Bent and Distorted

POITOU, FRANCE – This morning, we are wondering: How dumb is the Fed?

The question was prompted by this comment by former Fed insider Chris Whalen at The Institutional Risk Analyst blog.

 

They’re not the best map readers, that much is known for certain. [PT]

 

[O]ur message to the folks in Jackson Hole this week [at the annual central banker meeting there] is that the end of the Fed’s reckless experiment in social engineering via QE and near-zero interest rates will end in tears.

“Momentum” stocks like Tesla, to paraphrase our friend Dani Hughes on CNBC last week, will adjust and the mother of all rotations into bonds and defensive stocks will ensue. We must wonder aloud if Chair Yellen and her colleagues on the FOMC fully understand what they have done to the US equity markets. […]

Once the hopeful souls who’ve driven bellwethers such as Tesla and Amazon into the stratosphere realize that the debt driven game of stock repurchases really is over, then we’ll see a panic rotation back into fixed income and defensive stocks.

 

If you believe the newspapers, the Fed has begun a “tightening cycle.” It is on course to raise its key interest rate, little by little, in quarter-point increments.

It must know that this is a perilous thing to do. After so much market manipulation over such a long period, prices all up and down the capital structure – from junk bonds to quality stocks and solid real estate – have been bent and distorted.

After all, that was the idea: drive up the price of stocks and bonds by driving down interest rates. People would be forced to spend or invest their money rather than save it. And higher financial asset prices would make the rich feel even richer.

Walking down the street, the dollars would overflow from their pockets like turnips rolling off the back of a produce truck. They’d feel so flush, they’d buy, buy, buy… sending the plain people into a flurry of trucking, toting, and busting their humps to provide them with goods and services.

Then, after the rich were fully satiated (after all, how many martinis can the 1% drink?), they’d have to invest.

Cash would flow into money-losing start-ups like Tesla and Snapchat. Headline acquisitions, such as Amazon’s purchase of Whole Foods, would keep stock prices bubbling higher. And trillions of dollars in stock buybacks would make the rich even richer still!

 

What a wonderful work of art… the pièce de résistance of financial bubbles, the one you really had to see to believe. The red line depicts all the debt companies have amassed to grease the financial engineering wheels. This is a game that is indeed coming close to its end. US money supply and credit growth have tanked – the lagged effects of this change  in the monetary backdrop will play out. We suspect that the huge surge in corporate debt will become cause for big regrets at that juncture. [PT] – click to enlarge.

 

Money Mirage

But the feds could only work this miracle by buying bonds. And the feds didn’t have any money. What could they do? No problem! They used their fake money, the post-1971 credit dollars – trillions of them… money they could create at will.

From the post-crash bottom in 2009 to today’s top, U.S. stocks and bonds registered a cumulative increase of about $21 trillion. And upon that mirage now rest the hopes, dreams, and contentment of millions of people all over the planet.

One has planned his retirement based on his gains over the last eight years. Another has taken out a loan against his stocks to fund his business. Still another – a major player on Wall Street – has a billion-dollar hedge fund portfolio, a leveraged bet on “low vol,” which depends on further support from the Fed.

And look at super investor Warren Buffett… the latest headline news tells us his gifts to charities now top $27 billion. The money is to be used to fight illness and poverty worldwide. But the gifts came in the form of Berkshire stock – not cash. Imagine how the halt and the hungry will suffer if the stock goes down!

 

Homely Warren’s levitating gift. [PT] – click to enlarge.

 

Classic Credit Bubble

Which brings us back to our question: How dumb is the Fed?

As you can see from the foregoing, the boom of 2009–17 was wrought by the Fed and paid for with fake money. It is a classic credit bubble, in other words – not genuine prosperity.

Almost all the new jobs created during this period were low-wage or part-time jobs in health care or government, not high-value jobs in manufacturing. That’s why real earnings, per family, have scarcely improved – and real employment (as a percentage of the available workforce) has gone down.

All the bubbly action, in other words, is in the financial markets, not the real Main Street economy. And as the Austrian School economists tell us, every boom not financed on real savings must end in a bust.

 

Phantom wealth driver: the Fed’s electronic printing press. This orgy of money printing (TMS-2 is up more than 140% since early 2008) has driven asset prices to the stratosphere and has gone hand in hand with the explosion in outstanding debt depicted further above. Most of the “wealth” created in this manner is a mirage that will eventually  disappear, one way or another. It should be clear that it is simply not possible to print an economy to “prosperity”. [PT] – click to enlarge.

 

Nothing comes from nothing. Fake money produces fake prosperity. Take away the fake money… and the fake prosperity goes “poof,” too. Which is why the Fed will never, voluntarily, stop manipulating prices. It can’t let the markets return to “normal” price discovery. Because the markets are likely to discover prices a lot lower than Dow 20,000.

“Normal” may be a lot higher than a 2% yield on a 10-year Treasury yield, too. “Normal” may mean a deep depression as the economy shakes off the foolish investments and misallocations of the last eight years. “Normal” would also mean the disgrace of Janet Yellen and Ben Bernanke, who are largely responsible for this bubble.

But “normal” won’t stop there. The crisis of 2008–09 was a repudiation of the Fed’s fake-money debt bubble. The stock market crashed as the bubble deflated, just as it normally does. But then central banks went back to work, doubling down on their error with more hot air than ever before.

Federal debt alone almost doubled from about $10 trillion to about $20 trillion. Worldwide, $68 trillion in debt has been added since 2007 – a 45% increase – bringing the debt-to-GDP ratio to 327%.

 

Federal funds rate since 1978 – the recent tightening is historically still small, but one has to keep in mind that the end of QE was a tightening move as well. It is noteworthy in this context how quickly money supply growth has declined since its last interim growth peak in November 2016. [PT] – click to enlarge.

 

All of this debt now hangs on the feeble reed of more ultra-low interest rate policies. The Fed says it is going to return its interest rate policy back to normal…

No chance. It’s not that dumb.

 

Generally central planners do not have much of a clue. Evidence to that effect abounds, as do sound theoretical explanations as to why it cannot be otherwise, regardless of the knowledge, intelligence or intentions of the planners. What we can state is that the Fed is reactive. Since it has embarked on a tightening path, it will probably continue until something breaks – and that could happen very soon. [PT]

 

Cartoons by Bob Rich

 

Charts by: St. Louis Fed, StockCharts

 

Chart and image captions by PT

 

The above article originally appeared at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.

 

 
 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

5 Responses to “How Dumb Is the Fed?”

  • Hans:

    Good catch, Rodney!!

    WTF, is correct as well as Dumb and Dumber.

    I am sorry to say this, however, Ms Yellen is a idiot of the first order.

  • RagnarD:

    Why do people blame Greenspan/Bernanke/Yellen? It seems one could make this argument early in Greenspan’s tenure. But can we really blame the figureheads who are simply behaving as they’ve been expected to by those who have appointed them? If not Yellen, it would be Ms. EcononPhDX123, no?

    Clearly the general public is oblivious to the issue, as QE/money printing were largely ignored during the presidential campaigns. And I doubt Trump wants to bring a depression down on his own head. Maybe if he wins a second term he’d be willing to go there, but right now? I don’t think so.

    Certainly the fact that an entity such as Fed exists, under Jim Grant’s Phd standard, is the real culprit. And the fact that this money printing institution serves the needs of many folks in power, is the real issue.

  • Kafka:

    “People would be forced to spend or invest their money rather than save it.”

    A foundational lie upon which much economic asset stripping is falsely justified.

    Exactly where can savings be set aside, out of circulation, if interest paid on savings is fair. Only under Central Bank repression of interest rates, would a saver have to decide whether to put his cash into a mattress or into a bank. The lower the interest is paid on private savings the more indifferent a saver becomes to holding his cash outside the banking system vs putting his hard earned cash into the bank.

    Ergo, the Fed and other Central Banks, by using the power of Government penalty, reduce private savings, which otherwise could go into private investment via the intermediation that banks once did.

  • Hans:

    How dumb is the FED? So dumb they should
    have seismograph meters hooked up via a
    catheter.

    The latest FED Richter Scale 7.5 was Ms Yellen
    declaration about future economic events, with
    the cartoon like statement, dat 50% of the economy
    looks good while 50% of the economy looks bad.

    More proof that the FRB needs to be immediately closed
    for the health and welfare of the general public.

    • rodney:

      Hans, how’s this for a cartoon like statement:

      Another financial crisis is unlikely in our lifetime

      — Janet Yellen, June 27th, 2017

      Another “The subprime crisis is contained” moment?

      WTF? Dumb and Dumber anyone?

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • 21st Century Shoe-Shine Boys
      Anecdotal Flags are Waved   "If a shoeshine boy can predict where this market is going to go, then it's no place for a man with a lot of money to lose." - Joseph Kennedy   It is actually a true story as far as we know – Joseph Kennedy, by all accounts an extremely shrewd businessman and investor (despite the fact that he had graduated in economics*), really did get his shoes shined on Wall Street one fine morning, and the shoe-shine boy, one Pat Bologna, asked him if...
  • Christopher Columbus and the Falsification of History
      Crazed Decision The Los Angeles City Council’s recent, crazed decision* to replace Christopher Columbus Day with one celebrating “indigenous peoples” can be traced to the falsification of history and denigration of European man which began in earnest in the 1960s throughout the educational establishment (from grade school through the universities), book publishing, and the print and electronic media.   Christopher Columbus at the Court of the Catholic Monarchs (a...
  • India: The Genie of Lawlessness is out of the Bottle
      Recapitulation (Part XVI, the Last) Since the announcement of demonetization of Indian currency on 8th November 2016, I have written a large number of articles. The issue is not so much that the Indian Prime Minister, Narendra Modi, is a tyrant and extremely simplistic in his thinking (which he is), or that demonetization and the new sales tax system were horribly ill-conceived (which they were). Time erases all tyrants from the map, and eventually from people’s...
  • The Forking Paradise - Precious Metals Supply and Demand Report
      Forking Incentives A month ago, we wrote about the bitcoin fork. We described the fork:   Picture a bank, the old-fashioned kind. Call it Acme (sorry, we watched too much Coyote and Road Runner growing up). A group of disgruntled employees leave. They take a copy of the book of accounts. They set up a new bank across the street, Wile E Bank. To win customers, they say if you had an account at Acme Bank, you now have an account at Wile, with the same balance!   BCH, son...
  • The Government Debt Paradox: Pick Your Poison
      Lasting Debt “Rule one: Never allow a crisis to go to waste,” said President Obama’s Chief of Staff Rahm Emanuel in November of 2008.  “They are opportunities to do big things.”   Rahm Emanuel looks happy. He should be – he is the mayor of Chicago, which is best described as crisis incarnate. Or maybe the proper term is perma-crisis? Anyway, it undoubtedly looks like a giant opportunity from his perspective, a gift that keeps on giving, so to speak. [PT] Photo...
  • The United States of Hubris
      Improving the World, One Death at a Time If anyone should have any questions about whether the United States of America is not the most aggressive, warlike, and terrorist nation on the face of the earth, its latest proposed action against the supposed rogue state of North Korea should allay any such doubts.   Throughout history, the problem with empires has always been the same: no matter how stable and invincible they appeared, eventually they ran into “imperial...
  • Long Term Statistics on AAPL
      Introductory Remarks by PT Below we present a recent article by the Mole discussing a number of technical statistics on the behavior of AAPL over time. Since the company has the largest market cap in the US stock market (~ USD 850 billion – a valuation that exceeds that of entire industries), it is the biggest component of capitalization-weighted big cap indexes and the ETFs based on them. It is also a component of the price-weighted DJIA. It is fair to say that the performance of...
  • Tragedy of the Speculations
      The Instability Problem Bitcoin is often promoted as the antidote to the madness of fiat irredeemable currencies. It is also promoted as their replacement. Bitcoin is promoted not only as money, but the future money, and our monetary future. In fact, it is not.   A tragedy... get the hankies out! :) [PT]   Why not? To answer, let us start with a look at the incentives offered by bitcoin. We saw a comment this week, which is apropos:   "Crypto is so...
  • To Hell In A Bucket
      No-one Cares... “No one really cares about the U.S. federal debt,” remarked a colleague and Economic Prism reader earlier in the week.  “You keep writing about it as if anyone gives a lick.” We could tell he was just warming up.  So, we settled back into our chair and made ourselves comfortable.   The federal debtberg, which no-one cares about (yet). We have added the most recent bar manually, as the charts published by the Fed will only be updated at the end of the...
  • Despite 24/7 Trading: Bitcoin Investors are Taking off for the Weekend on Friday Already
      Crypto-Statistics In the last issue of Seasonal Insights I have discussed how the S&P 500 Index performs on individual days of the week. In this issue I will show an analysis of the average cumulative annual returns of bitcoin on individual days of the week.   Bitcoin, daily. While this is beside the point, we note the crypto-currency (and other “alt coins” as well) has minor performance issues lately. The white line indicates important lateral support, but this looks to...
  • Precious Metals Supply and Demand
      Fundamental Developments There were big moves in the metals markets this week. The price of gold was up an additional $21 and that of silver $0.30. Will the dollar fall further?As always, we are interested in the fundamentals of supply and demand as measured by the basis. But first, here are the charts of the prices of gold and silver, and the gold-silver ratio.   Gold and silver prices in USD terms (as of last week Friday) - click to enlarge.   Next, this is a...
  • Precious Metals Supply and Demand
      Back to the Happy Place Amid a Falling Dollar The prices of the metals dropped this week, $24 and $0.38. This could be because the asset markets have returned to their happy, happy place where every day the stock market ticks up relentlessly.   Sometimes, happiness is fleeting... - click to enlarge.   The major currencies have been rising all year—we insist that this is a rise in these dollar derivatives, not a fall in the dollar—and this is a risk-on pattern....

Support Acting Man

j9TJzzN

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com