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Riding ZIRP Into The Doom Loop—–Monetary Central Planning’s Dead End
Riding ZIRP Into The Doom Loop—–Monetary Central Planning’s Dead End
What the Fed really decided Thursday was to ride the zero-bound right smack into the next recession. When that calamity happens not too many months from now, the 28-year experiment in monetary central planning inaugurated by a desperate Alan Greenspan after Black Monday in October 1987 will come to an abrupt and merciful halt.
Why? Because Keynesian money printing is in a doom loop. The Fed’s ZIRP policies guarantee another financial crash, which will trigger still another outbreak of panic in the C-suites of corporate America and a consequent liquidation of excess inventories and labor on main street. That’s the new channel of monetary policy transmission, and it eventually leads to recession.
This upcoming recession, in turn, will prove beyond a shadow of doubt that in today’s financialized global economy you can’t manage the GDP of a single country as if it were isolated in an economic bathtub surrounded by high walls; nor can you attain domestic macro-targets for employment and inflation through the blunderbuss instruments of pegged money market rates and wealth effects levitation of the stock market.
Instead, the Fed’s falsification of financial asset prices simply subsidizes gambling in secondary markets; enables daisy chains of collateral to be endlessly hypothecated and re-hypothecated; causes vast misallocations and malinvestments of corporate resources, especially stock buybacks and other financial engineering; and sends money managers scrambling for yield without regard to risk, such as in junk bonds and EM debt.
What it doesn’t do is get households all jiggy, causing them to boost their leverage and spend up a storm. That’s because they reached “peak debt” at the time of the financial crisis, and have been struggling to reduce debt ever since. In the most recent quarter, in fact, household debt posted at $13.6 trillion or 3% lower than in early 2008.
…click on the above link to read the rest of the article…
Cash-Strapped Saudi Arabia Hopes To Continue War Against Shale With Fed’s Blessing
Cash-Strapped Saudi Arabia Hopes To Continue War Against Shale With Fed’s Blessing
Two weeks ago, Morgan Stanley made a decisively bearish call on oil, noting that if the forward curve was any indication, the recovery in prices will be “far worse than 1986” meaning “there would be little in analysable history that could be a guide to [the] cycle.”
As we said at the time, “those who contend that the downturn simply cannot last much longer are perhaps ignoring the underlying narrative that helps to explain why the situation looks like it does.”
“At heart,” we continued, “this is a struggle between the Fed’s ZIRP and the Saudis, who appear set to outlast the easy money that’s kept US producers alive.” This is an allusion to the fact that the weakest players in the US shale industry – which the Saudis figure they can effectively wipe out – have been able to hold on thus far thanks largely to accommodative capital markets.
But persistently low crude prices – which, if you believe Morgan Stanley, are at this point driven pretty much entirely by OPEC supply – are taking their toll on producers the world over. That is, the damage isn’t confined to US producers.
In fact, the protracted downturn in prices is slowly killing the petrodollar and exporters sucked liquidity from global markets for the first time in 18 years in 2014. To let Goldman tell it, a “new (lower) oil price equilibrium will reduce the supply of petrodollars by up to US$24 bn per month in the coming years, corresponding to around US$860 bn” by 2018.
As Bloomberg noted a few months back, the turmoil in commodities has produced a “concomitant drop in FX reserves … in nations from oil producer Oman to copper-rich Chile and cotton-growing Burkina Faso.”
And don’t forget Saudi Arabia which, as you can see from the chart below, isn’t immune to the ill-effects of its own policies.
…click on the above link to read the rest of the article…
Scotiabank Warns “The Fed Is Cornered And There Are Visible Market Stresses Everywhere”
Scotiabank Warns “The Fed Is Cornered And There Are Visible Market Stresses Everywhere”
Part One, China
An economic slowdown is underway in China. This is reflected in the steep drop in the commodity complex and in the currencies of emerging market countries. Large imbalances are being worked off as Beijing attempts to shift the composition of its growth. Policy decision are not always economic.
New sources of growth are being sought by Beijing as deleveraging occurs. Since officials care foremost about social stability, they try to preserve as many current jobs as possible during their attempt at economic transformation. During this period, banks might be averse to calling in loans. State owned enterprises (SOEs) are pressured to keep producing, so that workers can continue to receive a pay check. The result is over-production and downward pressure on prices.
Part Two, The Seven Year Fed Subsidy
The Fed’s zero interest rate policy has provided a subsidy to investors for the past 7 years. The lure of easy profits from cheap money was wildly attractive and readily accepted by investors. The Fed “put” gave investors great confidence that they could outperform their exceptionally low cost of capital. These implicit promises by central banks encouraged trillions of dollars into ‘carry trades’ and various forms of market speculation.
Complacent investors maintain these trades, despite the Fed’s warning of a looming reduction in the subsidy, and despite a balance sheet expected to shrink in 2016. It has been a risk-chasing ‘game of chicken’ that is coming to an end. Changing conditions have skewed risk/reward to the downside. This is particularly true because financial assets prices are exceptionally expensive.
Maybe investors do not believe ‘lift-off’ looms, because the Fed has changed its guidance so many times. Or maybe, investors are interpreting plummeting commodity prices and the steep fall in global trade as warning signs that global growth and inflation are under pressure.
…click on the above link to read the rest of the article…
Future Shock and the Greening of America
Future Shock and the Greening of America
What I find fascinating is our limited ability to make sense of trends unfolding in real time.
During our recent breakfast meeting in Berkeley, author/blogger Jim Kunstler suggested that the coherence of eras waxed and waned, and the present era was incoherent. By this he meant the narratives being propagated by the status quo no longer align with reality, and often conflict with one another, resulting in incoherence.
There is a time lag of many years between fast-changing events and our ability to make sense of them, i.e. construct a coherent account or narrative of what we collectively experienced.
Each era has its Big Events and trends, but the last era with truly ground-shifting changes that affected virtually everyone in the nation in one way or another was the 1960s. 9/11 increased airport security but other than that, the changes wrought by the Global War on Terror (GWOT) only heavily impact narrow slices of the state and populace–the armed forces and security agencies.
The same can be said of the Global Financial Meltdown of 2008-09: the Zero Interest Rate Policy (ZIRP) destroyed the yield on savings, but the daily-life effects on most people have been relatively restrained compared to far more disruptive eras; some have seen their portfolios skyrocket in value, but most households have seen their real net worth decline. Social welfare did its job of providing a safety net for those who lost their jobs in the recession.
The 1960s visibly changed society in a few short years, and less visibly, the economy. Two books published in 1970, at the end of the tumultuous 1960s, attempted to weave a coherent narrative of what everyone was experiencing: Future Shock and The Greening of America.
…click on the above link to read the rest of the article…
ZIRP——The Monetary Trick Which Killed Wages
ZIRP——The Monetary Trick Which Killed Wages
Stupid Fed Trick Number 1
The Fed thinks that keeping interest rates low spurs inflation. It was probably happy to see the purported uptick in wage inflation in the just released May jobs report. It wants to see wages start rising to create a bit of inflationary pressure.
That would be a real trick.
See, it doesn’t work that way. In fact, it’s just the opposite.
For the past 35 years, every time the Fed reversed monetary policy, wage rates immediately followed…in the same direction! When the Fed eased, the wage inflation rate fell. When the Fed tightened, wages rose faster. Not just a couple of times. Every single time!
If you want to know what’s killing workers wages in the US there it is. ZIRP.
If the Fed wants to get a little wage inflation, all it needs to do is start raising interest rates.
The above chart shows the annual rate of change in the average hourly wages of production and nonsupervisory employees, which comes from the BLS.
The same data reveals the second stupid trick. It’s not really a Fed trick, it’s a Wall Street economist, financial media trick. But trust me, the Fed will use it.
By now you’ve heard the G-R-R-REAT news that wage gains are heating up! Here’s how the Wall Street Journal put it a few minutes after the jobs report was released on Friday:
“At $24.96, average hourly earnings for private-sector workers were up 2.3% in May from a year earlier. That’s the biggest increase since the summer of 2013 a modest acceleration over the past four months and a little faster than the 2% average during the latest economic expansion.”
…click on the above link to read the rest of the article…
QE Breeds Instability
QE Breeds Instability
Central bankers have promised ad nauseum to keep rates low for long periods of time. And they have delivered. Their claim is that this helps the economy recover, but that is just a silly idea.
What it does do is help create the illusion of a recovering economy. But that is mostly achieved by making price discovery impossible, not by increasing productivity or wages or innovation or anything like that. What we have is the financial system posing as the economy. And a vast majority of people falling for that sleight of hand.
Now the central bankers come face to face with Hyman Minsky’s credo that ‘Stability Breeds Instability’. Ultra low rates (ZIRP) are not a natural phenomenon, and that must of necessity mean that they distort economies in ways that are inherently unpredictable. For central bankers, investors, politicians, everyone.
That is the essence of what is being consistently denied, all the time. That is why QE policies, certainly in the theater they’re presently being executed in, will always fail. That is why they should never have been considered to begin with. The entire premise is false.
Ultra low rates are today starting to bite central bankers in the ass. The illusion of control is not the same as control. But Mario and Janet and Haruhiko, like their predecessors before them, are way past even contemplating the limits of their powers. They think pulling levers and and turning switches is enough to make economies do what they want.
Nobody talks anymore about how guys like Bernanke stated when the crisis truly hit that they were entering ‘uncharted territory’. That’s intriguing, if only because they’re way deeper into that territory now than they were back then. Presumably, that may have something to do with the perception that there actually is a recovery ongoing.
…click on the above link to read the rest of the article…
A Much Bigger Threat Than Our National Debt
A Much Bigger Threat Than Our National Debt
The markets are acting as though it was already summer. They are wandering around with little ambition in either direction.
Meanwhile, we’ve been wondering about… and trying to explain… what it is we are really doing at the Diary.
We expect a violent monetary shock, in which the dollar – the physical, paper dollar – disappears.
But why?
Credit Bubble, the Sequel
As you know, we tend to take the side of the underdogs… as well as half-wits, dipsomaniacs, and unrepentant romantics.
But currently, we are standing up for the young, the poor, and all the others the credit bubble has hurt and handicapped.
It’s not that we are saints or do-gooders. We are just trying to make a living, like everybody else.
But we come at it from a different direction than most. Almost all the movers and shakers have the same bias: They want to see the credit extravaganza continue.
The Federal Reserve has already “invested” (if that’s the right word for throwing phony money down the drain in a futile and jackass effort to hold off the future) $4.5 trillion to protect the balance sheets of the elite.
This money has been amplified by zero-interest-rate policies to something like $17 trillion of stock market gains… and umpteen trillion in bond and real estate profits.
Naturally, the people who own these things – and not coincidentally provide early stage funding for congressional and presidential candidates – do not want to see a new movie.
They want to see the sequel, Credit Bubble 5. Then Credit Bubble 6. And so on…
And the show goes on! They buy their candidates. They place their ads. The newspapers they support voice their opinions. Their corporations wheel and deal on Wall Street, spinning off bonuses, fees… and even higher stock prices.
And the pet economists appointed to run central banks do their bidding.
…click on the above link to read the rest of the article…
A Bubble on Thin Ice
A Bubble on Thin Ice
An Inexperienced Herd
A recent Bloomberg article discusses the fact that most traders active today have never known anything but the era of easy money, and wonders how they will handle the potential end of that era. To this it should be mentioned that the widely expected rate hike cycle may well never begin. The economies of industrialized nations have been severely undermined by loose monetary policy for many years. In concert with over-regulation and over-taxation, this has encouraged ever more capital consumption. Continued economic weakness may encourage the Federal Reserve to simply continue with the ZIRP policy, although it appears to be eager to end it.
Once the herd stampedes, nothing can stop it
Photo via pixshark.com
We have last discussed these problems in “The Sick US Economy” and “The Goldilocks Illusion”. As we have pointed out in the latter article, weak economic growth is not necessarily a guarantee that there won’t be any “price inflation”. A scenario in which the Fed will be forced to hike rates in spite of weak economic growth is not unthinkable. If so, then all these inexperienced traders could be in for the shock of a lifetime.
Effective federal funds rate, log scale: many traders have known nothing but the “quasi ZIRP” era and its seemingly forever rising risk asset prices – click to enlarge.
For every individual, price changes of a different “basket” of goods and services are important. A rich “one percenter” won’t even notice if his grocery, utility and health care bills are going up. By contrast, people whose incomes are in the lower quintile will be especially hard hit by rising prices of such necessities.
…click on the above link to read the rest of the article…
Something Smells Fishy
SOMETHING SMELLS FISHY
It’s always interesting to see a long term chart that reflects your real life experiences. I bought my first home in 1990. It was a small townhouse and I paid $100k, put 10% down, and obtained a 9.875% mortgage. I was thrilled to get under 10%. Those were different times, when you bought a home as a place to live. We had our first kid in 1993 and started looking for a single family home. We stopped because our townhouse had declined in value to $85k, so I couldn’t afford to sell. In 1995 I convinced my employer to rent my townhouse, as they were already renting multiple townhouses for all the foreigners doing short term assignments in the U.S. We bought a single family home in 1995 with the sole purpose of having a decent place to raise a family that was within 20 minutes of my job.
Considering home prices on an inflation adjusted basis were lower than they were in 1980, I was certainly not looking at it as some sort of investment vehicle. But, as you can see from the chart, nationally prices soared by about 55% between 1995 and 2005. My home supposedly doubled in value over 10 years. I was ecstatic when I was eventually able to sell my townhouse in 2004 for $134k. I felt so smart, until I saw a notice in the paper one year later showing my old townhouse had been sold again for $176k. Who knew there were so many greater fools.
This was utterly ridiculous, as home prices over the last 100 years have gone up at the rate of inflation. Robert Shiller and a few other rational thinking people called it a bubble. They were scorned and ridiculed by the whores at the NAR and the bimbo cheerleaders on CNBC. Something smelled rotten in the state of housing.
…click on the above link to read the rest of the article…
The trouble with cash
The trouble with cash
When interest rates are zero and it costs a bank to look after your money it becomes an unattractive asset. Banks in some jurisdictions (such as Switzerland, Denmark and Sweden) are even charging customers interest on cash and deposits. And if you go to your bank and withdraw large amounts in the form of folding notes to avoid these charges you will be lucky if you are not treated as a sort of pariah. For the moment, at least, these problems do not extend to sound money, in other words gold.
There are two distinct issues involved with government-issued currency: zero-to-negative interest rates, which all but eliminate any interest turn on deposits for the banks, and a systemic issue that arises if too many people withdraw their money from the banking system. The problems with the latter would become significant if enough people decide to effectively opt out of holding money in the banks.
Conversion of bank deposits into physical cash increases reserve ratios, restricting the banks’ ability to create credit. However, while the banks are contractually obliged to supply physical cash to anyone who wants it, a drawdown on bank deposits is a bad thing from a central bank’s point of view. A desire for physical cash is, therefore, discouraged. Instead, if the option of owning physical cash was removed and there was only electronic money, deposits would simply be transferred from one bank to another and any imbalances between the banks resolved through the money markets, with or without the assistance of a central bank. The destabilising effects of bank runs would be eliminated entirely.
…click on the above link to read the rest of the article…
The Goldilocks Illusion
The Goldilocks Illusion
Why Market Participants Liked the Payrolls Report
Some people have wondered why the stock market reacted with such a big rally to last Friday’s payrolls data. After all, the report wasn’t much to write home about, especially if one ponders the details. In addition, the already weak March payrolls data were revised lower to an even worse figure.
However, the report certainly did one thing: it kept the “Goldilocks illusion” alive. While jobs data are a lagging economic indicator and would likely be completely ignored in an unhampered free market (if anyone even took the trouble to collect them, that is), they are regarded as decisive for Fed policy. Few things illustrate more vividly that the central planners are driving forward with their eyes firmly fixed on the rear-view mirror.
The Fed has little choice though, since its mandate explicitly includes employment as one the things central bank policy is supposed to support (which it does mainly by fostering artificial booms and malinvestment of capital). The market’s focus on the jobs data has increased greatly in recent years as a result of this, which incidentally illustrates how utterly dependent the markets have become on a continuation of easy money policies by central banks.
The “Goldilocks” idea is that it is best for risk assets if economic data are strong enough not to signal recessionary conditions, but weak enough to keep ZIRP and monetary pumping going. Friday’s data point was presumably considered almost perfect in terms of this playbook.
…click on the above link to read the rest of the article…
Why Markets Are Manic—-The Fed Is Addicted To The ‘Easy Button’
Why Markets Are Manic—-The Fed Is Addicted To The ‘Easy Button’
Later this week another Fed meeting will pass with the policy rate still pinned to the zero bound. The month of May will make the 77th consecutive month of ZIRP—–an outcome that would have been utterly unimaginable even a decade ago; and most especially not with the unemployment rate at 5.5% and after 23 quarters had elapsed since the official end of the recession.
There never was an Armageddon-like crisis in 2008 that justified all this; it all happened because two emotionally unstable and misguided high officials—-Ben Bernanke and Hank Paulson—-panicked Washington into the utterly false fear that Great Depression 2.0 was at hand.
I debunked this urban legend by chapter and verse in The Great Deformation, but suffice it to say here that not withstanding all the crony capitalist larceny that this financial terrorism enabled, it is impossible with the stock market at 2100—-50% above its pre-crisis level—that there remains any justification for maintaining these “extraordinary policies” seven years later.
In fact, the Fed’s cowardly dithering for yet another meeting this week has precious little to do with the so-called Great Financial Crisis—-the ostensible reason why we ended up with perpetual free money subsidies for financial market speculators. Instead, it is a product of a policy ideology and insular culture that has been building at the Fed and most other major central banks for more than two decades.
Central bankers now have their big fat thumbs perpetually on the Easy Button because they are addicted to it. In the case of the Fed, it has been in a rate cutting or rate holding mode during 80% of the time since 1990. Stated differently, during 240 of the last 304 months, the Fed has been riding the Easy Button.
…click on the above link to read the rest of the article…
China Considers Launching QE; Shanghai Stocks Soar
China Considers Launching QE; Shanghai Stocks Soar
Nearly two months ago we explained “How Beijing Is Responding To A Soaring Dollar, And Why QE In China Is Now Inevitable” in which we cited Cornerstone who reminded us “that from 2007 to late 2008, U.S. fed funds dropped 500 bp, and then the Fed still needed to do QE? The backdrop for China looks a bit similar. We had a credit bubble, they have a credit bubble. We had a housing bubble, they have a housing/investment bubble. Will China eventually have to go down the same path as the U.S., and the Eurozone? … The PBoC will first cut rates to 0%, before contemplating QE.”
To this we added that “once China, that final quasi-Western nation, proceeds to engage in outright monetization of its debt, then and only then will the terminal phase of the global currency wars start: a phase which will, because global economic growth and that all important lifeblood of a globalized economy – trade – at that point will be zero if not negatve, will see an unprecedented crescendo of money printing by absolutely everyone, before coordinated devaluations mutate into uncoordinated, and when central bank actions morph from “all for one” to “each man for himself.”
We may not have long to wait because just hours ago, MarketNews first among the wire services hinted at what we suggested was the endgame.
- *PBOC DISCUSSING DIRECT PURCHASES OF LOCAL GOVT BONDS: MNI
- *PBOC IS DISCUSSING UNCONVENTIONAL POLICIES: MNI
Bloomberg adds more, citing MNI as saying that the Chinese central bank discussing “adopting unconventional policies to rebuild its balance sheet and reinvigorate economy, including making direct purchases of local government bonds from market.”
Of just as we predicted.
…click on the above link to read the rest of the article…
The Euthanasia Of The Saver
The Euthanasia Of The Saver
What have been the economic consequences of ultra-low interest rates? The answer might not be as hopeful as you may think.
While better known for the role of government in stimulating the economy, John Maynard Keynes, one of the most influential economists of the 20th century, also provided the intellectual framework for a big reduction in interest rates with two goals in mind: to reduce economic inequality and to achieve full employment.
Here’s what he had to say about the “rentier” (a quasi-Communist term for “saver”) in Chapter 24 of his seminal book “The General Theory of Employment, Interest and Money”, published in 1936. It requires some effort to go through it (and even more to comprehend it, if at all) but because it influences so much of the current economic thinking it is worth it [our emphasis in bold]:
“The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.
…click on the above link to read the rest of the article…
What Happens To US Shale When The Easy Money Runs Out?
What Happens To US Shale When The Easy Money Runs Out?
Today we will take a look at both Whiting Petroleum (WLL) and Continental Resources (CLR) as far as their Bakken economics. Overall the numbers will show that, despite claims of low cash costs per MBOE ($16 or so for CLR) and high IRRs on $60 WTI, the facts say otherwise. In addition, the analysis will show how very high depletion rates combined with falling rig counts spells trouble for Bakken production growth despite better efficiencies per well. The analysis will be based on April presentations of both companies from which the graphs below are taken. I should note these economics are not much different from Eagle Ford, the second most prolific addition to US production growth in past years.
Firstly one must understand that the easy money via QE from the Fed and zero interest rates allowed many shale players to burn free cash flow while showing operationally net of capital expenditures (which were funded by cheap flowing monies via FED) cash generation. To be clear, that model is now broken as the era of free Fed money appears to waning as both QE, and soon, zero rates become a thing of the past. The cost of capital is no longer falling but is now rising through higher bond yields and/or lower stock prices.
…click on the above link to read the rest of the article…
