Investors are 'stoned on free money'



Posted by Ed 25 days ago
Société Générale's bearish strategist Albert Edwards has warned the investment community is "hooked on monetary opioids" provided by central bankers over the past decade.

In his latest investment note, the permabear noted that every major central bank has played a part in injecting another "dose of euphoria" into its "market patch".

The Federal Reserve, he said, was the most "visible and dominant dealer" of all, by deciding to put its foot on the interest rate brake in January just a month after signalling plans to raise rates twice in 2019. Markets are now pricing in a rate cut.

However, it is not just the Fed. As Edwards highlighted the European Central Bank, the Bank of Japan and the People's Bank of China all loosened policy in January.

"What we see is a market zig-zagging down the street in befuddlement after being given yet another quick fix by the central bank dealers in easy money.

"Having got the investment community hooked on monetary opioids, the central banks are making it clear that they will be there for the addicts if the withdrawal symptoms get too severe.

"Free money is now the drug of choice and the central banks have basically declared it legal and readily available."


Ed 25 days ago
Fed Tightening And Crumbling Fundamentals Expose The Recovery Lie

It is hard to say exactly when it started – in 2008 in the midst of the credit crisis, in the early 2000's when the Federal Reserve initiated artificially low interest rates which helped to create the vast US mortgage bubble, or maybe the root goes all the way back to 1913 when the Federal Reserve was founded, but somewhere along the line America entered severe economic decay.

One certainty is that signals in the fundamentals become visible every time the Fed inflates a financial bubble to stall a crash and then tightens policy without waiting for the economy to show true alignment.

This pattern is, in my view, not about the Fed “bumbling in the dark”. In fact, I see most Fed activities as quite deliberate, including the creation and deflation of large credit and equities bubbles.

Sometimes these crashing bubbles are used as an excuse by the Fed to launch an even more invasive program of stimulus, and sometimes the bubbles are allowed to collapse, allowing international banks to vacuum up hard assets for pennies on the dollar.

During the most widespread collapse events, the banking elites use the chaos and distraction to not only centralize assets, but shift entire geopolitical and fiscal dynamics in order to centralize power.

There is much debate in alternative economic analysis on which type of event we are facing today. There is not much debate, though, on the fact that the fundamentals are screaming bloody murder. The cycle has started over again.

Ed 25 days ago
Let's revisit the 'when' and 'why' the free money started....

JUNE 13, 2003 - There is increasing evidence that massive economic stimulus — monetary, courtesy of the Federal Reserve, and fiscal, thanks to the president and supply-side minded lawmakers — is taking hold.

The magnitude of the policy turnaround, which caps a constructive, multi-year reflation process, should overwhelm the economic negatives — including the drag from expensive oil and poor finances at the state- and local-government levels.

Expensive oil and its impact on other energy costs remains a concern.

The current level of U.S. monetary stimulus is massive. Real interest rates have fallen 5.2 percent from December 2000 to March 2003, reaching -1.2 percent. A swing of this magnitude may be historical.

Ed 24 days ago
Consequences of “Leaving Interest Rates Very Low for a Long Time”: Bank of Canada Governor Poloz

With the Bank of Canada’s overnight interest rate stalled out at 1.75%, lower than the rate of inflation, and leaving real rates stuck in negative territory, monetary policy continues to deliver stimulus to an incredibly long and aging economic expansion, one which has witnessed record debt accumulation. That is, at least, according to Bank of Canada Governor Stephen Poloz who delivered a speech in Montreal this past week.

Poloz ironically re-iterated the consequences of a prolonged negative interest rate environment:

“We have seen the natural results of leaving interest rates very low for a long time. For one thing, this has been hard for people, such as retirees, who rely on interest from their savings for their income.

“Further, people have taken on a lot of debt, mostly in the form of mortgages and home equity lines of credit. By 2017, the ratio of household debt to disposable income had hit a record – with the average household owing more than $1.70 for every dollar of disposable income.

“If we remove households that do not have mortgages, the ratio becomes much higher – close to $3 for every dollar of disposable income. And house prices were rising extremely quickly in some of Canada’s biggest cities.”

Ed 24 days ago
The global economy is slowing down. What can governments do about it?

“A decade after the crash, many nations are still on emergency monetary policies, even before a new downturn strikes…

“Central banks and finance ministries had better hope that the action taken so far will be enough to avert a recession because they will soon run out of conventional policy options.

“Krugman said in a Bloomberg interview: “We’re clearly in worse shape. We came into the last crisis with interest rates well above zero, we came into the last crisis with debt substantially lower than it is now…

““I think we’re in much worse shape. We probably don’t have a crisis of that magnitude about to hit us – God help us if we do – but we’re in much worse shape to deal with whatever shocks come along than we were 10 years ago.””

Ed 24 days ago
“Since 2008, the global economy has grown far too dependent on huge central bank balance sheets and accommodative monetary policy…

“…central bank actions are already an implicit acknowledgement that rising debt levels are unsustainable at higher rates and under tighter liquidity conditions. In the U.S., a record 7 million Americans are 90 days or more behind on their auto-loan payments, according to the Federal Reserve Bank of New York — a significant signal of distress among low-income groups who typically prioritize such payments…

“Printing money was always going to be easier than withdrawing it later. In effect, central banks are boxed into a situation where they can’t normalize policy and must maintain low rates and abundant liquidity, lest they destabilize fragile asset markets and spur low growth and disinflation. This state of “infinite QE” risks miscalculations and major policy errors. If central banks are, as is now fashionable to state, the only game in town, then the game is lost.”

Ed 24 days ago
Central banks and finance ministries had better hope that the action taken so far will be enough to avert a recession because they will soon run out of conventional policy options.

In 2008-09, the response to the financial crisis was fivefold: the central banks cut interest rates aggressively; they pumped cheap money into their economies through QE; finance ministries bailed out the banks with taxpayers’ money; governments ran bigger budget deficits as a way of boosting growth; and international cooperation kept trade flowing.

But today interest rates are still either zero or just about zero in most of the developed world; QE has been subject to the law of diminishing returns and has proved politically controversial; the public appetite for another round of bank bailouts is nonexistent; government debt levels are much higher than they were a decade ago; and economic nationalism is on the rise.

Krugman said in a Bloomberg interview: “We’re clearly in worse shape. We came into the last crisis with interest rates well above zero, we came into the last crisis with debt substantially lower than it is now … and we came into the last crisis with substantially better leadership … Our current treasury secretary [Steven Mnuchin] is no Hank Paulson.

“I think we’re in much worse shape. We probably don’t have a crisis of that magnitude about to hit us – God help us if we do – but we’re in much worse shape to deal with whatever shocks come along than we were 10 years ago.”

'probably'.... hmmm.....

Ed 22 days ago
The Doomsday Scenario for the stock and housing bubbles is simple: the Fed's magic fails.

When dropping interest rates to zero and flooding the financial sector with loose money fail to ignite the economy and reflate the deflating bubbles, punters will realize the Fed's magic only worked the first three times: three bubbles and the game is over.

So what happens when punters realize there won't be a fourth bubble? They sell.

Bids disappear because who's dumb enough to bet (with Japan and Europe as lessons) that more liquidity and negative interest rates will magically work when zero interest rates didn't move the needle?

Who's foolish enough to catch the falling knife (i.e. buying plummeting assets on the way down) on the unsupported assumption that the next dose of Fed magic will reverse a bidless market?

And should the Fed start buying stocks, mortgages, housing and bonds to prop up those bidless markets, what's the message it will be sending? Desperation.

If the only buyer is the money-printing central bank, that's pretty good evidence that your economy and markets are in free-fall.

The loss of faith in central bank magic will be gradual at first, as magical thinking dies hard.

It's oh so comforting to believe the central bank will rescue every overleveraged mal-investment and bail out every high-risk speculation, but the funny thing about the Fed's magic is it only works in liquidity crises--in every other condition, it only makes matters worse.

Ed 22 days ago

Ed 19 days ago
Insane Stock Market Rally Due To Massive Global Monetary Liquidity

Ed 18 days ago
Relying on monetary policy to prop up asset prices and smooth out global volatility is a recipe for disaster...

Just since December 2018, central banks have collectively injected as much as $500 billion of liquidity to stabilize economic conditions. The U.S. Federal Reserve has put interest rate increases on hold and is contemplating a halt to its balance-sheet reduction plan.

Other central banks have taken similar actions, fueling a new phase of the “everything bubble” as markets careen from December’s indiscriminate selling to January’s indiscriminate buying.

The monetary onslaught appears a reaction to financial factors -- falling equity markets, rising credit spreads, increased volatility -- and a perceived weakening of economic activity, primarily in Europe and China.

If they heeded Walter Bagehot’s oft-cited rule, central banks would act only as lenders of last resort in times of financial crisis, lending without limit to solvent firms against good collateral at high rates. Instead, they’ve become lenders of first resort, expected to step in at any sign of problems.

U.S. central bankers are currently debating whether quantitative-easing programs should be used purely in emergency situations or more routinely.

Ed 18 days ago
If you are a central banker... why would you engage in policies that are surely to end in disaster?

The Fed's 'accommodative' policies started around 2002.... what forced their hand then?

What continues to force them into ever more desperate policies?

Ed 16 days ago
US Budget Deficit Soars 77% As Federal Interest Expense Hits Record High

Another month, another frightening jump in the US budget deficit.

According to the latest Treasury data, the US budget surplus in January - traditionally one of the few surplus months of the year due to its tax receipts timing - was only $9 billion, badly missing the $25 billion surplus expected, and far below the $49 billion surplus recorded last January; it was the smallest January gain since 2015.

As a result, the budget deficit for the first four months of the fiscal year, widened to $310 billion, a whopping 77% higher than the $175.7 billion reported for the same period last year, largely the result of the revenue hit from Trump's tax cuts and the increase in government spending. The deficit was the result of a 2% drop in fiscal YTD receipts to $1.1 trillion, while spending jumped 9% to $1.4 trillion.

It would appear that the Fed has invented.... a perpetual prosperity machine.... just push a key on a computer then strike 0000000000000000 .... Enter .... whenever the economy starts to tilt towards recession....

The PBOC ECB BOJ etc.... also have one of these machines....

Ed 14 days ago
Now this says it all...

Market? What market.... the central banks are the market.... since GFC.... remove the CB manipulation... and .....

Chinese stocks slumped the most in four months as traders took a rare sell rating from the nation’s largest brokerage as a sign that the government wants to slow down the rally.

Ed 10 days ago
Ides and Tides

Just as presidents are expected to act presidentially, Federal Reserve chairpersons are expected to act oracularly — as semi-supernatural beings who emerge now and again from some cave of mathematical secrets to offer reassuringly cryptic utterances on mysteries of the economy.

And so was Jerome Powell wheeled out on CBS’s 60 Minutes Sunday night, like a cigar store Indian at an antique fair, so vividly sculpted and colorfully adorned you could almost imagine him saying something.

Maybe it was an hallucination, but I heard him say that “the economy is in a good place,” and that “the outlook is a favorable one.” Point taken. Pull the truck up to the loading dock and fill it with Tesla shares! I also thought I heard “Inflation is muted.” That must have been the laugh line, since there is almost no single item in the supermarket that goes for under five bucks these days.

But really, when was the last time you saw a cigar store Indian at Trader Joes? It took seventeen Federal Reserve math PhD’s to come up with that line, inflation is muted.

What you really had to love was Mr. Powell’s explanation for the record number of car owners in default on their monthly payments: “…not everybody is sharing in this widespread prosperity we have.”

Errrgghh Errrgghh Errrgghh. Sound of klaxon wailing. What he meant to say was, hedge-funders, private equity hustlers, and C-suite personnel are making out just fine as the asset-stripping of flyover America proceeds, and you miserable, morbidly obese, tattooed gorks watching this out on the Midwestern buzzard flats should have thought twice before dropping out of community college to drive a forklift in the Sysco frozen food warehouse (where, by the way, you are probably stealing half the oven-ready chicken nuggets in inventory).

Interlocutor Scott Pelley asked the oracle about “those half-a-million people who have given up looking for jobs.” Did he pull that number out of his shorts?

The total number out of the workforce is more like 95 million, and when you subtract retirees, people still in school, and the disabled, the figure is more like 7.5 million. There was some blather over the “opioid epidemic,” the upshot of which was learn to code, young man.

Personally, I was about as impressed as I was ten years ago when past oracle Ben Bernanke confidently explained to congress that the disturbances in Mortgage-land were “contained.”

Ed 10 days ago
Quote of the Day:

"you miserable, morbidly obese, tattooed gorks watching this out on the Midwestern buzzard flats should have thought twice before dropping out of community college to drive a forklift in the Sysco frozen food warehouse."

Ed 10 days ago
It wasn’t supposed to be this way.

Zero per cent interest rates and trillions of dollars of cash injections were supposed to be a temporary fix, a massive jolt to the heart of capitalism to revive the global economy.

The problem is that no-one has figured out how to remove the medicine, how to unwind the stimulus without causing a major downturn and economic chaos.

The US Federal Reserve at least tried. Until late last year, it was determined to push rates higher before Wall Street began to melt down, threatening to plunge the economy back into recession.

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