Confidence is truly a big part of economics (small “e”); that is why orthodox Economists (capital “E”) spend so much time with asset prices, infatuating themselves with bubbles while also convincing themselves they aren’t that. It isn’t something that can be conjured out of nothing, manipulated like a regression variable (raise stocks X, confidence increases Y, economy grows Z). But it can work in the other direction, such as when policymakers claim the “wealth effect” and then watch the economy instead sink. The real danger in terms of money and economy might be when the world wakes up to what I wrote above; policymakers have been calling a depression a recovery for nearly a decade. The implications of that might be where this possible event horizon sits; that central banks have exhausted themselves and we still got depression anyway.
The ultimate effect of continued inflation of central bank balance sheets will likely be the complete breakdown of the currency system. There’s little doubt about this eventual fate. What’s more, the prospect of helicopter drops will help accelerate this unpleasant outcome.
Unfortunately, at this point there’s no way to reverse course without triggering the breakdown. Our advice, acquire some physical gold if you haven’t already done so and prepare yourself mentally and spiritually for the final phase of the crack-up boom. Remarkable things will happen.
One interim scenario is that some stock market investors will believe they’re getting rich. There’s no telling what sort of mania could be propelled by the dual effect of perpetually low interest rates and perpetually braindead central bankers…or how many points outright debt monetization could add to the DOW.
There’s great potential that the stock market will become a crude barometer of how successful central banks are at destroying the accumulated wealth and capital of the world. One signal they’re succeeding involves rapidly rising stock prices in the face of a stagnating economy. Another signal involves rapidly rising stock prices in the face of sluggish earnings. A third signal involves rapidly rising stock prices in the face of declining currency values.
All of these signals are already visible to the naked eye. Their further magnification will presage the final bust.
The point is, at this twilight in the rise and fall of our 45-year fiat based currency system, escalating stock prices are not something to be celebrated. Rather, they’re a signal that the end is nigh. Remember this in the coming months when you see DOW 20,000 hats circulating on the floor of the NYSE.
Ben Hunt of Salient Partners writes convincingly that this status quo narrative is starting to falter very badly, and in the face of events like Brexit, becoming harder and harder to maintain:
“… status quo political and economic institutions – particularly Central Banks – have failed to protect incomes and have pushed income and wealth inequality past a political breaking point.
They made a big bet: we’re going to bail-out / paper-over the banks to prevent massive losses in the financial sector, we’re going to inflate the stock market so that the household sector feels wealthier, and we’re going to make vast sums of money available for the corporate and government sectors to borrow really cheaply.” Narratives die hard, but when the ‘omnipotent central bank’ narrative finally and conclusively fails, bond investors will suffer a religious experience as the market rushes to reprice these heavily overvalued bonds.
One conundrum stumping investors in recent months has been how, with investors pulling money out of equity funds (at last check for 17 consecutive weeks) at a pace that suggests a full-on flight to safety, as can be seen in the chart below which shows record fund outflows in the first half of the year - the fastest pace of withdrawals for any first half on record...
... are these same markets trading at all time highs? We now have the answer.
Recall at the end of January when global markets were keeling over, that Citi's Matt King showed that despite aggressive attempts by the ECB and BOJ to inject constant central bank liquidity into the gunfible global markets, it was the EM drain via reserve liquidations, that was causing a shock to the system, as net liquidity was being withdrawn, and in the process stocks were sliding.
Fast forward six months when Matt King reports that "many clients have been asking for an update of our usual central bank liquidity metrics."
What the update reveals is "a surge in net global central bank asset purchases to their highest since 2013."
And just like that the mystery of who has been buying stocks as everyone else has been selling has been revealed.
But wait, there's more because as King suggests "credit and equities should rally even more strongly than they have done already."
Like all employees of the FBI, James Comey lives off the sweat of the American taxpayer. His large salary, upon retirement, will be converted into a very generous pension. Like most federal employees in a high ranking position like his, Comey continues to look forward to decades of living at a standard of living far above what is experienced by ordinary people in the private sector.
To maintain this life of comfort, all he had to do was agree to look the other way as a powerful politician clearly — by Comey's own admission — broke federal law.
Naturally, this same treatment would never be afforded to an ordinary taxpayer, who would likely be looking at years in federal prison for offenses similar to that which Hillary Clinton has apparently committed. Moreover, Comey even went out of his way to do his best to ensure no federal prosecutor would proceed with charges when he claimed that "no reasonable prosecutor" would proceed with charges. It wasn't enough for Comey to simply not recommend charges. He had to pre-emptively condemn any prosecutor who might proceed with charges.
Some have claimed that Comey was forced to cave to Obama administration pressure in order to protect his family. Of course, Comey could have resigned his position rather than take a position he regarded as unethical. Then the task of clearing Clinton would have fallen to Comey's successor. There are precedents for this. When ordered by Nixon to fire the special prosecutor in the Watergate scandal, Attorney General Elliot Richardson resigned rather than do what the president mandated. Comey could have done the same, but then he would have had to give up some of his comforts and privileges.
When I was a boy, one of my favorite holidays was Independence Day. I was an enthusiastic student of the War for Independence. My favorite book was the How and Why Wonder Book of the American Revolution by Felix Sutton. I spent a lot of my childhood reading about the colonial era, the lives of people like Sam Adams, Paul Revere, Thomas Jefferson, Patrick Henry, and George Washington. I learned all about our American forefathers’ struggle for liberty against a king who merely treated them as revenue-generating pawns. I was nine years old when the US celebrated its bicentennial and my mother wallpapered my room with a red, white, and blue colonial American themed paper and I had various prints of famous revolutionary war scenes hanging on the walls. I looked forward every year to the day celebrating the signing of the Declaration of Independence.
Over the years, alas, my enthusiasm became dampened so that now, if I am exposed to any mainstream media celebrations of Independence Day, I do not feel the joy I once did. Instead I feel more like Charlie Brown at the beginning of A Charlie Brown Christmas. Remember in that childhood classic how, when Christmas approaches, Charlie Brown tells Linus that he knows he should be happy, but instead he always ends up feeling depressed. I increasingly get the same feeling as people gear up for 4th of July celebrations.
Now, much older and perhaps wiser, when I hear the popular media gushing about our freedoms, the Declaration of Independence, the Liberty Bell, Celebrate America concerts, and all the rest on the Fourth of July, instead of being happy, I feel a tinge of sadness. I like celebrating the Fourth of July by, say, gathering with friends, teaching my children about the Founding Fathers, reading the Declaration, and watching fireworks, but when I think about where we started and what we have become, like Charlie Brown I end up melancholy. This is because the politicians and the media talking heads clearly have no idea what they are talking about. Most seem to not even know what liberty really is. The only politician at the national level who spoke about freedom and the Constitution with actual conviction was Ron Paul and they laughed him off the stage. Instead, popular journalists and pundits try to make us believe that we are free because we are allowed to have other people vote away our liberties.
Actually, it is Bernanke who is badly confused and has completely misunderstood Wicksell’s analysis of the natural rate. Certainly, the Fed affects interest rates when it determines the money supply. But this begs the question. If the Fed were to completely halt its manipulation of the money supply, the loanable funds market would not disappear nor would interest rates become indeterminate. The supply of loanable funds would simply shift to the left and the interest rate would rise to a new equilibrium that aligns the loan rate with the long-run rate of return on investment in the real production structure. Wicksell’s natural rate would finally emerge for all to see. It is precisely the Fed’s attempt “to set the short-term interest rate somewhere” that causes it to be unobservable anywhere.
The anti-establishment trend has picked up its pace this morning, showing no signs of abating. Around 2:30 a.m. New York time, Wall Street traders were stunned by the news that U.K. voters had backed leaving the European Union by 51.9 percent versus a remain vote of 48.1 percent in the anxiously anticipated Brexit referendum held yesterday.
Today Janet Yellen came before the Senate Banking Committee to answer questions following last week’s announcement that the Fed will keep the Federal funds rate steady in light of May’s devastating job numbers. While the big media headline focused on Yellen echoing the Bank of England’s warnings against Brexit, the biggest take away may be Yellen’s tacit admission that the Fed’s consistently poor track record of projecting rate increases has crippled its credibility in financial markets.
DoubleLine’s Gundlach says ‘central banks are losing control’ … Jeffrey Gundlach, the chief executive of DoubleLine Capital, said on Tuesday investors are dropping risky assets and turning to safer securities including Treasuries and gold because they are losing faith in central banks. –Reuters
We were amazed in March when, during the last Fed press conference, CNBC's Steve Liesman and traditional Fed cheerleader went so far as to ask a stunned Janet Yellen whether she has a credibility problem: "Does the Fed have a credibility problem in the sense that it says it will do one thing under certain conditions, but doesn't end up doing it? And then, frankly, if the current conditions are not sufficient for the Fed to raise rates, well, what would those conditions ever look like?"
Janet Yellen's jumbled 261 word response was one for the ages (and can be read here), but that particular exchange was nothing compared to what Steve Liesman said today when, in similar words he asked the same question, and got the same garbled response.
But it was what he said afterwards that was amazing. And we quote:
I think the first rate hike cycle is over. What Janet Yellen said in response to my question, and if you look at what has happened to the rate hike cycle, is pretty profound. It's as close to the Fed getting to capitulation as I've ever seen, about the efficacy of Fed policy, about the outlook for the economy.
I just want to read this: "I think all of us are involved in a process of constantly reevaluating where the neutral rate is." Basically they see these headwinds to the economy as becoming part of the new normal. This five-eights decline to the Fed Funds rate outlook for 2018 is pretty profound and GDP remained the same. That's very important. And I am going to give rick a blue ribbon because Rick represents the markets. Rick - the markets won. The Fed has completely capitulated to the market's point of view. The Fed is not leading the markets here, the markets are leading the Fed. Every single time." To which Rick's response is absolutely spot on: "there is no market. There is Janet. There's Mario Draghi. There is Abe. There is no market left."
And, just to validate this point, Gundlach chimed in that "The 'rate hike cycle' has left the building"
Last month, central bankers and finance leaders from the Group of 7 (G-7) advanced economies met in Sendai to discuss the global economy at large. As expected, the United States cautioned Japan, a US currency watchlist country, to refrain from taking further steps to manipulate its currency. This warning came as a result of finance minister Taro Aso hinting that his country was “prepared to undertake intervention” in the foreign exchange market in order to weaken the yen.
If we simply care enough to look and see what’s hidden in plain sight, each and every one of us - regardless of orientation, will suddenly conclude that it’s time to stop fighting with one another, as the majority of such infighting and divisiveness is fostered by the subversive encouragement of none other than a plainly visible common enemy – our Oligarch’s.
This model now pegs the “fair value” of UST’s 10s at 1.95%, though as Bloomberg points out, rightly, it figured “fair value” at 2.85% before this latest reconfiguration. These mainstream models and interpretations are all GIGO – garbage in, garbage out. Nobody can figure out bonds because nobody can figure out money, and thus what real monetary policy is. Yet, the answer is so obvious that no one seems to want to believe it. As that article I quoted above from June 2013 reads, everyone is wrong based on one, simple miscalculation.
Although I was raised under the doctrines of the Roman Catholic Church, and respectful thereof - as I am with all other peaceful religions of the world, I do not consider myself to be particularly “religious,” but rather a logical skeptic, and persistent seeker of empirical truth in every realm.
Since I typically keep rather abreast to such matters of import, I’m quite surprised that I did not catch wind of this newly presented scientific knowledge, which by initial accounts became widely available to the public through a motion picture titled “The Principle,” theatrically released in 2014.
Stumbling upon it of late was quite the revelation, and raised for me the following 3 questions:
In my view, this new bout of turmoil in financial markets is the prelude to the final demise of government currency.
If I’m right, a long-expected collapse in the purchasing power, and of the very concept of fiat currency, will evolve from current events. The purpose of this article is to explain why monetary theory predicts a currency collapse.
The question at the heart of today’s market instability is the validity of fiat currency; that is to say, forms of money issued and sanctioned by individual governments, with no backing other than faith in those governments’ creditworthiness, and the enforcement of its use by law. The risks they impose on all of us will be evidenced one day by both the speed of the fall in each individual fiat money’s purchasing power, and inevitably by their comparison with gold’s more stable purchasing power. Essentially, an awareness of the dangers of unsound money will gradually become evident to every economic actor.
So far, or at least since the days when fiat money was freely exchangeable for gold, central banks have managed to enforce upon us their currencies as money, originally on the basis they were gold substitutes. That pretence was finally dropped in 1971. The purchasing power of fiat currencies has never been seriously challenged since, except in relatively few extreme cases, such as Zimbabwe and Venezuela. Not even the financial crisis eight years ago threatened a collapse in fiat currencies, when banks had to be rescued with unlimited extra quantities of money and credit.
We expect $10 trillion of “paper wealth” to be wiped from the U.S. equity market over the completion of this cycle, because it is not “wealth” at all. Again, since every security that is issued has to be held by someone until it is retired, the main consequence of Fed-induced speculation is the opportunity for wealth transfer - the chance for existing holders to sell their overvalued securities to some poor bagholder who will reap the whirlwind over the completion of the market cycle. We wish this on nobody, but it’s unavoidable that someone must assume that role. Those bagholders would best be those who understand our concerns and either accept the risks or choose to deny them.
The real nature of liquidity is not what you see today but what we might find when the going gets tough. Though it is an intangible concept (not that that hasn’t kept economists from trying to quantify it), we can reasonably assume that if overall liquidity today appears impaired under relatively benign conditions, it will be significantly worse as malignancy spreads. Like entropy, liquidity reacts only in one direction.
Decentralization and devolution of state power is always a good thing, regardless of the motivations behind such movements.
Hunter S. Thompson, looking back on 60s counterculture in San Francisco, lamented the end of that era and its imagined flower-child innocence:
So now, less than five years later, you can go up on a steep hill in Las Vegas and look West, and with the right kind of eyes you can almost see the high-water mark — that place where the wave finally broke and rolled back. Does today’s Brexit vote, win or lose, similarly mark the spot where the once-inevitable march of globalism begins to recede? Have ordinary people around the world reached the point where real questions about self-determination have become too acute to ignore any longer?
In short, there is an alternative to Yellen’s Keynesian babble and the policies which fuel the Wall Street casino’s endless party for the 1% and the recurring financial market booms and busts. Even then, the latter take their toll on Flyover America far more destructively than on the fast money gamblers who always seem to get the word early and get out of the way in time; or get bailed-out like Jeff Imelt and John Mack, if they don’t.
So abolish the FOMC. Liberate interest rates and the yield curve so that the right price can be discovered on the free market. Restore the Banker’s Bank. Bring back the green eyeshades and a mobilized discount rate. Adopt Super Glass-Steagall and break-up the big financial conglomerates.
Finally, recognize that debt is not the keystone to prosperity and that if policy is to lean at all—–it must be in behalf of less debt, not more, as far as the eye can see.
If you think that a referendum vote on June 23 by UK citizens on whether to withdraw from the European Union (called Brexit, short for British Exit), is simply a proxy on whether the UK should dislodge itself from the edicts of Brussels, think again. It’s morphed into a much broader debate on whether citizens worldwide should surrender their right to a participatory democracy in order to further the interests of multinational corporations, secret trade agreements packed with secret court tribunals, global banking hegemony and central banks attempting to keep all these balls in the air for their one percent overlords.
Beyond Human Capacity Distilling down and projecting out the economy’s limitless spectrum of interrelationships is near impossible to do with any regular accuracy. The inputs are too vast. The relationships are too erratic.
The economy – complex and ever-changing interrelations.
Image credit: Andrea Dionne
Quite frankly, keeping tabs on it all is beyond human capacity. This also goes for the federal government. Even with all their data gatherers and number crunchers they are incapable of stitching together an exact understanding of where the economy is really at, let alone where it is going.
What’s more, the economy is always evolving and changing in ways that are hard to discern in advance. Cause and effect do not correlate with the simple precision of a balance scale. When one input decreases, an apparently correlated one can somehow increase.
For example, when incomes go down, apartment rents should also go down. Lower incomes should result in lower price competition for apartment rents and, thus, lower rents. Logic would support the inherent truth of this premise.
Yet, in Sacramento California, and many other places, the exact opposite has happened. Median incomes have declined 13 percent, while median apartment rents have increased 13 percent. How does that work?
Perhaps too burdensome development regulations have something to do with it. Or maybe lasting fallout from the great mortgage bust is the culprit. Certainly, the shortage of affordable rentals is driven by a great variety of factors.
Of course, with the Fed out of the QE game for now, and discussing tightening monetary policy further, the only question is whether “organic economic growth” has actually taken hold?
The Fed’s hope has always been that at some point they would be able to wean the economy off of life support and it would operate under its own strength. This would allow the Fed to raise interest rates back to more normalized levels and provide a policy tool to offset the next recession.
It has taken a massive amount of interventions by Central Banks to keep economies afloat globally over the last seven years and there is little evidence suggesting growth is accelerating. In fact, there may be more evidence suggesting quite the opposite.
With expectations rising the Fed will further tighten monetary policy in June, the lack of liquidity for the markets may become a much bigger issue not only for investors, but for the economy as a whole. In other words, excessive exuberance may have a high cost to pay.
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