Tuesday, 25 August 2015

Crash: “What Hath Central Bank Policy Wrought?” [updated]


  • So will there be another global financial crisis?
    The short answer is yes.
    The Fall Guy is in Place for the Next Financial Crisis – Vinny Kolhatkar, THESAVVY STREET
  • With the U.S. and global markets having their worst month in years, here is a breakdown on how bad the damage has been since the declines started last week…
    How the world's major stocks markets have done this month – NZ HERALD
    What to Do When Markets Crash (Like They Did Today) – CASEY RESEARCH
  • What Hath Central Bank Policy Wrought?
    imageAfter futile attempts to prop up its stock market bubble, China stood back and did what it should have done in the first place: Let gravity take over…. 
        When China pledged to support the stock market, prices stabilized for a while, and traders ploughed back into margin. 
        But [yesterday], Chinese central planners finally figured out they could not stop gravity. The ensuing plunge was not orderly to say the least.
        The root of the problem in China is loosey-goosey central bank monetary policy that blew a massive property bubble followed by stock market bubble that had millions of high-schoolers opening up margin accounts to speculate.
        The same intervention problems exists in the US, Europe, and elsewhere.
    Central bank efforts to "stabilise" everything, led to the [volatility] earlier today in VIX "Too Disjointed to Calculate a Value"; Panic Grips Emerging Markets; Biggest VIX Jump on Record
        Gravity has finally taken over. It should have long ago.
    imageFew See Bubbles Until They Pop
        I don't know when this will stabilise, nor does anyone else, but if stock fall to normal valuations, it's a long, long way down from here.
    image    Central bankers will not see themselves as the problem even though they are to blame for the Dotcom mania, the housing bubble, current equity/junk bond bubble, and the income inequality problem that Janet Yellen rails about.
        Most fail to see the current bubbles in US equities and junk bonds for one reason only: The US markets have not crashed .... yet. 
        If there is a genuine crash, as opposed to a slow drip in the stock market for years as happened in Japan, cries will accumulate for the Fed to "do something".
        Here's reality: The Fed "already did something". The Fed created this bubble. The only beneficiaries were those with first access to money: The banks, Wall Street, and  the already wealthy.
        The middle class was brutally punished once again. Instead of protesting for higher wages at McDonald's people should instead protest Fed policies that steal from the middle class.
    Lessons in Gravity and Intervention; Do Something!  - MISH’S GLOBAL ECONOMIC TREND ANALYSIS
  • Plenty amongst you will be talking about economic cycles, and opportunities, and debate how to ‘play’ the crash, but all this is useless if and when a market doesn’t function. And just about all markets in the richer part of the world stopped functioning when central banks started buying assets. That’s when you stopped being investors. And when market strategies stopped making sense. 
        Central banks will come up with more, much more, ‘stimulus’, but what China teaches us today is that we’re woefully close to the moment when central banks will lose the faith and trust of everyone. After injecting tens of billions of dollars in markets, which thereby ceased to function, the global economy is in a bigger mess then it was prior to QE.
        The whole thing is one big bubble now, and we know what invariably happens to those. More QE is not an answer. And there is no other answer imageleft either. Those tens of trillions will need to vanish from the global economy before any market can be returned to a functioning one, and by that time of course asset prices will be fraction of what they are now…
    image    The entire west has become so addicted to China’s debt, and the illusion of prosperity and economic recovery it has brought, that all prices everywhere must come down, as noted above, until the tens of trillions of dollars in stimulus measures have vanished into the thin air they were fabricated in. Until value becomes real value again, not this virtual zombie Ponzi pricing.
        Today may be just a warning sign, and it may take a while longer before the deluge, but it will come. And since China has nothing left to fall back on but even higher private and public debt levels, make that sooner rather than later. 
        The main advice we’ve always given with regards to debt deleveraging stands: get out of debt.
        Meanwhile, the western financial press, which has been reporting on non-functioning markets for years as if they actually were still functioning, is worrying about a potential Fed rate hike, telling its readers and listeners that the US central bank ‘looks set to make a dangerous mistake’. But the real ‘mistake’ was made a long time ago.
    Stock Market Black Monday Crash, The BIG ONE? It Doesn’t Matter – Ralu Meijer, MARKET ORACLE
  • Let me be clear: I belong to the camp that has long argued for the Fed to raise short-term interest rates. The more the Fed held rates down, the more economic distortions its policy created. Rock-bottom interest rates stimulate investments in long-lived assets, which may be unsustainable once interest rates increase. The global bull market in commercial real estate comes to mind, as does the government bond market. Artificially low rates cause investors to chase yields and take on more risk. That was a goal of the Fed’s extraordinary monetary policy (though it was stated more euphemistically). And near-zero rates harm savers and those living on retirement income, so the policy is inherently and perversely redistributional. 
        All of these considerations, and others, argued for an earlier end to the near-zero policy. The question is why now, after seven years? …
        Low interest rates were thought to be stimulative. But we have learned that financial intermediaries struggle with spreads in a low-interest-rate environment. Hardest hit must surely be the money-market mutual-fund industry. Absent a dangerous lunge for risky returns, how much longer can that industry cope with the current interest-rate policy?
        One suspects that some combination of these motivations, reflecting a concern for financial stability, is behind the call for higher interest rates. To one degree or another, the concern is appropriate—but that has been the case for many years. Now it appears that the FOMC is at last poised to do the right thing, but with bad timing.
    The Fed Flirts With the Right Move at the Wrong Time – Gerald O’Driscoll, WALL STREET JOURNAL
  • [There is] one essential monetary idea [in this world]. That idea is that central banks can and should manipulate – override – the price mechanism… I think this idea is a worldwide idea, but it had its genesis in the United States. Ben Bernanke was an early proponent of it. The idea is that you put the cart of asset values before the horse of enterprise. By raising up asset values, you mobilize spending by people who have assets… It was otherwise known as trickle-down economics before the enlightenment, then it became something much fancier in economic lingo. But that’s essentially the idea. So what you have seen is an artificial structure of prices worldwide.
    image    The prices themselves are the cosmetic evidence of underlying difficulty. So if you misprice something, it’s not just the price that’s wrong. It’s the thing itself that has been financed by the price. So you have perhaps too many oil derricks, too many semi-conductor fabs. We have too much of something, which is financed by an excess of credit or debt. That, to me, is the essential backstory to this morning’s difficulties. It’s the mispricing of asset values, led by central banks who think that by inflating or lifting up stocks, bonds, real estate, they will thereby engender prosperity…
        In capitalism there is meant to be failure. It’s like the forest floor. There is life, there is regeneration, there is death. Without that, what you find is a bunch of dead ferns. What we have in America, it seems to me, is more and more evidence of ‘ferninisation.’ Radio Shack was an example of a business that was improbably surviving on the sales of extension cords in the digital age, and it had been financed with very leniently priced junk debt. What this does is to slow the metabolism of capitalism. So people say, ‘The Fed! These geniuses have succeeded in saving us from the abyss imageof 2000 and’ – Well, maybe. I doubt that. What they have given us is a system of enterprise that is much slower to change… 
        The Fed wanted to stimulate so-called aggregate demand. So it prints money. It suppresses interest rates. It wants to have a lot of financial activity. But in so doing, it reciprocally stimulates aggregate supply. So there’s a lot more of everything – a lot of big cap ex, a lot of big production, a lot of oil. And the lot-of-everything weighs on price indices and the Fed’s like, ‘Oh, we’re not meeting inflation targets. What shall we do? We shall print more money, suppress interest rates…’ and for [how long?]’ 
        Mispricing of debt does two things. It pulls demand forward, and it pushes failure out. So the junk bond default rate over the past 12 months has been the lowest in the 40-odd years in which the data has been collected – 2.3%, versus an average of something like 4%. So on its face, that’s a good thing. We don’t want people failing, because they might be your neighbour. And yet without that, without the dynamism that's success and failure introduced to enterprise, what you’re looking at is like in Europe.
    All Global Prices Are Artificial Thanks to Central Banks (Video) – Jim Grant, via SCHIFF GOLD
  • Fasten your seat belts, this ride is getting interesting…
        As I have been saying for years, the US Federal Reserve has always known that the fragile economy created through stimulus might prove unable to survive even the most marginal of rate increases. But in order to instil confidence in the markets, it has pretended that it could. Wall Street has largely played along in the charade, insisting that rate increases were justified by an apparently strengthening economy and needed to restore normalcy to the financial markets. 
        But the recovery Wall Street had anticipated never arrived, and traders who had earlier demanded that the Fed get on with the show, have now panicked that the rate hikes are about to occur in the face of a weakening economy. As a result, we are seeing a redux of the 2013 "taper tantrum" when stocks sold off when the Fed announced that it would be winding down its QE purchases of bonds.
        The question now is how much further the markets will have to fall before the Fed comes to the rescue by calling off any threatened rate increase? What else could pull the markets out of the current nose dive? 
        Think about where we are. Stock valuations are extremely high and earnings are falling and the economy is clearly decelerating. The steady march upward in stock prices has been enabled by a wave of cheap financing and share buybacks. There are very few reasons to currently suspect that earnings, profits, and share prices will suddenly improve organically. This market is just about the Fed. After one of the longest uninterrupted bull runs in history, bearish investors have learned the hard way that they can't fight the Fed. So why should they now expect to win when the Fed is posturing that its about to embark on a tightening cycle?  
    image    If the Fed were to do what it pretends it wants to do (embark on a tightening campaign that brings rates to about 2.0% in 18 months), and in the process ignore the carnage on Wall Street, I believe we would see a consistent sell off in which most of the gains made since 2009 would be surrendered. After all, how much of those gains came from bona fide improvements in the economy? It was all about the twin props of Quantitative Easing and zero percent interest rates. The Fed has already removed one of the props, and it's no accident that the markets have gained no ground whatsoever in the eight months since the QE program was officially wound down. 
        As the market considers a world without the second prop, a free fall could ensue. Now that we have broken through the October 2014 lows, there is very little technical support that should come in to play. A free fall in stocks could be an existential threat to an already weak economy.  It should be clear the Janet Yellen-controlled Fed would not want to risk such a scenario. This is why I believe that if the sharp sell off in stocks continues, we will get a clear signal that rate hikes are off the table.
        Of course, even if it does throw us that bone, the Fed will pretend that the weakness was unexpected and that it does not come from within (but is caused by external forces coming from China and Europe). Using that excuse, it will attempt to prolong the bluff that its delay is just temporary. For now at least Wall Street is happy to play along with the blame China game. This ignores the fact that China has had much bigger sell offs in recent weeks that did not lead to follow-on losses on Wall Street. I think the problems in China are the same problems confronting other emerging economies, namely the fear of a Fed tightening cycle that would weaken U.S. demand, depress commodity prices while simultaneously sucking investment capital into the United States, and away from the emerging markets, as a result of higher domestic interest rates and the strengthening dollar…
        Some still cling to the belief that the Fed will deliver one or two token 25 basis point rate increase before year end. But this could expose the Fed to a bigger catastrophe than doing nothing at all. If it actually raises rates, and the crisis on Wall Street intensifies, further weakening an already slowing economy, the Fed would have to quickly reverse course and cut back to zero. This would put the Fed's cluelessness and impotency into very sharp focus. From its perspective anything is better than that. If it does nothing, and the economy continues to slow, ultimately "requiring" additional stimulus, it will at least appear that its caution was justified.
        Unfortunately for the Fed, it won't be able to get away with doing nothing for too much longer. Events may soon force it to show its hand. Then perhaps some may notice that the Fed is holding absolutely nothing and has been bluffing the entire time.
    The Fed Is Spooking the Markets Not China – Peter Schiff, EURO PACIFIC CAPITAL

No comments:

Post a Comment

1. Commenters are welcome and invited.
2. All comments are moderated. Off-topic grandstanding, spam, and gibberish will be ignored. Tu quoque will be moderated.
3. Read the post before you comment. Challenge facts, but don't simply ignore them.
4. Use a name. If it's important enough to say, it's important enough to put a name to.
5. Above all: Act with honour. Say what you mean, and mean what you say.