A naysayer economist is saying that you can’t have your cake and eat it, too, in a world that believes you can have your cake, eat it, have it again, and eat it again. From Daniel Lacalle at mises.org:
Central banks should know by now that you cannot have negative interest rates with low bond yields and strong growth. One or the other.
Central banks have chosen low bond yields at any cost, despite all the evidence of stagnation ahead. This creates enormous problems and perverse incentives.
It is not a surprise that markets have bounced aggressively, driven by the tech sector, after a slump based on concerns about the pace of economic growth. Stimulus package effects are increasingly short, and this was pretty evident in the poor figures of industrial production and the ZEW survey gauge of expectations. The same can be said about a weakening ISM index in the United States. United States ISM Services PMI came in at 60.1, below expectations (63.5) in June, precisely in the sector where the recovery should be strongest.
Interestingly, European markets declined sharply after the European Central Bank sent the ultimate dovish message, a change in its inflation target that would allow the central bank to exceed its 2 percent limit without change of policy. What does it all tell us?
Governments have often impoverished their citizenry. From Dennis Miller at theburningplatform.com:
When I was dating my wife Jo, her 10-year-old daughter Holly learned I was a glutton for chocolate chip cookies.
This adorable little lady grinned, loaded in the chocolate chips and baked an entire batch by herself. As she put the cookies on the cooling rack, I began to devour them. They were soft, moist and yummy!
Holly yelled, “Mom he is eating them faster than I can bake them.” Not surprising, I soon gained 25 pounds.
Today Holly owns a small business. Over the holidays she complained. Much like Dennis and chocolate chips, our wealth is being gobbled up faster than it can be created. She is spot on.
The Big Heist
On 1/1/2000 10-year treasuries were paying over 6% interest. 21 years later, they paid .93%. They are guaranteed wealth destroyers.
The government spends recklessly, bails out banks and debt soars.
Bank borrow and lend cheap money; commercial loans have skyrocketed. Untold billions went to binge-borrowing corporations buying back their stock to hype the market price, yet their debts remain.
The Fed has become the deity of the financial markets. From Sven Henrich at northmantrader.com:
We all know it yet the unspoken truth deserves to be said out aloud.
You all heard the phrases ‘Don’t fight the Fed’, and ‘ there is no alternative’. Can we be clear what these phrases really mean? They mean people are buying assets at prices they otherwise wouldn’t because a central planning committee is putting in market conditions that changes their market behavior.
People are paying forward multiples that are higher than they would if they earned higher interest income. The ‘desperate search for yield’ they call it. Think of it as a forced auction. You must pay, and you must pay more because you can’t bid on anything else and neither can anyone else hence there are now bidders for ever less available product (i.e. think shrinking share floats) driving prices wildly higher. And as central banks have become permanently dovish over the past decade Fed meetings are the principal impetus for rallies. Indeed most gains in markets come around days that have Fed Day written on them, a well established history going back decades now.
A fact the Fed itself is very well aware of:
“In a 2011 paper, New York Fed economists showed that from 1994 to 2011 almost all the S&P 500’s returns came in the 3 days around an FOMC decision. Over this period the index rose by 270%, and most of those gains happened the before, the day of, and the day after a Fed meeting.”
So Pavlovian has the response become that shorts automatically cover ahead of Fed meetings and investors buy ahead of Fed meetings expecting a positive response. The Fed is the market as it’s driving its entire behavior. The “Fed put” they call it. Another phrase that explicitly acknowledges that investors are orienting their risk profile behavior on what this unelected committee does.
Endless money for deeply indebted companies that have no prospect of making a profit is not a feature of capitalism. From Wolf Richter at wolfstreet.com:
By Wolf Richter. This is the transcript of my podcast last Sunday, THE WOLF STREET REPORT. You can listen to it on YouTube, and you can find it on Apple Podcasts, Spotify, Stitcher, Google Podcasts, iHeart Radio, and others.
Through the first half of August – which is normally a quiet period for the bond market in the US – a total of $56 billion in junk bonds and leveraged loans were issued by junk-rated companies, according to S&P Global. That was nearly 50% higher than the prior records for the same period in 2012 and 2016, and more than double the amount issued in the entire month of August last year.
The Fed’s announcement on March 23rd that it would start buying corporate bonds and bond ETFs set off a huge rally in the bond market, including in the junk-bond market.
The rally started before the Fed ever actually bought the first bond. And then the Fed hardly bought anything by Fed standards. Through the end of July, it bought just $12 billion in corporate bonds and bond ETFs, including a minuscule $1.1 billion in junk bond ETFs. It’s not even a rounding error on its $7-trillion mountain of assets.
But the announcement was enough to trigger the biggest junk-debt chase in the shortest amount of time the world has likely ever seen. And it kept the zombies walking, and it generated a whole new generation of zombies too.
Not even microscopic or negative interest rates can keep a debt bubble inflated forever. From Max Rangely at mises.org:
Much has been written about the economic consequences of covid-19, yet, just as in many of the analyses of the Great Depression and the 2008 crisis, the years of accumulating debt preceding the event do not attract the attention they deserve. Covid-19—or to be more precise, the lockdown—has initiated a cascading liquidation of the debt bubble that has been building for a generation. From the early 1980s, each recession has been responded to with iteratively lower interest rates. Following the bursting of the late 1980s credit bubble, Greenspan inaugurated the loosest monetary policy for a generation, creating the dotcom bubble. When this burst in 2000, it was responded to with even lower interest rates, reaching 1 percent from 2003–04, generating the housing bubble. When this burst in 2007/8, the response was 0 percent interest rates, turning a $150 trillion global debt bubble as it was then—already the largest In history—into a $250 trillion global debt bubble.
When central banks set interest rates it fundamentally distorts the pricing mechanisms of credit markets, just like price setting in other parts of the economy. Friedrich von Hayek won the Nobel Prize in 1974 for articulating that interest rates, like other prices, should be set by the market rather than central planning committees. We are not surprised when the government setting the price of food in Venezuela leads to food shortages, so we should not be surprised that 0 percent interest rates leads to a shortage in yield for investors, leading to a $250 trillion global debt bubble.
You can have market-driven financial markets or you can have central bank-driven financial markets, but you can’t have both. From Raúl Ilargi Meijer at theautomaticearth.com:
It wasn’t really the plan to make this a series, but it seems to have turned into one. Part 1 is here: The Fed Detests Free Markets. Part 3 will follow soon. And yeah, I did think perhaps I should have called this one “End The Fed” Is No Longer Enough. Because that’s the idea here. But what’s in a name?
Okay, let’s talk a bit more about finance again. Though I still think this requires caution, because the meaning of the terminology used in such conversations appears to have acquired ever more diverse meanings for different groups of people. Up to the point where you must ask: are we really still talking about the same thing here?I’ve said multiple times before that there are no more markets really, or investors, because central banks have killed off the markets. There are still “contraptions” that look like them, like the real thing, but they’re fake. You can see this every time a Fed chief opens their mouth and every single person involved in the fake markets hangs on their lips.
They do that because that Fed head actually determines what anything will be worth tomorrow, not the markets, since the Fed buys everything up, and puts interest rates down so more people can buy grossly overpriced property and assets, and allows companies to buy their own shares so nobody knows what they’re worth anymore.
Posted in Banking, Business, Capitalism, Collapse, Debt, Economy, Financial markets, Governments, Pensions
Tagged central bank policies, Low interest rates, Savings
Low interest rates make the problems they purport to cure worse. From Wolf Richter at wolfstreet.com:
Interest rates don’t have to be negative to make a mess in the era of low demand.
This is the transcript from my podcast last Sunday, THE WOLF STREET REPORT:
Now the plot thickens: I’ve got a former Secretary of the Treasury backing me up. We’ve already seen, including in my last podcast, how negative interest rates screw up the economy. Negative interest rates are so absurd that just thinking about them gives me a headache.
In the era of negative interest rates, owning financial assets such as government bonds, or savings in the bank, or corporate bonds, and increasingly European junk bonds, no longer produces income but a financial burden – because you have to pay the negative interest in one form or another. And so these quote unquote “assets” are not only a financial burden on you that you would want to get rid of normally, but by extension, they’re burden on the economy as a whole.
Look how economies and stocks have fared in countries with negative interest rates – such as Japan and the countries of the Eurozone: Their stocks have gotten crushed. Their bank stocks have gotten annihilated. Japanese bank stocks are down 92% from the peak 30 years ago, and European bank stocks are down 76% from 12 years ago. European bank stocks are now back where they’d first been in 1993.
The European and Japanese economies have been mired in microscopic growth interspersed with declines. In Japan, this has been going on for over two decades. In Europe it’s been a dozen years.
The world and US economy are addicted to debt and low interest rates. From the Zman at theburningplatform.com:
The Federal Reserve is making noises about cutting interest rates for the first time in several years. The reason is the trade dispute with China and now Mexico is potentially having an impact on the global economy. Even though it is only a signal of an intention, markets rallied on the news. Global investors and their robot traders love cheap credit from the Federal Reserve, so anytime there is the promise of more cheap credit, there is a rush into equities. It is a reminder of what actually drives stock indices.
It used to be that recessions were seen as a correctives for the system, as they eliminated unproductive and parasitic elements from the economy. In good times, all sorts of inefficiencies are tolerated, as everyone is making money. When times get tight, everyone gets serious again. Inefficient businesses and industries fail, thus putting those resources into more productive areas. The recession was the economy’s way of policing itself, so it was considered a necessary, if unpleasant, feature.
No one thinks like that today. Any sign of a downturn produces panic, especially among office holders. Part of it is no one has any respect for office holders, so voters will look for any reason to throw the bums out. For people who live off the public, losing an election is worse than death. Another part of it seems to be the sense among the ruling classes that they have only a tenuous grip on power. This is a bread and circus world now and they better make sure both are in ample supply.
More debt as a solution to the 2008-2009 debt crisis was never going to work out. From Charles Hugh Smith at oftwominds.com:
Isn’t it obvious that repeating the policies of 2009 won’t be enough to save the system from a long-delayed reset?
2019 is shaping up to be the year in which all the policies that worked in the past will no longer work. As we all know, the Global Financial Meltdown / recession of 2008-09 was halted by the coordinated policies of the major central banks, which lowered interest rates to near-zero, bought trillions of dollars of bonds and iffy assets such as mortgage-backed securities, and issued unlimited lines of credit to insolvent banks, i.e. unlimited liquidity.
Central governments which could do so went on a borrowing / spending binge to boost demand in their economies, and pursued other policies designed to bring demand forward, i.e. incentivize households to buy today what they’d planned to buy in the future.
This vast flood of low-cost credit and liquidity encouraged corporations to borrow money and use it to buy back their stocks, boosting per-share earnings and sending stocks higher for a decade.
Wall Street feels it has an “entitlement” to perpetually rising markets. From Wolf Richter at wolfstreet.com:
Their “Everything Bubble” is being pricked “gradually,” and they don’t like it.
Wall Street has been moaning, groaning, and crying out loud about the Fed’s current monetary policies – raising rates and unwinding QE. They fear that these policies will undo the Fed’s handiwork since the onset of QE and zero-interest-rate policy in 2008, now called the “Everything Bubble” (stocks, bonds, “leveraged loans,” housing, commercial real estate, classic cars, art…). In an effort to pressure the Fed to back off, they’re accusing the Fed of making a “policy mistake” and creating “scarcity” of bank reserves.
Here is Bloomberg News this morning. It’s really cute how this works. This is how the article starts out: “Fixed-income traders are telling the Federal Reserve that it might end up making a big policy mistake.”
These folks cannot say that the Fed’s QE unwind and higher rates might unwind some of the wealth of asset holders that resulted from the Fed’s desired “wealth effect.” That would be too clear. So they have to come up with hoary theories to back their “policy mistake” theme. This time it’s the theory of a “scarcity of bank reserves.”
When these folks talk about “scarcity,” what they mean is that they have to pay a little more. In this case, banks are having to pay more interest to attract deposits.