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Paul Singer Warns “The Consequences Of Monetary Manipulation Are Unknowable”
Paul Singer Warns “The Consequences Of Monetary Manipulation Are Unknowable”
The world believes it is in a sweet spot. There is global consensus that central banks know what they are doing and are in control, and that if economies falter, a bigger dose of QE or ZIRP or NIRP (negative interest rate policy – we just made that one up) will keep it from getting out of hand. Additionally, there seems to be a universally held belief that the U.S. is unquestionably the safe haven for the foreseeable future, that its financial crisis and long recession are behind it and that China has complete control over its own destiny. It may not surprise you to learn that we either disagree with or remain unconvinced about every one of the foregoing propositions.
Conditions in the global economy are clearly abnormal. The policymaker response to those conditions is extraordinary, with minimal focus on an all-out push for higher growth. Instead, the primary focus is on boosting “inflation” with repeated doses of bondbuying, stock-buying and super-low interest rates. We cannot appreciate why policymakers are not jumping up and down clamoring for structural pro-growth reforms and policies, and why there is a compliant consensus that the only policy that is possible is more monetary easing. Apparently, most politicians are happy to leave the hard economic and policy decisions to their central banks instead of introducing legislation to properly address the world’s economic problems. It is impossible to assess what will change or destroy the consensus that current policies will hold the global economy and financial system afloat forever, but when assessing the scope and shape of risks to our assets, it is most useful to match them to the size of the aberrations which could cause reversal or surprise. Today, those potential changes are strikingly large.
We have frequently said that real deflation (price and credit collapse, not a tiny downturn in aggregate prices or “insufficient” inflation) is impossible. Governments are too alert to that possibility, have no compunction about debasing their currencies and will simply not stand for seriously-falling prices. The issue of real inflation, at the other end of the spectrum, is deemed by just about everyone but us, plus a few beleaguered stragglers and fellow travelers who “didn’t get the memo,” to be a non-issue into the future as far as one can peer.
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Rates Don’t Matter–Liquidity Matters
Rates Don’t Matter–Liquidity Matters
The cure for systemic fragility is not low interest rates forever–it’s a market that transparently prices credit and risk for lenders and borrowers, qualified and marginal alike.
One of the most unquestioned narratives out there is that the Federal Reserve raising interest rates from 0% to .25% (or .50%) will crush everything and everybody. But does this make sense? Let’s start by putting ourselves in the shoes of actual lenders and borrowers.
From the point of view of the lender, higher rates are positive, as they enable higher margins. Perversely, the Fed’s zero-interest rate policy (ZIRP) was negative for lenders, as the yields on issuing loans declined. This made legitimate lenders reluctant to issue loans, especially to those with less-than-sterling credit. Why take a chance for pitiful yields?
From the perspective of borrowers, another half-percent of interest is not a dealer breaker for most borrowers–what matters more than the interest rate is the availability of reasonably priced credit. What matters more than the advertised rate on a mortgage is the availability of mortgage money in the real world.
Low rates don’t mean anything if borrowers can’t actually obtain loans in the real world.
If I only qualify for a mortgage at 3.5% annual interest and a jump to 4% pushes me out of qualifying, I probably have no business buying the house in the first place.
Subprime borrowers, shackled to the debt-serf oars of 24% annual interest for auto loans and credit cards, will not be impacted by a notch up in the Fed rate; they are already paying the maximum rate.
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Crash-O-Matic Finance | KUNSTLER
Crash-O-Matic Finance | KUNSTLER.
“Oil prices have dropped $50 a barrel. That may not sound like much. But when you take $107 and you take $57, that’s almost a 47 percent decline…!”
–James Puplava, The Financial Sense News Network
May not sound like much? I guess when you hunker down in the lab with the old slide rule and do the math, wow! Those numbers really pop!
This, of course, is the representative thinking out there. But then, these are the very same people who have carried pompoms and megaphones for “the shale revolution” the past couple of years. Being finance professionals they apparently failed to notice the financial side of the business, for instance the fact that so much of the day-to-day shale operation was being run on junk bond financing.
It all seemed to work so well in the eerie matrix of zero interest rate policy (ZIRP) where investors desperate for “yield” — i.e. some return more-than-zilch on their money — ended up in the bond market’s junkyard. These investors, by the way, were the big institutional ones, the pension funds, the insurance companies, the mixed bond smorgasbord funds. They were getting killed on ZIRP. In the good old days of the late 20th century, before Federal Reserve omnipotence, they could depend on a regular annual interest rate churn of between 5 and 10 percent and do what they had do — write pension checks, pay insurance claims, and pay clients, with a little left over for company salaries.
