A Question For Every Investor

Authored by 720Global's Michael Lebowitz via RealInvestmentAdvice.com,

Recently we received the following question from a subscriber:

“If a correction in the stock or bond markets comes, the Central Banks will buy stocks with printed money, like the Japanese Central Bank, etc. Will there ever be a shakeout of the garbage and junk in the system? I am losing all confidence.” –Ron H.

Questions like Ron’s that suggest the decay of capitalism and free markets should raise concerns for anyone’s market thesis, bullish, bearish or agnostic. What stops a central bank from manipulating asset prices? When do they cross a line from marginal manipulation to absolute price control? Unfortunately, there are no concrete answers to these questions, but there are clues.

Global central banks’ post-financial crisis monetary policies have collectively been more aggressive than anything witnessed in modern financial history. Over the last ten years, the six largest central banks have printed unprecedented amounts of money to purchase approximately $14 trillion of financial assets as shown below. Before the financial crisis of 2008, the only central bank printing money of any consequence was the Peoples Bank of China (PBoC).

The central banks’ goals, in general, are threefold:

  • Expand the money supply allowing for the further proliferation of debt, which has sadly become the lifeline of most developed economies.
  • Drive financial asset prices higher to create a wealth effect. This myth is premised on the belief that higher financial asset prices result in greater economic growth as wealth is spread to the masses.
    • “And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”Ben Bernanke Editorial Washington Post 11/4/2010.
  • Lastly, generate inflation, to help lessen the burden of debt.

QE has forced interest rates downward and lowered interest expenses for all debtors. Simultaneously, it boosted the amount of outstanding debt. The net effect is that the global debt burden has grown on a nominal basis and as a percentage of economic growth since 2008. The debt burden has become even more burdensome.

The wealth effect is putting riches in the hands of a small minority of the population, with negligible benefits, if any, flowing to the majority of the population. Bernanke’s version of the virtuous circle, as highlighted above, is far from virtuous unless you are in the upper five to ten percent of households by wealth.  To understand how a real economic virtuous circle works, we recommend you read our article The Death of the Virtuous Cycle and watch The Animated Virtuous Cycle.

Inflation has been low since 2008 and deflation continues to be a chief concern of most central bankers. Because QE, in all cases, was focused on financial asset prices and not the prices of everyday goods and services, the inflation they aimlessly seek has not occurred.

To summarize our views, largely ineffective monetary policies are providing few economic benefits. They are increasing the debt burden and furthering socially destabilizing trends. Worse, these policies are packed with consequences that lie dormant and have yet to emerge. One of our concerns, which is being heralded as a positive, is the massive distortions in financial asset prices worldwide. Consider a few of these facts below and whether they are sustainable:

  • U.S. yields have been among the lowest ever on record dating back to 1776
  • U.S. equity valuations have risen to levels rarely observed and from this perch have always been followed by massive losses
  • Over $9 trillion in sovereign bonds yields in many European countries and Japan have negative current yields
  • European junk-grade debt now trades at yields lower than U.S. Treasuries
  • Veolia, a French BBB rated company, recently issued a 3-year bond at a yield of -.026%.
  • Italian 3-year government bonds yield -0.337%, despite the 3rd highest debt to GDP ratio of all developed nations (132%)
  • Argentina, which has defaulted 6 times in the past 100 years, issued a $2.75 billion 100-year bond paying a paltry 8% interest
  • The BOJ owns over 75% of all Japanese ETFs
  • The Swiss National Bank owns 19.2 million shares of Apple, or 3% of total shares outstanding, and $84 billion in aggregate of U.S. stocks

Yes, Ron, the central bankers have clearly crossed the line between free markets and government controlled markets. To answer your question about the “shakeout,” we must wait until the inevitable day comes and asset prices are in free-fall. When this occurs, we will learn the full extent of their support and how far they have crossed the line. We like to think the central bankers are willing to endure the short-term pain of such a situation and allow the natural cycle of economies and asset prices to run their course. The reality, however, is that the pattern of their actions in the post-financial crisis era argue that they are unlikely to relinquish their grip. To the extent that authority and power is extended to the Fed through the U.S. Congress, it does not seem likely for career politicians to urge action that may be painful in the short-term but highly beneficial in the long-term.

This premonition was supported by recent statements from the October 2017 Federal Reserve minutes and appointed Fed Chairman Jerome Powell respectively. Fed Minutes:

“In light of elevated asset valuations and low financial market volatility, several participants expressed concerns about a potential buildup of financial imbalances,” further “They worried that a sharp reversal in asset prices could have damaging effects on the economy.” Jerome Powell, in prepared remarks to Congress stated: “(the Fed) will respond with force to threats to the nation’s stability.”

Putting two and two together, one can quickly figure out that falling asset prices and the “damaging effects” they will inflict on the economy will not be tolerated by the Fed. 

Ron, while we cannot answer your question with certainty, we are relatively confident the Fed and other central banks’ influence on markets will only increase in time as they continue to perpetuate the debt and economic problems they helped create. Naturally, the next question for consideration is to what extent markets may be bigger than the Fed? That is an article for another day.

Comments

ElTerco Ghost of PartysOver Wed, 12/13/2017 - 15:04 Permalink

(b) In a surprising manner, 250 years
emerges as the average length of national
greatness.

(d) The stages of the rise and fall of great
nations seem to be:
The Age of Pioneers (outburst)
The Age of Conquests
The Age of Commerce
The Age of Affluence
The Age of Intellect
The Age of Decadence.

(e) Decadence is marked by:
Defensiveness (defend a nation rather than effect change)
Pessimism
Materialism
Frivolity
An influx of foreigners
The Welfare State
A weakening of religion.

(f) Decadence is due to:
Too long a period of wealth and power
Selfishness
Love of money
The loss of a sense of duty.

http://people.uncw.edu/kozloffm/glubb.pdf

In reply to by Ghost of PartysOver

nuerocaster LawsofPhysics Wed, 12/13/2017 - 11:40 Permalink

I think it was the German Fin minister that made the hilarious comment a few years back, that there was a "danger" of monetary policy drifting into fiscal policy.Think Central Bank welfare state. Think Soviet Union. The major difference between the Soviet Union of the past and US today is trading various types of money and financial instruments.Don't imagine that these trading activities will have much impact on the actual deployment of resources. Political power and influence will. New and or advanced technology will.There is also an important difference between the media oligopolies and the old Soviet media. I think the MSM is more effective because allowing some reality to leak through acts as a pressure release.Look at the articles and comments at ZH. Take the recent Buchanan article as a good example. Right Pat and let's petition Emperor Constantine to reinstitute the republic.There's no going back. The costs would be teeny tiny, apochalyptically prohibitive. Practical suggestions on making the best of it would be more useful.

In reply to by LawsofPhysics

LawsofPhysics nuerocaster Wed, 12/13/2017 - 11:51 Permalink

"Don't imagine that these trading activities will have much impact on the actual deployment of resources."BULLSHIT.  The central bankers clearly control the prices now and PRICES matter in the real world. As a producer of food, I will happily sell to the highest bidder.  I have REAL margins and consume REAL resources in order to produce.  None of this can be created out of thin fucking air."Political power and influence will. New and or advanced technology will." -  LMFAO!!!! Development and implimentation of new technology requires years and tremendous amounts of REAL resources.  This is precisely why PRICE DISCOVERY is important.  It insures that we DO NOT mis-allocate or mal-invest our capital and resources.The end result WILL be war, thinning of the herd and a return to locally-sourced inputs for local economies. I actually don't see the latter as a bad thing.Is what it is. Economics is a social science for fuck's sake, the laws of Nature and physics are what they are. 

In reply to by nuerocaster

nuerocaster LawsofPhysics Wed, 12/13/2017 - 12:28 Permalink

Money and prices are now mostly part of the system of carrots and sticks for the donkeys. Not allocating resources.I agree new technology requires real resources. And elites prioritize it. But behind politics and government of course.The 3 main functions of money medium of exchange, store of value(divided into consumption value and capital value), price discovery/indexing have been fundamentally changed.Medium of exchange and consumption value are the only ones really functioning. And there's warping around the edges there. I'm not kidding about the Soviet Union comparisons.I don't think we're really in all that much disagreement.

In reply to by LawsofPhysics

nuerocaster LawsofPhysics Wed, 12/13/2017 - 11:40 Permalink

I think it was the German Fin minister that made the hilarious comment a few years back, that there was a "danger" of monetary policy drifting into fiscal policy.Think Central Bank welfare state. Think Soviet Union. The major difference between the Soviet Union of the past and US today is trading various types of money and financial instruments.Don't imagine that these trading activities will have much impact on the actual deployment of resources. Political power and influence will. New and or advanced technology will.There is also an important difference between the media oligopolies and the old Soviet media. I think the MSM is more effective because allowing some reality to leak through acts as a pressure release.Look at the articles and comments at ZH. Take the recent Buchanan article as a good example. Right Pat and let's petition Emperor Constantine to reinstitute the republic.There's no going back. The costs would be teeny tiny, apochalyptically prohibitive. Practical suggestions on making the best of it would be more useful.

In reply to by LawsofPhysics

HRClinton LawsofPhysics Wed, 12/13/2017 - 12:52 Permalink

Why TF would I want Central Banksters or CFPs?Why would I want to seek out the 'expert advice' of unvetted strangers, whose intellect, knowledge and agenda are unproven? I know that their advice rotates around CBs.Fork that! None of them made me rich. Self made. Ergo...All my Wealth is private, decentralized and discrete.All my Investments are private, decentralized and discrete.Consequently... No longer a 'Subject' of the (((Plantation))).  USrael passport? What's that?Suck ducks, banksters and gov gangstas!

In reply to by LawsofPhysics

NoDebt Wed, 12/13/2017 - 10:49 Permalink

"Will there ever be a shakeout of the garbage and junk in the system? I am losing all confidence.” –Ron H."Ron, grab some Dramamine and strap in.  These fuckers control the money supply.  They can keep this shit show going a lot longer than you think they can. 

small axe Wed, 12/13/2017 - 10:59 Permalink

it's a feature, not a bug.system is working as designedwho wouldn't want to own everything now, paid for in advance by claims on future wealth of following generations?

3-fingered_chemist Wed, 12/13/2017 - 10:59 Permalink

The central banks of the "emerging" markets have simply gone into hyperdrive with the accommodations for the markets whereas the more "mature" central banks have taken their foot off the gas. Where do you think all that liquidity from China is ending up? BITCOIN! 

InDisbelief Wed, 12/13/2017 - 11:00 Permalink

This is probably the most depressing article I've read on this site... ever. It makes me realize that they can print all the way into state-control of the markets.  There's no reason to ever stop, ever.  You can't short it, you can't hedge it, you can't win..

ForWhomTheTollBuilds InDisbelief Wed, 12/13/2017 - 12:16 Permalink

Thats a big 10-4.  Back in 2007 I was buying gold thinking, "This will be a great investment.  Just like in the 70s, they will print huge amounts of money and gold will shoot up and then I can take profits as the markets force a return to rationality ....    Unless of course this is just the start of something much bigger...."Just think about how long Soviet communism lasted before collapse and then think that we aren't even technically there yet and that this time we have a much bigger running start technologically and in terms of knowlege about how to control/distract the masses.Im gonna keep buying real things and scheming for how to have cash flow in old age and how to lower the need for cash in as many areas as possible.  This project of "saving the west" is not only long lost, but "the west" may never have existed anyway in the sense of a real common culture.  I think this idea that "we" ever "stood for" anything is more of a story we told ourselves after the fact. Find somewhere else to be and something else to think about.

In reply to by InDisbelief

SDShack InDisbelief Wed, 12/13/2017 - 14:20 Permalink

Yep, it all changed when the CB's effectively got control of the Bond Markets. The EU collapse was their wake up call, and they had to neutralize the bond vigilantes. When the CB started purchasing every govt backed bond and effectively surpassed the 50% threshold, the bond vigilantes were killed. There has been no real bond market since then, and that has infected and corrupted every market on earth. This has allowed unlimited fiat printing to monetize ever expanding debt. Another name for this is a giant world wide Ponzi. Just like every Ponzi, the designers will pump and dump it to their advantage, and leave every "investor" holding the bag. They can keep doing this at will now.

In reply to by InDisbelief

wmbz Wed, 12/13/2017 - 11:01 Permalink

"I am losing all confidence.” –Ron H."Wow, hard to believe Ron has held on for so long.I lost all confindence so long ago that I forgot, and I had very,very little to begin with.

ForWhomTheTollBuilds wmbz Wed, 12/13/2017 - 12:14 Permalink

Its fun to tell yourself that, but how many are really truly able to divorce themselves mentally from the culture that reared them?Sure you can look at "How they are in Japan, Italy or Russia" and analyze that without feelings, but can you really watch the media coverage of US politics, the price action in markets or the worldview being pushed in popular entertainment with total indifference?I'm moving more in this direction all the time, but I still catch myself looking at events and thinking, "How could you do that to the world or to your own lives?".   And thena  few years on, I care even less than before.   It's a weird process.  I think I'm becoming a much better person for it, but you gotta watch you don't turn into the exact phsycopath you hated when you were younger.

In reply to by wmbz

rp2016 Wed, 12/13/2017 - 11:04 Permalink

Like David Stockman said, Inverstor class has been killed... there are only gamblers. I would have gladly offered my service had your really wanted to fight the real problem. but all you want is money... no matter by what crooked logic you can get.

Iconoclast421 Wed, 12/13/2017 - 11:10 Permalink

It will not ever stop until the money printing societies fail. This central bank fiat printing is like bolts of lightning searching for a ground. And each time one of these bolts finds its way to ground, it takes out a tree or a person. It damages the economy in some way, generally in the form of higher prices for everyone. When enough people see people getting rich from what they perceive as wholly unjust means, you get a social collapse. That is where we're headed, and that is what will bring us to the hyperinflationary stage that precedes the final collapse. When you see your neighbor gets rich by buying tulips and then selling them to even dumber people for insane profits, you lose all respect for people (not to mention the tulips). This is the root of societal collapse.

gunzeon Wed, 12/13/2017 - 11:22 Permalink

i like this line near the end ... "The wealth effect is putting riches in the hands of a small minority of the population, with negligible benefits, if any, flowing to the majority of the population"ErrHmm, any crypto millionares out there ?Just another wave of wealth transfer,1 - oil - ranchers2 - QE - banker mates of the govts 3 - crypto - geeks 

falak pema Wed, 12/13/2017 - 11:23 Permalink

There are two historical ways to clear the deck :1° Refuse to pay debt, make the creditors default; aka a bubble which often leads to wars if the pain is too dificult politically ; witness the 100 years war all based on borrowed money from Italians that kings of France and England could not pay to allow outright victory ! 2° Use inflation to dilute the debt. This is the Keynesian route during the 30s and Monetarist route after BW revoke. It only works if the productivity and real growth is there to allow the debtors to recoup via a devaluation that makes their production capable to pay back the debt.Europe and Japan both benefitted from collapse of their money to rebuild using stable $ as debt and revitalized production at home to pay it back over 40-50 years.But since the 2008 crisis the FED has invented a THIRD WAY :3° Since the rise of Reaganomics and use of petrodollar to build US consumption on "other people's money", using US debt anchored into WS paper assets, in the hegemonic monetary construct, we entered into the red zone of bubble-economics and spawned a mindset of hubris ignoring moral hazard to levels unknown.It led to the current crisis which has INVENTED a new experiment based on the monopoly print press system : Zero interest debt to bootstrap growth.But has it worked?ONLY if the growth in US  and other deeply indebted countries had reduced the outhanging previous debt. Apparently that has not occurred. THe debt to GDP has increased in all first world nations.So the Cbs are now saying we keep playing this game and USE deflation to break the debt camel's back-- via productivity rise of 4th revolution type tech. In 30 years we may have the fruit of this method.But before then those who are not in debt will have decoupled their economies with the First world so deeply indebted; especially the USA which controls 70% of the status quo monetary thread via the Petrodollar imposed commodity spot and future derivative swap trades.Once the world economy will decouple, North to South, East to West; currently in PROGRESS;  the USA will become Weimared; hoisted on its own petard... and the hope of 4th revolution about turn will have dispappeared if they- the others- have FANG's edge in their own back yards.Game ocer USA... We want our money back or we pull the plug on you.We head there and the Duck is making a head up ass effort to stop that trend.He won't succeed; the world has told him that loud n clear. The barriers to his barriers are now going up and he will be economically hogtied.So what does Pax America do : 100 years war like Edward III against Philip VI ?Hmmm, Dr Stangelove says its a lose-lose !Whad'ya say? 

SDShack falak pema Wed, 12/13/2017 - 14:52 Permalink

Reaganomic growth happened because the debt was constrained according to historical patterns because there was a functioning private bond market. This functioning bond market is why Paul Volker had to raise rates to 15% to rein in 20% inflation. Yes debt expanded, but debt was expanding going back to the creation of the Fed. It accelerated when the gold standard was abolished by Nixon. The key is the private bond market still functioned within the dictates of expanding debt.That all changed in 2008. When the EU collapsed, the CBs had to neutralize the bond vigilantes or the very existance of nation states were at risk. So the CBs started buying every govt backed bond, multiplying their balance sheets and monetizing their ever expanding debt based stimulus. This killed the bond vigilantes and allowed the CB to defacto control the bond markets. So a CB controlled bond market, coupled with CB printing press, and a mandate for ever expanding govt budgets/debt, and you have a world wide Ponzi.As to the rest of the world saying "No" to the US and taking them down. Good luck with that. There is a reason why the US and it's allies are all in the same boat. There is also a VERY BIG reason why the US has the LARGEST MILLITARY in the world. The bottom line is any take down will be fought, literally to the death by the Security State, if necessary. History has shown many great empires failing, and the US will probably be no exception. But the timeline is probably much longer then anyone can believe, and I predict it will be exponentially bloodier then anything ever seen before. Plan accordingly.

In reply to by falak pema

falak pema SDShack Wed, 12/13/2017 - 15:15 Permalink

The EU did Not collapse in 2008...WS did...The EU collapsed in 2010 when Mutti said : we won't protect Euro by Eurobonding; all for one one for all...And the HFs; aka the sharks of Shadow banking, the most delusional expression of "greed is good" and "the only rule in there are no rules" of Reaganomics John Galt delusionism,  took the EU to the cleaners...IT WAS A DECLARATION OF WAR BY PAX AMERICANA TO ITS PARDNERS ... AS CAPITALISM BECAME "EVERY MAN FOR HIMSELF".... and may the petrodollar rule via the derivatives hold on swap and futures $ monopoly.NOW ITS #MAGA; all the while the world realizes that Pax Americana under the Duck's desperate "winner take all" Casino play, makes Aldous Huxley day the iconic moment when "for us or against us" became the Imperial Mantra of the MIIC debasement of FDR's liberal and multilateral legacy.  A 60 year fall into APocalypse now type hubris and loading the dice.America has never been as great as in 1945... on the beaches and shores of a corrupted European dream; but then suffering its own decline-- like a Dorian Gray portrait of its European original-- as a corrupted projection of this fall of Europe now becoming a corrupted AMerican dream.Its a Western civilization tragedy. Whence the Asian pivot.

In reply to by SDShack