Tag Archives: interest rate suppression

Unhinged….. And Then Some! by David Stockman

Buy stocks because bonds are so central-bank suppressed that they’re the guaranteed investment from hell. That’s what passes for wisdom on Wall Street these days. From David Stockman at davidstockmanscontracorner.com via lewrockwell.com:

Jerome Powell puts you in mind of the boy who killed both of his parents and then threw himself on the mercy of the court on the grounds that he was an orphan!

That’s what JayPo essentially did in his presser yesterday while trying to explain that the most hideous equity market bubble in history is actually not that at all:

“If you look at P/Es they’re historically high, but in a world where the risk-free rate is going to be low for a sustained period, the equity premium, which is really the reward you get for taking equity risk, would be what you’d look at,” Powell said.

“Admittedly P/Es are high but that’s maybe not as relevant in a world where we think the 10-year Treasury is going to be lower than it’s been historically from a return perspective,” Powell said.

Right. The Fed has essentially murdered the bond yield. So relatively speaking, grossly inflated stocks are a bargain compared to dead-in-the-water bonds.

Bloomberg even has a chart to prove all this based on the so-called “Fed model”:

The S&P 500’s earnings yield – profit relative to share price – is 2.5 percentage points higher than the yield on 10-year Treasury notes. The comparison, loosely labeled the Fed model, sits well above what the spread was before the burst of the internet bubble, when bonds yielded more than equities by that measure.

Then again, the “earnings yield” is not exactly cash you can take to the bank, unlike a bond coupon as meager as it might be at present. The former is just a computational hope that today’s vastly inflated stock prices relative to earnings stay inflated indefinitely, world without end.

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No Recession Ever Again? The Yellowstone Analogy, by Charles Hugh Smith

The forest fire analogy has been used many times with reference to financial “forest fire” suppression, but it’s a good analogy and it certainly helps explain why we’re headed towards a financial conflagration. From Charles Hugh Smith at oftwominds.com:

Just as forestry management’s policy of suppressing forest fires insured uncontrollable conflagrations, so central banks’ attempts to eliminate recessions insure a financial conflagration that will burn down the entire global financial system.

The first task of those at the levers of neoliberal global capitalism is to deny that global capitalism is in crisis. One manifestation of this is the no recession ever again policy that is the implicit goal of central banks and governments globally.

Any hint of global slowdown draws an immediate and overwhelming deluge of credit and currency as central banks slash interest rates, buy bonds and stocks to push markets higher and unleash a tsunami of fresh credit so corporations can buy back billions of dollars of their own shares and consumers can continue to buy vehicles, houses and other goodies.

Neoliberal global capitalism has one unstated law: credit must always expand or the system dies. The rate of credit expansion can increase or decrease but it must continue expanding forever.

This is the foundation of the no recession ever again policy: as long as governments, consumers and corporations continue to borrow more, nothing else matters.

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