Money, Money, Everywhere

Tyler Durden's picture

FX Concepts' John Taylor is out with today's slam dunk de-noisification of all that is irrelevant with the following summary of what is really going on as the world's central banks embark on the latest and hopefully final attempt to reliquify everything. All we can add to Taylor's analysis, especially in light of today's incremental easing in ECB collateral requirements, is that the biggest beneficiary by far of what in a few months will be another multi-trillion balance sheet expansion, is and continues to be hard, non-dilutable, i.e., real, money. Because as fiat currency loses all relevance in a world in which it is printed on a daily basis by the central banks, whether or not we end up with a Weimar scenario, the cash thrown out by the even profitable companies will be increasingly more meaningless. Yet the take home message is that banks will never, ever stop diluting existing money. They simply can't as the past few months have so vividly demonstrated.

From John Taylor of FX Concepts

Money, Money, Everywhere

My desk is littered with analysts’ charts showing the explosion of central bank assets over the past four years.  As interest rates have dropped to just above the infamous “zero bound” while the global banking system and the developed economies have threatened to collapse, the central banks have responded with new forms of monetary stimulus to keep the financial system alive and to push their economies toward growth.  The acronyms might be different for the methods used by the US Fed, ECB, Bank of England, Bank of Japan, and Swiss National Bank, but these various techniques have all served to expand the high-powered money available to their banking systems by at least a factor of three.  These five countries all have ratios of central bank assets to GDP over 18%, and in Switzerland it is over 40%, a far cry from the old days.  Add to this the extension of swap lines between the Fed and other central banks, and liquidity is everywhere. Those of us in the financial world are surrounded by a sea of money, but just like the ditty of my youth when sailing on the ocean, ‘water, water, everywhere, but not a drop to drink,’ there seems to be nothing economically constructive to do with this money.  If the idea was to keep the banking system alive, it is obvious that this strategy will work.  Clearly, giving money to banks at no cost or, at the worst, extremely low cost means that they don’t have to pay anything for their liabilities – a perfect match for all of their bad-loan assets, which give them no revenue either.  This allows the banks to avoid: calling their bad loans, causing companies to go bankrupt or real estate to go on the auction block, and admitting economic reality.  To us, this seems to be exactly the strategy followed by the Bank of Japan for years, the one that was so harshly criticized by Bernanke ten years ago.

Europe and the US now have their own zombie banks – dead but they keep on walking, not lending money or clearing out the bad debts.  If this massive infusion of liquidity was meant to help ‘main street,’ the operating economy, or the average worker, it has been a complete failure in each country, except Switzerland where this was not its goal.

This gigantic flood of extremely inexpensive high-powered money does have a major impact, not in the real economy, but in the liquid investment markets.  Free money sets a very low hurdle for a short-term investment and as long as the transaction has decent liquidity, why not do the trade.  As a result, almost every equity, commodity, and credit market is moving higher.  High beta currencies are moving higher as well, as risk is clearly on the front foot.  This positive mood began at the start of October, a bit more than a week after Bernanke announced the start of ‘Operation Twist,’ a subtle way to improve the profits of the banks and increase the risk of the Fed without expanding its balance sheet. Global equity markets began to climb. Bernanke then announced an expansion and cheapening of the US swap lines with Europe, which currently have $103 billion outstanding, adding massively to Europe and Japan’s liquidity. Mario Draghi’s move into the ECB Presidency on November 1 was the next harbinger of a new wave of liquidity, as he dropped the refinancing rate a few days later and then announced the LTRO on December 8, expanding the ECB balance sheet by over 4% of the GDP in one day later in the month.  By the end of December things were clearly moving up in all the traded markets, and Bernanke put the cherry on the top of the sundae not once, but several times in the last few weeks. First, he announced that US rates would be extremely low into late 2014, then, a bit later, he emphasized the likelihood of QE3 if there were any economic pause, and then Tuesday he told the US Senate that he was not happy with the way the economy was growing – more hopes for QE3.  As the markets always respond to monetary stimulus when the trend is already positive, prices will be forced even higher.  Although we can’t be positive about the real economy, this expanding liquidity will keep us happy until a political accident intervenes.   Europe offers some candidates: Greece in March, followed by France in April.   

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Cdad's picture

This just in....Nanex has officially just spotted the "Crocodile Algo."  That is all.

spankthebernank's picture

Can someone give me an end date for this ponzi?

nope-1004's picture

The expriment began in 1971 but I believe formally ended in 1999.

Since that point, credit has been feeding the fallacy.  Going forward, no choice but QEn



hedgeless_horseman's picture



Sounds like it is time to take out a $200,000 home equity loan?

Mr Lennon Hendrix's picture

Or buy the Dow.

I can't fucking believe it is at 13k and everyone is running around saying to buy it....

....oh wait, yes I can.

hedgeless_horseman's picture



I had another use of proceeds in mind.

Thomas's picture

I think watching fur traders beat baby harp seals to death would be more pleasing than watching these markets and central bankers do there unnatural acts.

battle axe's picture

Of-course you should buy the Dow, I mean it is not like there is going to mass defaults in Europe or Israel will have to use nukes in order to wipe out the Iranian Nuclear centers. OOOPs wait a minute. Forget it, buy Gold/guns/scotch/porn...

The Big Ching-aso's picture



Ben's rethinking original Bell Huey UH-1 approach and going instead with an MI-26, the world's largest helicopter.


Mr Lennon Hendrix's picture

[Cue Ride of the Valkyries]

[Ben is dressed up as Rambo, he is throwing pallets of dollars into crowds of people]

Better yet, everyone remember the Joker's Parade in Tim Burton's original Batman?  The Joker is throwing money everywhere and then he gases everyone. 

spankthebernank's picture

K  Just bought 10 aapl through my Etrade account.



kraschenbern's picture

Probably not in our lifetime.  There is the possibility that Keynesians and monetary theorists can find theoretical justification, and limited emprical confirmation, for endless quantitative easing.  All at a carefully controlled rate of course.  If you have the time, try reading through the IMF working paper at the link below:

Dick Darlington's picture

Speaking of zombie banks, does anyone have any color on the latest rumor of italian bank Monte dei Paschi di Siena being in trouble? Have they ran out of Milky Way wrappers?

Hedgetard55's picture

Palladium, bitchez.

Village Smithy's picture

Someone finally got the message: Do not pump excess liquidity into commodities, including PM's, of any kind. All excess funds are to be deployed into the following ETFs: SPY, IWM, QQQ, XLF, and on slow days DIA. Thank you for your cooperation, B.B.

Cdad's picture

Ummm....maybe....but if you truly understand the "Crocodile Algo" then you know that all the buying that you think you see is actually selling.  And if this was an actual market, it would be arbitraging to death all of the late to the party PMs that are misallocating capital to the long side of the game.

You know, unless of course Greece will be fixed "within hours" again, before it is not "fixed" again.

Hedge accordingly...whatever that means.

Village Smithy's picture

I hope you are right, and eventually you will be. I'm just not sure we are there yet.

Mr Lennon Hendrix's picture

Shitty news sites everywhere are saying Greece agreed to the plan.  Did I miss something?  Because I thought that they were kicking the can down the road.  So either the media is more stupid than I thought, or they are flat out lying.

Village Smithy's picture

Just hang in there a little bit longer. These fools have been expecting "good news" any day now for so many weeks that they are a little stunned. What you are seeing is the equivalant of the deer in the headlights look. Next comes realization and then terror.

piceridu's picture

I'll take Flat Out Lying for a thousand Hendrix

Jena's picture

And now for Double Jeopardy, where the scores can really change!

YesWeKahn's picture

buy buy buy, Cramer is right.

non_anon's picture

it sure ain't landing in my pocket, but I will never go on the guv dole, never!

resurger's picture

Xerox sales unexpectedly rise...


Whiner's picture

Mother AU will not bow before a sea of fiat currencies. Putting my fiat dollars into physical assets that have intrinsic, durable value with only a small pile of fiat dollars in mattress for bank holiday.

zerotohero's picture

Japan has yet to experience the "end game" - so the same shall be for the U.S. for the next 20 years of so of a no growth least.

aerojet's picture

Very true!  But the situation has now gone global, so whereas Japan had a relief valve, this time--no valve!

morning_glory's picture

Anyone short equities in this environment is an idiot.

I am an idiot :(

resurger's picture

Bears are the Punishment of God on those fuckers! just be careful and patient and calculate you maximum loss on your positions... dont worry about those shillers, i think they read ZH more than we do.

Take a look at those graphix, they would soothe you

"Take Off is optional, Landing is a must"

Snakeeyes's picture

Taylor is brilliant.

bank guy in Brussels's picture

He's a smart guy, but John Taylor of FX concepts has made some bad calls on timing ... In late 2010, he called for the euro to sink to not far from parity with the dollar toward the end of 2011, whereas the euro was able to keep to the 1.30 neighbourhood vs USD.

Though Taylor was certainly right about Europe being a hugely increasing mess, as he himself admits, he really underestimated - along with many or most people - how much longer the central bankers can keep the whole game going.

Jim Sinclair, tho focused on gold, was more correct here ... and Sinclair says even now, the situation of the dollar with the US states in so much financial trouble, is really a bigger mess for 2012 than the euro, that California blowing up is a much bigger deal than Greece blowing up.

Cult_of_Reason's picture

Bernanke Talks His Book (Lying)

"...he ignored ample evidence in 2012 that the economy had long since passed the Emergency Stage will be Ben’s undoing. He's so pregnant with his monetary policy that he can’t see (or just chooses to ignore) that the fire is out, the emergency is over, and his monetary policy should be in the process of normalization. That failure, will cost everyone, big time..."

alien-IQ's picture

The stock market is not the economy.

hedgeless_horseman's picture



Watch it, you'll end up on the FBI's terrorist list saying things like that.  As a matter of fact, I think I may be required to report you.

ThisIsBob's picture

Its my economy.  Liquidity talks, bullshit walks.

ziggy59's picture

The Rime of The Corrupt Central Banker and Fed...good story when it will it be written?

Zola's picture

ZH CONTEST !  Which number is the number of the QE which when announced will make the market go DOWN ( 3,4,5 ?) take your pics.

Mr Lennon Hendrix's picture

I counted last night, it's 9, but I am still going to refer to it as QE X for theatrical purposes.

SheepDog-One's picture

3rd time is always the charm.

_ConanTheLibertarian_'s picture

water, water, everywhere, but not a drop to drink’

Nice analogy.

toadold's picture

 "there seems to be nothing economically constructive to do with this money."

If you can't do anything economically constructive with it, can it actually be called money? 

Alpha Monkey's picture

People confuse the terms "money" and "currency" frequently, and to their own peril.

jimmyjames's picture

If you can't do anything economically constructive with it, can it actually be called money?


Good point-if that money doesn't and it wont-find a way to get into our hands so we can spend it-it is a non inflationary event-but that's not to say it doesn't dilute the real money you get from a paycheck-

John Law Lives's picture

"Yet the take home message is that banks will never, ever stop diluting existing money."

That is the quote of the day.

gjp's picture

When was the last time the s&P dropped by 1% or more?  What are the precedents for this long a run in the past?  Crazy.

John Law Lives's picture

1. Enforce extended ZIRP to crush the returns on fixed-income

2. Print fiat currency and dilute its value and lie to the masses about the subsequent inflation

3. Jack the markets up higher and higher until retail goes "all in" so the 1% can dump their own shares onto the masses

4. Markets crash again as the massive wealth transfer process marches on

Pretty goddam vicious process...

100% FUBAR.

Tom.the.Bomb's picture

Somewhere over the rainbow Way up high, There's a land that I heard of Once in a lullaby. Somewhere over the rainbow Skies are blue, And the dreams that you dare to dream Really do come true. Someday I'll wish upon a star And wake up where the clouds are far Behind me. Where troubles melt like lemon drops Away above the chimney tops That's where you'll find me. Somewhere over the rainbow Bluebirds fly. Birds fly over the rainbow. Why then, oh why can't I? If happy little bluebirds fly Beyond the rainbow Why, oh why can't I?