Tag Archives: central bank policies

The Federal Reserve’s Controlled Demolition Of The Economy Is Almost Complete, by Brandon Smith

According to Brandon Smith, financial mayhem is imminent. From Smith at alt-market.com:

The Federal Reserve is an often misunderstood entity, not only in the mainstream, but also in alternative economic circles. There is this ever pervasive fantasy on both sides of the divide that the central bank actually “cares” about forever protecting the US economy, or at least propping up the US economy in an endless game of “kick the can”. While this might be true at times, it is not true ALL the time. Things change, agendas change, and sometimes the Fed’s goal is not to maintain the economy, but to destroy it.

The delusion that the Fed is seeking to kick the can is highly present today after the latest Fed meeting in which the central bank indicated there would be a pause in interest rate hikes in 2019. As I have noted in numerous articles over the past year, the mainstream media and the Fed have made interest rates the focus of every economic discussion, and I believe this was quite deliberate. In the meantime, the Fed balance sheet and its strange relationship to the stock market bubble is mostly ignored.

The word “capitulation” is getting thrown around quite haphazardly in reference to the Fed’s tightening policy. And yet, even now after all the pundits have declared the Fed “in retreat” or “trapped in a Catch-22”, the Fed continues to tighten, and is set to cut balance sheet assets straight through until the end of September. Perhaps my definition of capitulation is different from some people’s.

One would think that if the Fed was in retreat in terms of tightening, that they would actually STOP tightening. This has not happened. Also, one might also expect that if the Fed is going full “dovish” that they would have cut interest rates in March instead of holding them steady at their neutral rate of inflation. This has not happened either. In fact, I’m not exactly sure how anyone can claim with a straight face that the Fed has given up on Quantitative Tightening (QT).  Despite the many assumptions out there that the Fed is going to reverse on interest rates, I believe this is wishful thinking and that the Fed will not reverse rates in 2019.

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The dangerous zombie infestation (of the world economy), by Tuomas Malinen

Ultra-low interest rates keep alive walking dead companies and create a walking dead economy. From Tuomas Malinen at gnseconomics.com:

It is estimated that over 14% of companies in the S&P 1500 are zombies. In China, roughly 20 percent of A-share listed companies on Shanghai and Shenzhen exchanges are zombies. In the developed economies, approximately 12 percent of all non-financial companies are ‘zombies’. Only 30 years ago, this share was just 2 percent.

These are stunning figures.  How did we get there? What is behind the worrying phenomenon of zombification?

The risks of this zombie infestation to the economy and markets are also widely misunderstood and mostly ignored at the moment. They should not be. The large share of zombie companies creates the possibility of the spontaneous collapse of both global asset markets and economy.

“They’re coming to get you, Barbara!”

Zombies were introduced in the economic jargon by Caballero, Hoshi and Kashyap (2008) when they described the unproductive and indebted—yet still operating—firms in Japan as ”zombie companies”. They found that, after the economic crash of the early 1990’s, instead of calling-in or refusing to refinance existing debts, large Japanese banks kept lending flowing to otherwise insolvent borrowers (aka zombies).

Zombies companies restrict the entry of new, more productive companies, diminish job creation in the economy and lock capital into unproductive uses. In a word, they are a menace to the economy and society.

According to current academic research, the biggest factor in the creation of zombie companies is the health of banks. When they are fragile and unable to cope with loan losses, banks start to evergreen debtor companies. That is, weak banks support ailing companies, which support each other. This is why low interest rates foster zombie creation. Low (or negative) interest rates make banks weaker, by restricting their profits, and they provide cheap loans to zombie companies to avert losses.

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Fed Policy vs. ECB Policy: A Comparison, by Gunther Schnabl and Thomas Stratmann

Noxious as the Federal Reserve’s cure to the last financial crisis was, it left the US in better shape than Europe, where its central bank has been particularly maladroit. From Gunther Schnabl and Thomas Stratmann at mises.org:

Ten years after the outbreak of the global financial crisis, banks in the euro area have not recovered. The Euro Stoxx Financials is only 40% above its March 2009 low, well below its pre-crisis level (Fig. 1). By contrast, the S&P Financials index in the US has risen by 320%. The different fates of European and US financial institutions could be due to the different monetary and regulatory crisis therapies of the European Central Bank (ECB) and the Fed.

Fig. 1: US and Euro Area Financial Stock Prices

schnabl1.JPG

Source: Thompson Reuters Datastream.

The Fed lowered its key interest rate faster than the ECB (Fig. 2) and expanded its balance sheet more quickly via quantitative easing (Fig. 3). The Fed dropped its benchmark rate down to an all-time low of 0.25% in December of 2008. The Fed’s asset purchases included risky securitized mortgage loans, which helped prevent a financial meltdown during the crisis. The US Treasury also purchased more than $400 billion worth of securitized mortgage loans and bank shares under the Troubled Asset Relief Program (2009-2012). Thus, the banks were forcibly recapitalized. As asset and real estate prices recovered thanks to the Fed’s monetary policy, banks’ balance sheets were further stabilized.

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The Freak Chart, by the Northman Trader

Long-term stock market charts are perhaps sending a message that US equity markets may in for a lengthy period of consolidation at best, and perhaps a long bear market. From the Northman Trader at northmantrader.com:

I got a freak chart for you that’s stunning, but bear with me here because it requires some background and patience. Most of us are focused on the daily or weekly action and it’s easy to lose sight of big cyclical trends. We don’t think of them as they take a long time to unfold and the daily noise is so much more dominant.

With the advent of permanent central bank intervention sparked by the financial crisis all of us have come accustomed to markets always going up with the occasional correction in between and the timing of corrections have seemingly become shorter and shorter. Big fat bottoms that happen after just a few days of temporary terror. We haven’t seen a true bear market since the financial crisis and even that one lasted barely more than a year as central banks stepped in. The last longer term bear market came after the technology bust in 2000 when markets bottomed in 2002 and 2003 and then proceeded onto the next bull market.

It didn’t always used to be this way. Going back to 1900 there were multiple extended periods of stock markets going nowhere and trading in wide chop ranges:

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An Open Letter on the Next Great Crisis wrought by the Fed, by Stephanie Pomboy

Stock markets have staged a vigorous rally and the economy has expanded since the financial crisis of 2008-2009. Paradoxically, pension funds have become more underfunded. From Stephanie Pompoy of Macro Mavens at nebula.wsimg.com:

Actions have consequences. Even for the Fed.

That’s not a reference to the market’s grumpy reaction to the central bank’s continued rate hikes and quantitative tightening. No. The impact of both on financial assets were as obvious as they were inexorable. To be sure, Wall Street’s resident soothsayers had a good run spinning tales that ‘this time’ was different. A tightening Fed, we were assured, was a good thing—a ringing endorsement of the economy’s indefatigable strength. But, in the end, there was simply no way around the basic fact: Just as rate cuts and QE were designed to expand the pool of credit and incent the embrace of risk, so would rate hikes and QT necessarily beget the reverse. And so they have.

But while the impact of receding liquidity and the reduced reward for reckless speculation and risk-taking have finally begun to play out on Bloomberg screens everywhere, the real devastation has yet to be revealed. In the ensuing weeks and months the full and lugubrious legacy of the Fed’s great monetary experiment of the last decade will finally come into view. Beyond inflating and bursting a bubble in corporate debt (with leveraged loans acting as posterchild), the Fed’s decade-long financial repression has had a far larger and more sinister impact. It has silently bankrupted the US pension system.

Sound overly-dramatic??

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The Eurozone Is in a Danger Zone, by Alasdair Macleod

ECB liquidity has kept the European economy and European government bond markets afloat. What happens when the ECB tightens the spigot? From Alasdair Macleod at mises.org:

It is easy to conclude the EU, and the Eurozone in particular, is a financial and systemic time-bomb waiting to happen. Most commentary has focused on problems that are routinely patched over, such as Greece, Italy, or the impending rescue of Deutsche Bank. This is a mistake. The European Central Bank and the EU machine are adept in dealing with issues of this sort, mostly by brazening them out, while buying everything off. As Mario Draghi famously said, “whatever it takes.”

There is a precondition for this legerdemain to work. Money must continue to flow into the financial system faster than the demand for it expands, because the maintenance of asset values is the key. And the ECB has done just that, with negative deposit rates and its €2.5 trillion asset purchase program. But that program ends this month, making it the likely turning point, whereby it all starts to go wrong.

Most of the ECB’s money has been spent on government bonds for a secondary reason, and that is to ensure Eurozone governments remain in the euro system. Profligate politicians in the Mediterranean nations are soon disabused of their desires to return to their old currencies. Just imagine the interest rates the Italians would have to pay in lira on their €2.85 trillion of government debt, given a private sector GDP tax base of only €840 billion, just one third of that government debt.

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The Fed IS the Ugly Truth, by Raúl Ilargi Meijer

The back and forth and massive publicity given to what the Federal Reserve obscures a central question: should the Fed even exist? From Raúl Ilargi Meijer at theautomaticearth.com:

This Fed thing just keeps going on, and it needs to stop. There is nothing in the discussion about the Federal Reserve these days that has any value other than it provides even more proof that the Fed has killed off the most essential elements of what once made the US economy function. All markets, stocks, bonds, housing markets, all price discovery, all murdered. No heartbeat. Pining for the fjords.

And instead of addressing that, and I’m not even talking about addressing fixing what is wrong, all I see is neverending stuff about Jay Powell using, or not using, terms such as “patient” or “accommodative”. Like any of it means anything coming from him and his ilk. Other than for making ‘investors’ a quick buck. Like a quick buck could ever trump the survival of entire market systems.

People discussing whether Jay Powell is doing a good job all miss the point. Because Powell should not be doing that job in the first place. The Fed should not have the power to manipulate the US economy anywhere near as much as it does. Because that power is perverting America like nothing else, and the US economy will never recover as long as the Fed holds that power. Is that clear enough? Do we understand that at least?

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