Investors are 'stoned on free money'



Posted by Ed 3 mths 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 3 mths 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 3 mths 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 3 mths 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 3 mths 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 3 mths 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 3 mths 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 3 mths 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 3 mths ago

Ed 3 mths ago
Insane Stock Market Rally Due To Massive Global Monetary Liquidity

Ed 3 mths 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 3 mths 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 3 mths 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 3 mths 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 3 mths 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 3 mths 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 3 mths 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.

Ed 2 mths ago
The Coming Crisis the Fed Can't Fix: Credit Exhaustion

Thus will end the central banks' bombastic hubris and the public's faith in central banks' godlike powers.

Having fixed the liquidity crisis of 2008-09 and kept a perversely unequal "recovery" staggering forward for a decade, central banks now believe there is no crisis they can't defeat: Liquidity crisis?

Flood the global financial system with liquidity. Interest rates above zero? Create trillions out of thin air and use the "free money" to buy bonds. Mortgage and housing markets shaky? Create another trillion and use it buy up mortgages.

And so on. Every economic-financial crisis can be fixed by creating trillions of out thin air, except the one we're entering--the exhaustion of credit. Central banks, like generals, always prepare to fight the last war and believe their preparation insures their victory.

China's central bank created over $1 trillion in January alone to flood China's faltering credit system with new credit-currency. Pouring new trillions into the financial system has always restarted the credit system, triggering renewed borrowing and lending that then powered yet another cycle of heedless consumption and mal-investment--oops, I meant development.

The elixir of new central bank money isn't working as intended, and this failure is now eroding trust in the central bank's fixes. Central banks can issue new credit to the private sector and it can can buy bonds, empty flats and mortgages, but no central bank can force over-indebted borrowers to borrow more or force wary lenders to lend to uncreditworthy borrowers.

Let's be honest: the entire global "recovery" since 2009 has been fueled by soaring debt. The output of more debt is declining, that is, every additional dollar of debt is no longer generating much in the way of positive returns. As with any stimulant, increasing the stimulant leads to diminishing returns.

Then there's the issue of debt saturation and debt exhaustion: those who are creditworthy no longer want to borrow more and those who are not creditworthy cannot borrow more, unless lenders want to eat the losses of default a few months after they issue the new loan.

The evidence is plain enough: defaults of student loans and auto loans are already at monumental levels, and the recession hasn't even started. Zero-percent financing for vehicles is a thing of the past, and those borrowers with average credit ratings are paying 6% or more for a new vehicle loan.

Coupled with the ever-higher prices of vehicles, this is leading to auto loans of $600 and $700 a month and lenders extending the duration of the loans from 5 to 7 years. Just how badly do households need a new vehicle at these rates and prices?

As for housing--unless the buyer just sold a house in a bubblicious market and has hundreds of thousands of dollars in cash, housing is out of reach of the bottom 95% in many markets. This raises the other dynamic of credit exhaustion: the whole exercise of buying a home or dumping more money in stocks is ultimately based on greater fools arising who will pay substantially more that the buyer paid today.

Greater fools generally depend on credit to finance their purchase, and so the erosion of creditworthy borrowers means the pool of greater fools willing and able to pay $1.2 million for the old bungalow someone paid $1 million for today is drying up fast.

Only a fool buys an asset that is poised to lose value as the pool of future buyers dries up. No wonder insiders are selling stocks like no tomorrow, and housing markets have become decidedly sluggish: the pool of qualified borrowers who are willing to bet on another decade of central-bank goosed "growth at any cost" is shrinking rapidly.

The next crisis won't be one of liquidity that central banks can fix by emitting additional trillions; it's a crisis that's impervious to central bank manipulation. The credibility of central banks is already evaporating like spilled water in July-baked Death Valley.

Central banks cannot magically make uncreditworthy borrowers creditworthy or magically force those who have forsworn adding more debt to borrow more at high rates of interest, and as a result they are powerless to stop the tide of credit from ebbing.

Thus will end the central banks' bombastic hubris and the public's faith in central banks' godlike powers, the "global growth" story, the China story, and all the other fairy tales that have passed as policies for the past decade rather than what they really were: politically expedient cover for the greatest expansion of inequality in modern history.

Ed 2 mths ago
The Countries with the Most Monstrous Corporate Debt Pileups. US Wimps out in 25th Place!

Ed 49 days ago
Banning Buybacks Would Crash The Market, Goldman Warns

Few topics prompt as powerful (and violent) a response from financial professionals as what the role of financial buybacks is in determining stock prices.

One group, largely those bulls who after a decade of central bank manipulation still believe that markets are efficient and unrigged, and in hope of increasing their AUMs claim that they are financial geniuses for riding the world's biggest financial bubble in history, argue that stock buybacks have no impact on stock prices.

Others, those who actually understand that if there is a trillion dollars in price indiscrimiant stock bids (as was the case in 2018 and will again happen in 2019) is the single most effective way to boost stock prices (and management's incentive-linked comp, linked to higher stock prices), know - correctly - that corporate buybacks, which until not too long ago were banned, and which over the past decade emerged as the single biggest source of stock purchases, are one of the two most important factors behind the all time highs in the stock market (the other being the Fed, whose policies have allowed companies to issue debt with record low yields, allowing them to fund these trillions in buybacks).

And with the debate raging, either side happy to "convince" others in its echo chamber while hurling insults at the other, few have been as vocal in their defense of stock buybacks as Goldman Sachs.

Ed 49 days ago
If you bought an index fund in 2008.... you'd be a mega genius!

Ed 46 days ago
Is this why the Fed blinked and reversed on interest rate hikes? i.e. they will keep the markets stoned free money (forever...)

This is How Stocks Get Hit When BBB-Rated Companies Try to Dodge a Downgrade to “Junk”

There are now many of them. Shoring up the balance sheet is the opposite of “shareholder friendly.” It’s “creditor friendly.”

Ed 46 days ago

Ed 46 days ago
Apr 9, 2019 at 9:09 pm

So is this the reason the Fed backed off raising rates ? The inability to refinance corporate debt would have set off a chain reaction that would have been hard to contain. .

Wolf Richter
Apr 9, 2019 at 9:18 pm

Yes, there was a problem with that, late last year. The junk bond market started getting very cold. No new junk bonds were issued late in the year. Yields were spiking. Leveraged loans took a big dive. All heck was breaking loose in the credit market. I think this spooked the Fed. I pointed out some of the credit-market issues at the time. It spooked me too :-]

Ed 44 days ago
As we noted at the time, one month after the PBOC injected a gargantuan 4.64 trillion yuan ($685 billion) into the economy - more than the GDP of Saudi Arabia - in the month of January in the country's broadest credit measure, the All-System Financing Aggregate a credit injection that was so massive it even prompted the fury of China's prime minister Li Keqiang ....

who lashed out at the central bank for its unprecedented debt generosity in a time when China was still pretending to be on a deleveraging path, in February the PBOC again surprised China-watchers, this time to the downside, when the Chinese central bank reported that aggregate financing increased by a paltry 703 billion yuan, roughly half the expected 1.3 trillion, the lowest print in the revised series history.

However, to assuage fears that China was turning off the credit taps just one month after the release of weak February TSF, PBOC governor Yi commented in his press conference during the NPC that (although February TSF data was weak) the data should be viewed in light of strong January data.

He also noted that even combined Jan-Feb data could be distorted by the Chinese New Year, and one needed to wait for March data.

Well, we got just that overnight (as reported previously) and it was a monster: just after 4am ET, the S&P futures surged above 2,900 when the PBOC reported that in March, new yuan loans jumped by 1.69 trillion, far above 1.25 trillion estimate, while total social financing in March soared higher 2.86t yuan, the highest March increase on record; smashing the 1.85 trillion yuan estimate, and more than four times the February 703BN yuan increase.

According to the PBOC, adjusted TSF growth (after adding local government special bond issuance) was 10.7% yoy in March, vs 10.1% yoy in February. If one adds all local government bond net issuance to TSF flow data (excluding special bond issuance to avoid double counting), Goldman estimates that adjusted TSF stock growth at 11.6% yoy in March, higher than 11.0% in February. The implied month-on-month growth of adjusted TSF was 11.6% SA ann, higher than 11.3% in February.

Putting the staggering jump in China's All-System Financial Aggregate in context, the March number was 80% higher than the year ago March print, and the YTD TSF cumulative total is 40% higher than a year ago!

Run-rated, and assuming no further growth at any month in the rest of 2019, China's TSF is set to close 2019 some 12% higher than a year ago, and nearly twice as high as China's official GDP growth rate.

Ed 44 days ago

Ed 33 days ago
““The Fed is between a rock and a hard place,” said Kathleen Gaffney, a portfolio manager at Eaton Vance Management in Boston. “They can’t go lower because there are signs that inflation is rising and they can’t go higher because of global political uncertainty. It leaves the market on pause.”

“…Gaffney said the Fed will likely have to raise rates again because of rising wages and other forms of inflation by the end of the year, adding that such a move will “pierce” the high valuations in both the stocks and bond markets.”

Ed 32 days ago
The Fed Is Resigned To Blowing The Biggest Bubble Ever Just To Extend The Expansion

Many have wondered if the Fed is ignorant to the problems their policy prescriptions cause, or if they've just resigned to walking society down the path to destruction knowingly.

It increasingly looks like the latter.

Indeed, the Fed may very well understand that its "lower for longer" policy is leading the economy and global markets straight into disaster.

However, as the same time, the central bank - feeling trapped after 10 years of unprecedented stimulus which if undone would result in a historic crash - is backed into a corner and has no choice but to accept this growing risk, as the world's punch drunk central bankers continue to try at all costs to keep the bloated economic "expansion" going.

Indeed, the Fed itself acknowledges this risk, because according to the minutes of the FOMC policy-making meeting from March 19 and March 20. "A few participants observed that the appropriate path for policy, insofar as it implied lower interest rates for longer periods of time, could lead to greater financial stability risks" the minutes read.

Chairman Powell himself understands very well the risks that he is taking: he has previously pointed out publicly that the last two "expansions" ended in the dot com bubble burst and then the housing bubble burst, according to Bloomberg.

Ed 32 days ago
Central Banks Cave, Usher In The Crack-Up Boom

This was going to be the year when the other big central banks joined the Fed in “normalizing” interest rates and reversing the past decade’s QE experiment. Instead, the other central banks blinked and went back to aggressive ease, and the Fed is following them. This is a very big deal.

Let’s consider some before-and-after stories:

Ed 32 days ago
What does this mean?

Several things, all of them momentous:

• 10 years into an expansion, with unemployment below 5% and officially reported inflation at the central bank target of 2%, the global economy is still too fragile to handle historically normal interest rates. The structural weakness that that implies is absolutely terrifying.

• If central banks can’t normalize monetary policy now, they’ll never be able to. Let that sink in. The old conception of monetary policy is over for the remaining life of the current global financial system.

• Since debt is soaring even in this late stage of the expansion with most people working and paying taxes, the financial headwinds that now prevent rate normalization will continue to strengthen. If 2% inflation is necessary to stave off collapse today, then 3% will be necessary shortly. Then 4% and so on, again, for the remaining life of this financial system.

How much time is left?

That’s unknowable of course, but it’s fairly safe to say that this central bank course reversal has ushered in the final chapter.

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