"Today, The Music Stops..."

Tyler Durden's picture

Authored by Simon Black via SovereignMan.com,

Today’s the day.

After months of preparing financial markets for this news, the Federal Reserve is widely expected to announce that it will finally begin shrinking its $4.5 trillion balance sheet.

I know, that probably sound reeeeally boring. A bunch of central bankers talking about their balance sheet.

But it’s phenomenally important. And I’ll explain why-

When the Global Financial Crisis started in 2008, the Federal Reserve (along with just about every central bank in the world) took the unprecedented step of conjuring trillions of dollars out of thin air.

In the Fed’s case, it was roughly $3.5 trillion, about 25% of the size of the entire US economy at the time.

That’s a lot of money.

And after nearly a decade of this free money policy, there is more money in the financial system than ever before.

Economists have a measure for money supply called “M2”. And M2 is at a record high — nearly $9 trillion higher than at the start of the 2008 crisis.

Now, one might expect that, over time, as the population and economy grow, the amount of money in the system would increase.

But even on a per-capita basis, and relative to the size of US GDP, there is more money in the system than there has ever been, at least in the history of modern central banking.

And that has consequences.

One of those consequences is that asset prices have exploded.

Stocks are at all-time highs. Bonds are at all-time highs. Many property markets are at all-time highs. Even the prices of alternative assets like private equity and artwork are at all-time highs.

But isn’t that a good thing?

Well, let’s look at stocks as an example.

As investors, we trade our hard-earned savings for shares of a [hopefully] successful, well-managed business.

That’s what stocks represent– ownership interests in businesses. So investors are ultimately buying a share of a company’s net assets, profits, and free cash flow.

Here’s where it gets interesting.

Let’s look at Exxon Mobil…

In 2006, the last full year before the Federal Reserve started any monetary shenanigans, Exxon reported $365 billion in revenue, profit (net income) of nearly $40 billion and free cash flow (i.e. the money that’s available to pay out to shareholders) of $33.8 billion.

At the time, the company had $6.6 billion in debt.

Ten years later, Exxon’s full-year 2016 revenue was $226 billion, net income was $7.8 billion, free cash flow was $5.9 billion and the company had an unbelievable debt level of $28.9 billion.

In other words, compared to its performance in 2006, Exxon’s 2016 revenue dropped nearly 40%, due to the decline in oil prices.

Plus its profits and free cash flow collapsed by more than 80%. And debt skyrocketed by over 4x.

So what do you think happened to the stock price over this period?

It must have gone down, right? I mean… if investors are essentially paying for a share of the business’ profits, and those profits are 80% less, then the share of the business should also decline.

Except — that’s not what happened. Exxon’s stock price at the end of 2006 was around $75. By the end of 2016 it was around $90, 20% higher.

And it’s not just Exxon. This same curiosity fits to many of the largest companies in the world.

General Electric reported $13.9 billion in free cash flow in 2006. Last year’s free cash flow was NEGATIVE.

Plus, the company’s book value, i.e. its ‘net worth’, plummeted from $122 billion in 2006 to $77 billion in 2016.

So investors’ share of the free cash flow is essentially worthless, while their share of the net assets has also fallen dramatically.

GE’s stock was actually down slightly in 2016 compared to 2006. But the minor stock decline is nothing compared to the train wreck in the company’s financial statements.

Between 2006 and 2016, McDonalds reported only a tiny increase in revenue. And in terms of bottom line, McDonalds 2016’s profit was about 30% higher than it was in 2006.

McDonalds’ debt soared from $8.4 billion to $25.8. And the company’s book value, according to its own financial statements, dropped from $15.8 billion to NEGATIVE $2 billion.

So over ten years, McDonald’s saw a 30% increase in profits, but took on so much debt that they wiped out shareholders’ book value.

And yet the company’s stock price has TRIPLED.

Coca Cola. IBM. Johnson & Johnson.

Company after company, we can see businesses that are performing marginally better (or in some cases WORSE). They’ve taken on FAR more debt than ever before.

Yet their stock prices are insanely higher.

How is that even possible? Why are investors paying more money for shares of a business that isn’t much better than before?

There’s really only one explanation: there’s way too much money in the system.

All that money the Fed printed over the years has created an enormous bubble, pushing up the prices of assets to record highs even though their fundamental values haven’t really improved.

As the Wall Street Journal reported yesterday, “Financial assets across developed economies are more overvalued than at any other time in recent centuries,” i.e. at least since 1800.

Investors are paying far more than ever for their investments, but receiving only marginally more value in return. And they’re actually excited about it.

This doesn’t make sense. We don’t get excited to pay more and receive less at the grocery store.

But when underperforming assets fetch top dollar, people feel like they’re wealthier. Crazy.

Today the Fed should formally announce that after nearly a decade, it’s going to start vacuuming up a lot of that money it printed in 2008.

Bottom line: they’re going to start cutting the lights and turning off the music.

And given the enormous impact that this policy had on asset prices, it would be foolish to think its reversal will be consequence-free.

Do you have a Plan B?

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JungleCat's picture

You mean "poop party." Because putting questionable MBS shit on their balance sheet is how they "inflated their way out of the crisis." And when I say "shit", I do mean "shit."

Killtruck's picture

So exactly how long will it be until the tide turns against Bernanke? Can we string that bald fuck up yet? With his smug-looking face....fucking guy with his "I saved the world" attitude and his $400G speeches.

lasvegaspersona's picture

dude...The Bernack is in a retirement home in Florida...leave the old codger be...It is that new young hottie Yellen we need to watch.

JRobby's picture

I hear continuously droning elevator music and a deafening laugh track attempting to drown out the bleeting of sheep being slaughtered. The music is not over. Far from it.

"Today the Fed should formally announce that after nearly a decade, it’s going to start vacuuming up a lot of that money it printed in 2008...

Not going to happen. Kabuki

Gorgeous's picture

"...vacuuming up a lot of that money". 

The money supply will go negative... On what planet will this happen?

HillaryOdor's picture

Blame Bernanke and you're blaming Friedman.  Blame Friedman and you're suddenly blaming free markets.  It's a very clever sleight of hand these people are up to, where free markets always get the blame when the central planning schemes inevitably fail. 

Truther's picture

Then let's "shit" around and see what happens 

HRClinton's picture

You mean that the Fed will also DE-DOLLARIZE (De-Dildorize)?

Et tu Brutta Yellen?

MANvsMACHINE's picture

Not gonna happen. They may say they will but they can't. For the same reason it's as big as it is today. If the problems no longer existed, maybe, but the problems are much worse now. No way they can afford to shrink their balance sheet.

Killtruck's picture

Agreed and well said. Everything is worse. Fucking Bernanke. 

Snaffew's picture

that is why no matter what reductions the fed announces in their holdings, Switzerland, Eu, and japan willl be there to scoop up any shortcomings.  the party must go on or it's lights out for Wall St.

lasvegaspersona's picture

Buffet say DOW 1 million in a hundred years...more likely in 3 years. Go Fed Go!!!

NYC_Rocks's picture

Exactly.  Just like when they said they will raise rate.  They did a little, but not as much as the free market would have.  We are passed the point of no return.  They are just jawboning as always.  The country has an addiciton that cannot be cured.  In long run, it's the same result... massive write down of debt and may services that won't be delivered.  We need to take our medicine and restructure.  The sooner the better.  Politician are scum and caused all of it.

Implied Violins's picture

They will do whatever it takes to collapse the system. The Globalists need to kill the dollar to get their NWO currency going. If that means shrinking the balance sheet or raising rates, then that is EXACTLY what they will do.

Gorgeous's picture

Not ever.  All those companies who took on cheap debt to buy back their stocks will now dump their stocks to pay back their loans?  Riiiight.

I realize just how much I truly I believe Janet and Warren.  Whatever they say, that is the truth, and that is what they will do.  We should live our lives according to their benevolent wisdom.  It is what they wish.


lasvegaspersona's picture

No centrl bank, in the history of fiat currency, has ever significantly caused deflation.

They are paid to avoid political pain and that is what they will do....ultimately.

Whether we get a show pony of 'hawkishness' is a question but in the long run the spice must flow.

karenm's picture

They'll do it because they have to. They can print all the paper they want but whatever is used as currency, ultimately becomess worthless when too much of it is printed. The average guy on the street doesn't know or care, but corporations, governments, those who know the meaning of this sure do. They know how many are printed and the drop dead date when their value goes to zero.


And yes, I know, their value is already zero, but when you have artificial demand from billions of people who think its money, even worthless paper assumes a value.

That's what even ZH'ers don't get. Neither do most here understand it cannot be printed endlessly due to the insiders knowing its depreciating value, which is why the USD will soon be worthless. 

Gorgeous's picture

Don't project your nonsense on us karen.

HRClinton's picture

What about the Trillions missing from the Pentagram? 

Anybody recall Rumsfeld testifying to CONgress on Sep.10, 2001?

yogibear's picture

Plenty of companies have been doing stock buy-backs.

It's going to hurt if they ever shut off the spigot.

Snaffew's picture

I can almost guarantee that they run this market into the close.  The Costanza effect still reigns in "Murica!

syzygysus's picture

"Today the Fed should formally announce that after nearly a decade, it’s going to start vacuuming up a lot of that money it printed in 2008."


KEY WORDS: Announce.  Going to start. 


Don't hold your breath.  BTFD

ReturnOfDaMac's picture

Bullish!  Everybody knows that stawks can only go up

TabakLover's picture

Fed does nothing.  Blames Irma and Harvey. Kicks can hoping Trump tax reform can jack the SPX to 3000.  Then, maybe, from there they feel the country can handle a 20% correction. 

Hammer823's picture

That's right.  Add 1,000 to the SPX with a pre-programmed rally.  Then allow for a 400 point "correction" to keep up appearences.

SPX gains 600 overall.

The U.S. stock market is rigged to perfection by the Central Banks.

Kidbuck's picture

We've just had 8 years of preplanned ralley. These fuckers will never stop robbing the middle class. Even if we get as poor as Bangladesh they will never quit stealing our purchasing power.

Snaffew's picture

sure...and that "correction" would take us back to where we are right now.  No harm, no foul---

youngman's picture

all talk..no action I think...they cant...they are going to print more and more

GreatUncle's picture

Agree, or they will pull the plug, system crashes intentionally then they CTRL-P $5T to replace the $4T. (a $1T CTRL-P)

Now try and remove $4T and watch the epic collapse unless ... another CB prints it.

That's the game they been playing since 2008 and they need even more now just to keep it all going.

Of course unless they are going to let it all crash and burn intentionally but that is like asking to be tarred and feathered and nothing crystallises in a population in what they have done than pain and suffering.

Either way, I don't get hanged they do because I did not defraud the whole economic system.

aqualech's picture

They need to create a new crisis before they can take their control to the next level.

Solio's picture

How many suicides can be tied to the FED/bank policies across the nation since 2008?

Death mongers in suits.

Clowns on Acid's picture

"$15 Billion / year for the next 30 years"...will be head Bolshevik spokeperson Yellen's reply. In other words "We ain't heavy , we your brothaaaa" "And on We go ".

They will monetize the QE debt by allowing it ALL to mature...slowly. Any hick ups and the SNB buys equities....its easy with the 3D printer ...best invention since Gutenberg's printing press.

5000yl's picture

winners dont need a plan b... 'Murica!

Txpl9421's picture

Yeah.  So this is bad, right?

Maestro Maestro's picture




In that order.

Rick Cerone's picture

George Orwell Economics.

The truth is what we say it is.

dark fiber's picture

So when they start tightening, what do they propose to do with US sovereign debt.  I get the feeling they will either trigger a full scale collapse and conveniently blame it on Trump, or they will do a big fat nothing and call it tightening. 

agstacks's picture

ESF plans on buying it all.  No worries. 

Kidbuck's picture

They have done nothing but expand the fiat since 1913. The greedy fucking thieves are not going to stop now.

agstacks's picture

People aren't buying stocks in the volume they used to so it is up to the buyer of last resort to offer a bid.  This isn't going away.  With Central Banks now directly buying stock how do you seriously expect any major correction?  

There's picture

Ah... Soft music, flattering lights, sweet smell of excitement and exuberance, the financial industry and the Fed have put lipstick on company and bank stock prices

Today the music stops and the bright lights reveal we have all been in bed with real pigs. 


SantaClaws's picture

Zero interest rates were great for Wall Street and the 1%.  If the Fed begins to shrink its balance sheet, and rates begin to rise, there will be another plan to benefit Wall Street and the 1% at everyone else's expense.  We, the proletariat, just don't yet know what it is.

crghill's picture

Janet was a usurer at the only joint in town.  She had a reputation as a central banker that got around.  Down Wall Street after midnight with a brand new pack of cigs.  A fresh one hangin' from her lips and a beer between her legs.  She'd ride down by the UN and meet with all her friends.....


The road goes on forever and the party never ends!

Batman11's picture

Financial stability is a lot easier than it looks; Central Bankers just make it look hard.

What does the data the FED doesn’t look at say?


Things are slightly worse than they were before the Great Depression.

These people are a liability.

We need to get all the Central Bankers in for updating.

The continual financial crises of financial liberalisation have helped a new era of economists learn from the constant mistakes of the current incumbents.

Steve Keen - Minsky moments and affects of debt on the economy

Richard Werner - Money and debt, bank credit and how it must be allocated for economic success, studying Japan around 1989

Michael Hudson - The history of economics, the difference between earned and unearned income

Richard Koo - After the Minsky Moment, studied 1929, Japan 1989 and 2008.

Sorry Canada, Australia, Sweden and Norway, the Central Banker update program will be too late to save you.

Richard Koo can help the ECB learn what’s wrong with austerity before they do any more damage in the Club Med.

Calm should be restored when they have been through the update program.

grunk's picture

I can't remember if I cried when I heard about the market's slide,

but something touched me deep inside the day,

the country died.