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When Authorities “Own” the Market, The System Breaks Down: Here’s Why
When Authorities “Own” the Market, The System Breaks Down: Here’s Why
Central planning asset purchases aimed at propping up prices destroy the essential price discovery needed by private investors.
Panicked by the possibility of declines that undermine the official narrative that all is well, authorities the world over are purchasing assets like stocks, bonds and mortgages directly. Central banks are explicitly taking on the role of buyers of last resort on the theory that if they place a bid under the market to arrest any decline, private buyers will re-enter the market once they detect that the risk of a drop has dissipated.
The idea is that once private buyers flood back into the market, central banks can unload the assets they bought to stem the panic. In this view, the market is not based on fundamentals such as revenues, profits and price-earnings ratios–it’s all about confidence. If central banks restore confidence by reversing any drop with massive buying, this central-planning manipulation will restore the confidence of private investors.
When this restoration of confidence has been accomplished, private buyers will happily buy the central banks’ stocks, bonds and mortgages. The central banks’ portfolios of assets will shrink and the central banks will once again have “dry powder” to buy assets the next time markets falter.
This sounds reasonable in the abstract, but it doesn’t work in the New Normal economy central banks have created. Let’s consider a simple example to see why.
Let’s start by recalling that prices are set on the margin, i.e. the last view shares, bonds or homes bought/sold. In a neighborhood of 100 houses, the price of each home is based on the last few sales which become the comparablesappraisers use to establish the fair market value of all the nearby properties.
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Deflation Is Winning – Beware!
Deflation Is Winning – Beware!
Expect the ride to get even rougher
Deflation is back on the front burner and it’s going to destroy all of the careful central planning and related market manipulation of the past 6 years.
Clear signs from the periphery indicate that a destructive deflationary pulse has been unleashed. Tanking commodity prices are confirming that idea.
Whole groups of enterprises involved in mining and energy are about to be destroyed. And the commodity-heavy nations of Canada, Australia and Brazil are in for a very rough ride.
Whether the central banks can keep all of their carefully-propped equity and bond markets elevated throughout the next part of the cycle remains to be seen. We know they will try very hard. They certainly are increasingly willing to use any all tools at their disposal to keep the status quo going for as long as possible.
Whether it’s the People’s Bank of China stepping in to the market to buy 10% stakes in major Chinese corporations in a matter of weeks, the Bank Of Japan becoming the majority owner of key ETFs in the Japanese markets, or the Swiss National Bank purchasing $100 billion of various global equities, we see the same desperation. Equity prices are being propped, jammed and extended higher and higher without regard to risk or repurcussions.
It makes us wonder: Why haven’t humans ever thought to print their way to prosperity before?
Well, that’s the problem. They have.
And it has always ended up disastrously. History shows that the closest thing that economics has to an inviolable law is: There’s no such thing as a free lunch.
Sadly, all of our decision-makers are trying their hardest to ignore that truth.
First, The Fall….
So how will all of this progress from here?
We’ve always liked the Ka-Poom! theory by Erik Janzen which we explained previously like this:
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Bubble, Bubble, Toil and Trouble: When Authorities Buy Assets to Prop Up Markets
Bubble, Bubble, Toil and Trouble: When Authorities Buy Assets to Prop Up Markets
The Central Planners who thought that buying shares to prop up the stock bubble was an excellent fix are about to find out the true meaning of toil and trouble.
The actual line from Shakespeare’s Macbeth is double, double, toil and trouble, fire burn, and cauldron bubble but for the purposes of analyzing what happens when authorities prop up market bubbles by directly buying assets, bubble, bubble, toil and trouble is also appropriate.
China’s authorities seem to have chanted Shakespeare’s magical incantation nonstop this year, as the Shenzhen and other Chinese stock market indices have more than doubled. This chart illustrates what the Chinese authorities were aiming for: a bubble that just keeps expanding and never pops:
But what actually happened was predictable: China’s stock bubble burst. In response, Chinese authorities threw everything within reach into the market to stem the decline: criminalizing negative comments about stocks, loosening credit, enablinggreater fools to post their homes as collateral for margin accounts, and the last and chillingly irreversible tool in the Central Planning Bubble Inflation Tool Kit, direct purchases of stocks: China Spends 10% Of GDP On “All Bark, No Bite” Stock Bailout:
In gambling parlance, Chinese authorities doubled-down on their bet (there’s your double, double) that they could save their bubble, bubble.
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China is trying to centrally plan its way out of a black hole
China is trying to centrally plan its way out of a black hole
It’s here in southwestern China’s postcard-perfect Yunnan province that the mighty Mekong River rises.
From its source in a nearby mountain range, the river proceeds south, cutting its way across Southeast Asia’s fertile lands through Burma, Laos, Thailand, Vietnam, and Cambodia.
The Mekong is hugely important; its waters irrigate million of acres of land and provide untold quantities of fish, both of which support tens of millions of people in the region.
So it’s a major concern that China appears to be unilaterally diverting the Mekong to support its own needs.
We’ve discussed China’s worrisome drought several times in the past.
It would not be the slightest overstatement to say that China’s water situation is rapidly approaching crisis levels.
Even China’s Agriculture Ministry is sounding the alarm bells.
The numbers they’re reporting show that China already has to import more water than the United States imports oil.
And this is creating major problems for their food security– for without staggering food imports, China cannot feed itself.
If you add up all the acres of farmland that it takes to grow the amount of food China must now import each year, the total area is larger than the entire state of California.
And this problem is only getting bigger.
Here in Yunnan, the scenic countryside stretches to the horizon with beautiful farms and vast walnut groves, benefiting from the province’s gentle climate.
Yunnan is actually one of the biggest walnut producing regions in China, which itself is the largest walnut producer in the world.
But this won’t last. It can’t. They simply don’t have enough water.
That’s actually the reason I’m here– walnuts.
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Diminishing Returns on Central-Planning Policy Extremes = 2016 Crash
Diminishing Returns on Central-Planning Policy Extremes = 2016 Crash
The problem with these policy extremes is that they are so painfully visibly acts of central-planning desperation.
It is perhaps fitting that I am posting a call for a financial crisis that fails to respond to the usual central-planning manipulations on Bastille Day. There are two main lessons for the present era we can draw from the storming of the much-hated Bastille fortress-prison by a revolutionary mob in 1789 Paris:
1. The authorities can only keep a lid on a simmering stew of injustice, inequality and structural imbalances for so long before the pot boils over.
2. Last-minute baby-step reforms designed to placate the masses (i.e. simulacra reforms that are all show and no substance) cannot resolve the crisis; rather, they only reveal the full depth of the injustices, inequalities and imbalances.
We are in the endgame of central planners’ attempts to keep the lid on the simmering stew of profound imbalances that characterize the status quo. As I have described many times, Maintaining the Illusion of Stability Now Requires Ever-Greater Extremes of central-planning policies.
Mortgage/housing market melting down due to systemic fraud? Nationalize the mortgage market. This is what the federal/Federal Reserve central planners did post-2008, as 97% of all mortgages were guaranteed by federal agencies and the Fed bought $2 trillion of the $10 trillion outstanding mortgages in the U.S.–fully 20% of the entire mortgage market.
Stock market bubble popping? Ban short-selling, criminalize negative comments in the media, and withdraw half the companies on the stock exchange from trading. This is partial list of the extremes China’s central planners recently imposed in an panic-driven orgy of central-planning.
Another way to understand the increasing reliance on central-planning extremes and their declining effectiveness is diminishing returns: more treasure, capital, time, energy and labor must be expended to keep the status quo from falling off a cliff.
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Maintaining the Illusion of Stability Now Requires Ever-Greater Extremes
Maintaining the Illusion of Stability Now Requires Ever-Greater Extremes
This much-needed re-set to an economy that serves the many rather than the few is what the Powers That Be are so fearful of.
On the surface, everything still looks remarkably stable in the core industrial economies. The stock markets in Japan, Germany and the U.S. are only a few percentage points off their highs, and we’re constantly assured that inflation no longer exists and official unemployment is low.
In other words, other than the spot of bother in Greece, life is good. Anyone who signs on the dotted line for easy credit can go to college, buy a car or house or get another credit card.
With more credit, everything becomes possible. With unlimited credit, the sky’s the limit, and it shows.
Europe is awash with tourists from the U.S., China and elsewhere, and restaurants are jammed in San Francisco and New York City, where small flats now routinely fetch well over $1 million.
In politics, the American public is being offered a choice of two calcified, dysfunctional aristocracies in 2016: brittleness is being passed off as stability, not just in politics but in the economy and the cultural zeitgeist.
But surface stability is all the status quo can manage at this point, because the machine is shaking itself to pieces just maintaining the brittle illusion of prosperity and order.
Consider what happened in Greece beneath the surface theatrics.
1. Goldman Sachs conspired with Greece’s corrupt kleptocracy to conjure up an illusion of solvency and fiscal prudence so Greece could join the Eurozone.
2. Vested interests and insiders gorged on the credit being offered by German and French banks, enriching themselves to the tune of tens of billions of euros, which were transferred to private accounts in Switzerland at the first whiff of trouble. When informed of this, Greek authorities took no action; after all, why track down your cronies and force them to pay taxes when tax evasion is the status quo for financial elites?
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Welcome to Blackswansville
Welcome to Blackswansville
While the folks clogging the US tattoo parlors may not have noticed, things are beginning to look a little World War one-ish out there. Except the current blossoming world conflict is being fought not with massed troops and tanks but with interest rates and repayment schedules. Germany now dawdles in reply to the gauntlet slammed down Sunday in the Greek referendum (hell) “no” vote. Germany’s immediate strategy, it appears, is to apply some good old fashioned Teutonic todesfurcht — let the Greeks simmer in their own juices for a few days while depositors suck the dwindling cash reserves from the banks and the grocery store shelves empty out. Then what?
Nobody knows. And anything can happen.
One thing we ought to know: both sides in the current skirmish are fighting reality. The Germans foolishly insist that the Greek’s meet their debt obligations. The German’s are just pissing into the wind on that one, a hazardous business for a nation of beer drinkers. The Greeks insist on living the 20th century deluxe industrial age lifestyle, complete with 24/7 electricity, cheap groceries, cushy office jobs, early retirement, and plenty of walking-around money. They’ll be lucky if they land back in the 1800s, comfort-wise.
The Greeks may not recognize this, but they are in the vanguard of a movement that is wrenching the techno-industrial nations back to much older, more local, and simpler living arrangements. The Euro, by contrast, represents the trend that is over: centralization and bigness. The big questions are whether the latter still has enough mojo left to drag out the transition process, and for how long, and how painfully.
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How Could the Fed Protect Us from Economic Waves?
How Could the Fed Protect Us from Economic Waves?
Making Waves
Mainstream economists tell us that the Federal Reserve protects us from economic waves, indeed from the business cycle itself. In their view, people naturally tend to go overboard and cause wild swings in both directions. Thus, we need an economic central planner to alternatively stimulate us and then take away the punch bowl.
Newspapers report on the adoption of the Federal Reserve Act. It was erroneously held that it was going to be “a constructive Act to aid business”. Ominously, even more such acts were promised.
Prior to the global financial crisis of 2008, a popular term described the supposed benefits created by the Fed. The Great Moderation referred to the reduced volatility of the business cycle. For example, I have written beforeabout economist Marvin Goodfriend, who asserted that the Fed does better than the gold standard.
(Credit: Greg Ziegerson and Keith Weiner)
An Orwellian Mandate for the Provision of Miracles
This belief is inherent in the Fed’s very mandate from Congress. The Fed states its three statutory objectives as, “maximum employment, stable prices, and moderate long-term interest rates.” These terms are Orwellian.
Maximum employment means five percent of able-bodied adults can’t find work. Stable prices are actually rising relentlessly, at two percent per year. The meaning of moderate long-term interest rates must be changing, because rates have been falling for a third of a century.
That aside, the basic idea is that the Fed has both the power and the knowledge to somehow deliver an economic miracle. However, we know that central planning never works, even for simple things such as wheat production. Communist states have invariably failed to produce the food to keep their people alive. Stalin, Mao, and other communist dictators have deliberately starved off segments of their populations that they couldn’t feed.
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Martin Armstrong Reports on a Secret Meeting in London to Ban Cash
Martin Armstrong Reports on a Secret Meeting in London to Ban Cash
At this point, anyone paying even the slightest bit of attention to the central planning economic totalitarians running the fraudulent global financial system is aware of the blatant push in the media to acclimate the masses to accepting a “cashless society.”
In the mind of an economic tyrant, banning cash represents the holy grail. Forcing the plebs onto a system of digital fiat currency transactions offers total control via a seamless tracking of all transactions in the economy, and the ability to block payments if an uppity citizen dares get out of line.
While we’ve all seen the idiotic arguments for banning cash, i.e., it will allow central planners to more efficiently centrally plan economies into the ground, Martin Armstrong is reporting on a secret meeting in London with the aim of getting rid of any economic privacy that remains by ending cash.
From Armstrong Economics:
I find it extremely perplexing that I have been the only one to report that there is a secret meeting in London where Kenneth Rogoff of Harvard University and Willem Butler the chief economist at Citigroup will address the central banks and advocate the elimination of all cash to bring to fruition the day when you cannot buy or sell anything without government approval. When I Googled the issue to see who has picked it up yet, to my surprise Armstrong Economics comes up first. Others are quoting me, and I even find it spreading as the Central Bank of Nigeria, but I have yet to find reports on the meeting taking place in London when my sources are direct.
Other newspapers who have covered my European tour have stated that the “crash” of which I speak is the typical stock market rather than in government. What is concerning me is the silence on this meeting where there are more and more reports about a cashless society would be better.
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Leading German Keynesian Economist Calls For Cash Ban
Leading German Keynesian Economist Calls For Cash Ban
It’s official: the world has gone central-planner crazy.
Monetary policy, whether in the form of “conventional” methods such as the micromanagement of policy rates or so-called “unconventional” measures such as QE, has proven utterly ineffective when it comes to both “smoothing out” the business cycle and reigniting economic growth in the wake of severe downturns. If anything, recent history has shown the exact opposite to be true. That is, the Fed helped to engineer the housing bubble and has now succeeded in inflating a similar bubble in stocks and fixed income. Meanwhile, the Japanese experience with QE has plunged the country into what we have affectionately dubbed “The Kuroda Zone”, wherein the BoJ has cornered both the stock and bond markets while failing to promote wage growth or meaningfully raise inflation expectations. In China, the PBoC has taken to cutting policy rates at the first sign of weakness in the stock market, helping to sustain what will perhaps go down in history as the second coming of the tulip bulb mania, while the ECB has taken the insane step of adopting a trillion euro bond buying program while simultaneously demanding fiscal discipline, meaning the central bank’s bond monetization efforts are set against a backdrop of meager supply.
In sum, the collective actions of the world’s most influential central banks have done wonders when it comes to inflating asset bubbles but have done very little to revive robust economic growth. In fact, far from smoothing out the business cycle and resuscitating DM demand, post-crisis monetary policy has actually had the exact opposite effect: it has set the stage for an even more spectacular collapse while simultaneously creating a worldwide deflationary supply glut.
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In September, The UN Launches A Major Sustainable Development Agenda For The Entire Planet
In September, The UN Launches A Major Sustainable Development Agenda For The Entire Planet
The UN plans to launch a brand new plan for managing the entire globe at the Sustainable Development Summit that it will be hosting from September 25th to September 27th. Some of the biggest names on the planet, including Pope Francis, will be speaking at this summit. This new sustainable agenda focuses on climate change of course, but it also specifically addresses topics such as economics, agriculture, education and gender equality. For those wishing to expand the scope of “global governance”, sustainable development is the perfect umbrella because just about all human activity affects the environment in some way. The phrase “for the good of the planet” can be used as an excuse to micromanage virtually every aspect of our lives. So for those that are concerned about the growing power of the United Nations, this summit in September is something to keep an eye on. Never before have I seen such an effort to promote a UN summit on the environment, and this new sustainable development agenda is literally a framework for managing the entire globe.
If you are not familiar with this new sustainable development agenda, the following is what the official United Nations website says about it…
The United Nations is now in the process of defining Sustainable Development Goals as part a new sustainable development agenda that must finish the job and leave no one behind. This agenda, to be launched at the Sustainable Development Summit in September 2015, is currently being discussed at the UN General Assembly, where Member States and civil society are making contributions to the agenda.
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Economist on Gold – A Dissection
Economist on Gold – A Dissection
A Proven Contrary Indicator
In early May, the Economist has published an editorial on gold, ominously entitled “Buried”. We wanted to comment on it earlier already, but never seemed to get around to it. It is still worth doing so for a number of reasons.
The Economist is a quintessential establishment publication. It occasionally gives lip service to supporting the free market, but anyone who has ever read it with his eyes open must have noticed that 70% of the content is all about how governments should best centrally plan the economy, while most of the rest is concerned with dispensing advice as to how to expand and preserve Anglo-American imperialism. We are exaggerating a bit for effect here, but in essence we think this describes the magazine well. In other words, its economic stance is essentially indistinguishable from that of the Financial Times or most of the rest of the mainstream financial press.
Image credit: Bloomberg
Keynesian shibboleths about “market failure” and the need to prevent it, as well as the alleged need for governments to provide “public goods” and to steer the economy in directions desired by the ruling elite with a variety of taxation and spending schemes as well as monetary interventionism, are dripping from its pages in generous dollops. It never strays beyond the “acceptable” degree of support for free markets, which is essentially book-ended by Milton Friedman (a supporter of central banking, fiat money and positivism in economic science, who comes from an economic school of thought that was regarded as part of the “leftist fringe” in the 1940s as Hans-Hermann Hoppe has pointed out). Needless to say, the default expectation should therefore be that the magazine will be dissing gold – and indeed, it didn’t disappoint.
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Steve Keen: The Deliberate Blindness Of Our Central Planners
Steve Keen: The Deliberate Blindness Of Our Central Planners
The models we use for decision making determine the outcomes we experience. So, if our models are faulty or flawed, we make bad decisions and suffer bad outcomes.
Professor, author and deflationist Steve Keen joins us this week to discuss the broken models our central planners are using to chart the future of the world economy.
How broken are they? Well for starters, the models major central banks like the Federal Reserve use don’t take into account outstanding debt, or absolute levels of money supply. It’s why they were completely blindsided by the 2008 crash, and will be similarly gob-smacked when the next financial crisis manifests.
And within this week’s podcast is a hidden treat. Steve’s character exposition on Greek Financial Minister Yanis Varoufakis. Steve has known Varoufakis personally for over 25 years, and is able to offer a window into his constitution, how his mind thinks, and what he’s currently going through in his battle with the Troika for Greece’s future.
…click on the above link to listen to the podcast…
Central Planners Are In A State of Panic – Chris Martenson | Peak Prosperity
Central Planners Are In A State of Panic – Chris Martenson | Peak Prosperity.
The central planners are in a state of fear and panic. They are trying everything and anything to create market validation for their policies, watching with trepidation as their favored economic metrics fail to respond to all of their frenzied efforts.
They are so far over the tips of their skis right now that there’s nothing they won’t do. They’ve summarily thrown granny under the bus because they have this idea that negative real interest rates are the cure. The cure for what? The massive amounts of debts and imbalances their prior policies caused. So savers are punished in the pursuit of policy. You know, ‘for the greater good’ and all that.
They’ve spurred the greatest wealth gap ever in US history, greater even than at the extremes of the Great Depression, apparently without the slightest concerns for Plutarch’s ancient admonition that “An imbalance between rich and poor is the oldest and most fatal ailment of all republics.”
They’ve even gone so far in Europe as to now force negative nominal interest rates on savers, dispensing with their usual slight-of-hand of letting inflation steal from each unit of currency in their system. When you’re panicking, there’s no time for subtlety.
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According To Russell Napier Which World Has No Volume, No Volatility And Rising Prices? The USSR | Zero Hedge
Great Expectations, Pregnant Pandas and Last Wednesday’s Treasury Market
“I must be taken as I have been made. The success is not mine, the failure is not mine, but the two together make me.”
– Estella, Great Expectations
What sort of financial world is a world with no volumes, no volatility and steadily rising prices? The only historical example is perhaps the Soviet Union. When the marginal buyer of any product is the state, or its handmaiden the central bank, then simply nothing happens until the state comes out to play.
Across the world the owners of private sector assets sleep under palm trees in Bangkok, relax over mahjong in Beijing, play sudoku in Berlin, read The Sun newspaper in London or take turns to appear on CNBC in New York – all awaiting the arrival of the state. No two private parties will enter a bargain in the absence of the state, for what if the state does not like their price? Then the price will be moved by state fiat and one, or perhaps both, of those parties will look very foolish indeed.
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