving, and congratulating each other."

And that makes them criminals in a class unto themselves: the death penalty would be too lenient. Really!

Shocker's picture

What is the next step?

Keyser's picture

Do you mean which comes first, the mushroom clouds or the rewind to 19th century society due to economic collapse?

espirit's picture

Takeaway intelligent means, and make it 16th Century.

Sudden Debt's picture

A 75 year long crisis where everything spirals down to levels 10 timmes lower what people think the bottom looks like right now.

And after that, if the strucutures are still there, a chance to rebuild. 

We won't see the bottom in our life times.

And don't believe prepping is a sollution :) that's a pipe dream for idiots.

Get mobile assets that you can take with you when shit get's real and be willing to move to the other side of the globe where life continues.

Society will hang on another 10 to 15 years before it starts to look really weird.

Rule 1: Live now. And make it a goal to keep living. Survival isn't a life style. that's for idiots who still believe in a quick recovery.

Rule 2: always move where the living is good and don't hang on to pipe dreams of the past.

Only the idiots believed Titanic would never sink and sure there where those who thought they could build a life raft for themselves.

none survived. Only those who got away in time when all the rest tought they where premature and chicken.

 

 

Seer's picture

"Society will hang on another 10 to 15 years before it starts to look really weird."

What, it doesn't look weird NOW?

Food, shelter and water.  THAT is where you want to be.

Everywhere will be affected, at some point, to a varying degree, and for varying amounts of time.

Mention of the Titanic is very apropos!

 

ebworthen's picture

Exactly - they are completely delusional.

It was a mistake when they bailed out the banks/corporations/insurers.

We are 7 years past crossing the Rubicon forever; that's when I was done.

JamaicaJim's picture

Know the truth, trade the lie.....since 2008....my motto

ThirdWorldNut's picture

Just to be clear - it was not a mistake to bail out banks, it was a plan to bail out banks.

When you call it a mistake, you are giving them benefit of doubt. As in all the ill effects were unintentional. and we all know, thats a lie.

Finally, remember what Bush Jr said few years after Iraq war - it was a mistake!

A Nanny Moose's picture

They are lower fucking life forms. Who else would seek employment in an entity with the monopoly priviledge to initiate force within a specific geographic area?

nope-1004's picture

When your only tool is a hammer, every problem looks like a nail.

The Fed has no other fancy tools other than bail out banks through QE and lower rates.  Well, we've done both and nothing is working.

Up next is default, but it will be called "restructuring" or something stupid to further numb the masses.

 

fockewulf190's picture

Boy, all those banks heaping up the derivatives into the quadrillion zone over the last few years sure doesn´t make the situation any easier.  It  should make a bigger boom though.

herkomilchen's picture

Not if the Fed buys them.  Problem "solved."

Seer's picture

For years I've been suggesting that the Fed will be the black hole to swallow up all the debt.  In the end the debt has to disappear; since it would still be on the Fed's books it would mean that the Fed itself would have to essentially declare itself bankrupt.  TPTB get their reset (they'll still be holding assets/weapons [in control of military]), the slate gets cleaned- while those with negative balances may cheer to see their negative balances go away, their starting balances will be ZERO, so, yes, the games begin again AND the "chosen ones" will once again have a huge/insurmountable head-start.

A Nanny Moose's picture

War, then a new currency (or a new definition of existing currency...moving of goalposts). Not like it hasn't been done before. Continentals, Greenbacks, Demonetization of Silver, Bretton Woods, Nixon-'71.

On a long enough timeline, the value of all fiat falls to ZERO

herkomilchen's picture

You're thinking too narrowly.  The Fed has endless fancy tools.  Because the fundamental tool beneath them all is a printing press.  You ain’t seen nothing yet with respect to how the creative the Fed can get.  Remember, it is currently authorized to buy any assets it wants.  And imagine what more it could do if acting in partnership with Treasury officials and politicians all operating under the mantle of “an emergency.”

Seer's picture

To continue the path would mean that they'd be purchasing ever-more-worthless crap (shitty assets and businesses that are certain to go bust).  If one notices one will see that somewhere along the line STUFF has to actually be made in order for it to be bought up.  If folks are broke and resources are too expensive to obtain (because people are broke!) then the stool loses its legs.

eforce's picture

Careful what you wish for, the next crisis by design is meant to be so bad that the world accept world government.