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The Ugly Truth

January 6, 2019

The Ugly Truth

For years critics of central bank policy have been dismissed as negative nellies, but the ugly truth is staring us all in the face: Market advances remain a game of artificial liquidity and central bank jawboning and not organic growth and now the jig is up. As I’ve been saying for a long time: There is zero evidence that markets can make or sustain new highs without some sort of intervention on the side of central banks. None. Zero. Zilch.

And don’t think this is hyperbole on my part, I will present the evidence of course.

In March 2009 markets bottomed on the expansion of QE1 which was introduced following the initial QE1 announcement in November 2008. Every major correction since then has been met with major central bank intervention. QE2, Twist, QE3 and so on.

When market tumbled in 2015 and 2016 global central banks embarked on the largest combined intervention effort in history to the tune of over $5 trillion between 2016 and 2017 giving us a grand total of over $15 trillion in central bank balance sheet courtesy FOMC, ECB and BOJ:

When did global central bank balance sheets peak? Early 2018. When did global markets peak? January 2018.

And don’t think the Fed was not still active in the jawboning business despite QE3 ending. After all their official language remained “accommodative”  and their hike schedule was the slowest in history, cautious and tinkering not to upset markets.

With tax cuts coming into the US economy in early 2018 along with record buybacks markets at first ignored the beginning of QT (quantitative tightening), but then it all changed.

And guess what changed? 2 things.

In September 2018, for the first time in 10 years, the FOMC removed one little word from its policy stance: “accommodative” and The Fed increased its QT program. When did US markets peak? September 2018.

…click on the above link to read the rest of the article…

“Peak QE”: This Is What Share Of The Market Central Banks Now Own

October 27, 2018

“Peak QE”: This Is What Share Of The Market Central Banks Now Own

After a decade of unprecedented liquidity injections by central banks to preserve the western financial system, global QE has peaked.

First, the aggregate balance sheet of major central banks started to shrink earlier in the year, a reversal that took investors many months to notice but judging by recent market volatility, it is finally being fully appreciated.

Second, beginning this month the Fed’s bond portfolio run-offs as part of its QT are roughly offsetting the combined tapered net QE purchases by the ECB and BoJ. Worse, QT is now set to dominate.

Some facts: between mid-2008 and early 2018, the “Big-6” central banks expanded their balance sheets by nearly $15tn, most of it due to explicit targeted purchases of domestic assets (QE) in addition to other forms of liquidity injections (collateralised lending such as the ECB’s TLTROs or FX interventions equivalent to foreign-asset QE).

According to Deutsche Bank estimates, the four major central banks involved in QE (Fed, ECB, BoJ and BoE) are now collectively holding $11.3tn of securities accumulated through their asset purchase programs.

Why is the above important? Because as Deutsche strategist Michal Jezek, now that liquidity is contracting makes for a timely moment for looking at the proportion of relevant asset classes owned by central banks and putting the ECB’s corporate bond holdings into a wider context.

To begin, as Jezek confirms what we have been saying since the start of 2009, “clearly, QE matters.” As central banks reduced the free float of some securities and QE has worked its magic on confidence and growth, asset valuations reached unprecedented levels while volatility became suppressed. A couple of years ago, a quarter of the global bond market was trading with a negative yield. With global QE fading, this proportion has now fallen by half but remains significant.

…click on the above link to read the rest of the article…

Interest Rates Starting To Bite

December 18, 2017

Interest Rates Starting To Bite

We have long held that interest rates have been so low (especially real rates) that it will take some time to reach a level for them to really matter and impact markets. The 2-year yield crossing over the S&P500 divie yield this past week for the first time in the last ten years is unlikely to slow the momentum driving risk markets. Nevertheless, they are getting closer to the zip code — after two years since the tightening cycle began — where they will begin to impact fundamental valuations (what is the fundamental value of Bitcoin?) and the relative pricing of risk assets. Keep it on your radar.

Long-term rates are so utterly distorted by the central banks we are not sure if the markets even pay attention anymore. Pancaking of the yield curve? Not the signal it used to be.  Meh!

The above, of course, is somewhat offset by the massive stock of central bank money in the global financial system which has driven up asset values to a level that has finally kicked the real economy into third gear.  This has created the perception of a Goldilocks global enviornment and positive feedback loop between markets and the economy.  Now add fiscal stimulus.

The unprecedented reservoir of the mix of this type of money is still so full it will take some time to drawdown central bank balance sheets to parch the risk markets. A higher share of central bank money relative to credit based bank money reduces global systemic risk and thus asset price risk premia.  Thus, additional market distortions.

The party continues.  Momentum is a powerful thang!   Until it isn’t.

…click on the above link to read the rest of the article…

Mr Creosote is Full

June 18, 2017

Mr Creosote is Full

Maitre D’: “And finally, monsieur, a wafer-thin mint.”

Mr Creosote: “No.”

Maitre D’: “Oh, sir! It’s only a tiny little thin one.”

Mr Creosote: “No. F**k off. I’m full…” [Belches]

Maitre D’: “Oh, sir… it’s only wafer thin.”

Mr Creosote: “Look – I couldn’t eat another thing. I’m absolutely stuffed. Bugger off.”

Maitre D’: “Oh, sir, just… just one…”

Mr Creosote: “Oh, all right. Just one.”

Maitre D’: “Just the one, sir… voila… bon appetit…”

[Mr Creosote somehow manages to stuff the wafer-thin mint into his mouth and then swallows. The Maitre D’ takes a flying leap and cowers behind some potted plants. There is an ominous splitting sound. Mr Creosote looks rather helpless and then he explodes, covering waiters, diners, and technicians in a truly horrendous mix of half digested food, entrails, and parts of his body. People start vomiting.]

Maitre D’: [returns to Mr Creosote’s table] Thank you, sir, and now the check.

The Monty Python skit depicted has a lot of truth in it.

Only idiots refuse to acknowledge excess. Society is littered with examples of the consequences. Eating too much results in indigestion and lethargy, and, if done, regularly obesity and an early grave.

We’d be forgiven for thinking that these simple truths don’t or won’t apply to the financial markets.

Indeed, the GFC was but one of the last examples of such excess, and Canada’s own Real estate market is now suffering what Mr Creosote suffered.

There are naturally other examples, many covered in my subscriber-only publication, but there is one elephant in the room worth looking at:

The above graph, which I nicked from Bloomberg, is actually only a few months old… and as such out of date.

How out of date can it actually be, you might ask? Heck, it’s less than a month old.

…click on the above link to read the rest of the article…

David Stockman: Thanks for the Corporate Bond Bubble, Fed

March 11, 2016

DAVID STOCKMAN: THANKS FOR THE CORPORATE BOND BUBBLE, FED

Once upon a time businesses borrowed long term money—-if they borrowed at all—-in order to fund plant, equipment and other long-lived productive assets. That kind of debt was self-liquidating in the sense that it usually generated a stream of income and cash flow that was sufficient to service and repay the debt, and to kick some earned surplus into the pot as well.

Today American businesses are borrowing like never before—-but the only thing being liquidated is there own equity capital. That’s because trillions of debt is being issued to fund financial engineering maneuvers such as stock buybacks, M&A and LBOs, not the acquisition of productive assets that can actually fuel future output and productivity.

So it amounts to a great financial shuffle conducted entirely within the canyons of Wall Street. Financial engineering deals invariably shrink the float of outstanding stock among the companies visiting underwriters. Likewise, they invariably leave with the mid-section of their balance sheets bloated with fixed obligations, while the bottom tier of shareholder equity has been strip-mined and hollowed out.

At the same time, none of this vast flow of capital leaves a trace on the actual operations—-such as production, marketing and payrolls—of the businesses involved. Instead, prodigious sums of debt capital are being sold to yield-hungry bond managers and homegamers via mutual funds and then recycled back into windfall gains for stock market gamblers who chase momo plays and the stock price rips that usually accompany M&A, LBO or stock buyback announcements.

Needless to say, central bank financial repression is responsible for this destructive transformation of capital market function.

…click on the above link to read the rest of the article…

The Keynesian Recovery Meme Is About To Get Mugged, Part 1

December 23, 2015

The Keynesian Recovery Meme Is About To Get Mugged, Part 1

Yellen said at least one thing of importance last week, but not in a good way. She confessed to the frightening truth that the FOMC formulates its policies and actions based on forecasts of future economic developments.

My point is not simply that our monetary politburo couldn’t forecast its way out of a paper bag; that much they have proved in spades during their last few years of madcap money printing.

Notwithstanding the most aggressive monetary stimulus in recorded history—-84 months of ZIRP and $3.5 trillion of bond purchases—–average real GDP growth has barely amounted to 50% of the Fed’s preceding year forecast; and even that shortfall is understated owing to the BEA’s systemic suppression of the GDP deflator.

What I am getting at is that it’s inherently impossible to forecast the economic future, but that is especially true when the forecasting model is an obsolete Keynesian relic which essentially assumes a closed US economy and that balance sheets don’t matter.

Actually, balance sheets now matter more than anything else. The $225 trillion of debt weighing on the world economy——up an astonishing 5.5X in the last two decades—– imposes a stiff barrier to growth that our Keynesian monetary suzerains ignore entirely.

Likewise, the economy is now seamlessly global, meaning that everything which counts such as labor supply and wage trends, capacity utilization and investment rates and the pace of business activity and inventory stocks is planetary in nature.

By contrast, due to the narrow range of activity they capture, the BLS’ deeply flawed domestic labor statistics are nearly useless. And they are a seriously lagging indicator to boot.

…click on the above link to read the rest of the article…

Olduvai IV: Courage
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Olduvai II: Exodus
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