The very future of democracy and capitalist prosperity hangs in the balance, and not simply owing to today’s 2000 Dow point bloodbath and the giant Covid-19 pin that has slammed hard upon the world’s bubble-riven financial system.
What comes next is the real danger. Namely, a bald-faced financial coup d’ etat attempt by the Fed and its Wall Street auxiliaries, shills and handmaids.
To forestall the Armageddon of its owing making, it will soon be loudly demanding additional “tools” and statutory “authorities” to arrest the financial contagion and to”support” a main street economy that will be reeling from the double whammy of the Covid-19 supply-side shocks and the financial meltdown it has catalyzed.
Since the Fed can and does buy every variety of Treasury security and Federally guaranteed paper extant in the bond pits, the statutory enhancement at issue will involve the authority to buy equities, corporates, junk bonds, commercial real estate, ETFs and Tesla, too.
In other words, in order tranquilize and triage the casino against the carnage its treasury bond-buying and interest-rate pegging have already fostered, it will be seeking authority to join the gamblers at the financial roulettes wheel, and do so with the unlimited fiat credits that issue from its legal printing press.
Yet the very idea of buying stocks and junk with printing press money gives the notion of financial fraud an altogether new definition. After all, what else could you call the trillions of market cap that could be created from thin air by even modest amounts of Fed stock or ETF buying?
Indeed, the multiplier effect in the stock market would be truly insidious because it would open the door to larcenous front-running by Wall Street insiders like never before. That is, if it became known or surmised that the Fed will be buying Apple stocks and the bank ETFs, speculators would be backing up the trucks with malice aforethought.
As it is, honest price discovery has already been smothered in the bond pits and the money dealing rooms, which, in turn, has deeply infected all other financial markets through cheap carry trade speculation, rock bottom cap rates and debt-fueled financial engineering in the C-suites.
But to put the 12-member monetary politburo (viz FOMC) directly in the stocks, junk and ETF buying business is beyond the pale. It would constitute the finally victory of the state over the free market. Capitalism as we know would be no more because healthy, efficient, stable and honest money and capital markets are its very lifeblood.
So the U.S. Congress dare not accommodate this imminent power grab, and believe us it is halfway up Pennsylvania Avenue already. It was already percolating through the Fed’s so-called policy process review scheduled for completion this summer, which has now been accelerated mightily by the market meltdown underway.
Indeed, in just a handful of days, the whole misbegotten project of Keynesian central banking has come a cropper. With oil at $29/barrel, the 10-year UST plunging to 0.41% and stock indices cratering limit down, (7%) it should be finally obvious that there is sheer desperation in the Eccles Building.
Almost on cue, in fact, Boston Fed president Eric Rosengren was out preemptively on Friday suggesting Congress will need to amend the Fed’s statutory authorities to permit it to jump into the non-UST markets:
We should allow the central bank to purchase a broader range of securities or assets,” Rosengren said in a speech Friday in New York. “Such a policy, however, would require a change in the Federal Reserve Act.
Rosengren said that if the Fed was permitted to broaden the scope of assets it buys, the U.S. Treasury should indemnify it against losses.… He also resurrected the idea of establishing a facility that could buy broader assets provided that Treasury insured the central bank against risk.
What Rosengren was effectively saying is that the proverbial Boston bus driver/taxpayer should now underwrite the future gambling losses in the stock market of a posse of PhDs and power hungry apparatchiks who have proven themselves clueless time and again about the financial market malignancies they have repeatedly created.
Do these people have no shame!
Actually, what they really suffer from is tunnel-vision and historical amnesia which is so acute that they apparently do not even recognize the absurdity of putting the central bank in the stock buying business.
When Mario Draghi famously declared the ECB would do “whatever it takes” back in 2012, he spoke for a whole generation of Keynesian central bankers who are so ensnared in institutional mission creep and group-think that unless stopped there is no limit to the powers they would demand. We are talking about a virtual financial dictatorship run by a handful of unelected PhDs and government apparatchiks that for the most part have never sullied their hands in the real world by meeting a payroll or trading a junk bond.
Just consider the credentials of Friday’s messenger, Eric Rosengren. He’s an absolute Fed lifer, who got his PHD in 1986 at the University of Wisconsin, one of the leading hot beds of leftwing Keynesian statism, and was immediately hired by the Boston Fed and has been there ever since.
The man’s brain has been marinating for 35 years in the brackish waters of the nation’s monetary politburo. And he is not alone—nearly all the movers and shakers on the Fed are pretty much in the same boat.
New York Fed president John Williams has been in the system his entire career, as has Lael Brainard, Charles Evans, and Loretta Mester; and they are complimented by a Goldman Sachs alum at the Dallas Fed and Richard Clarida, the Trump-appointed Vice-Chair, who spend at lifetime at the world’s biggest bond fund (PIMCO) raking in the arbitrage booty relentlessly generated by the knuckleheads at the FOMC.
These cats actually thinks, apparently, that interest rates, yield spreads, stock prices and real estate cap rates were invented by the economic gods so that central bankers would have the requisite “tools” to macro-manage the financial system, and thereby smooth, steer and stimulate the path of the main street economy to the promised land of Keynesian full-employment, world without end.
The truth is, the price of money and financial assets are the most important, sensitive and systematically important prices in all of capitalism. The 12-member FMOC cannot possibly know the right price for millions of dynamically moving financial variables and virtually nothing at all with respect to the elaborate plumbing and signally system by which financial asset prices are connected to the internals of the nation’s $21 trillion economy.
Yet that is exactly the predicate of the Keynesian monetary central planning practiced by the Fed and its fellow-traveling central banks around the world. What it has led to is an absolute mangling of the financial system and a relentless outpouring of false price signals to the public and private sectors alike.
For instance, the supply chain disruption that is inherent in the plethora of potential plagues, droughts, floods, storms, viruses and other natural disasters that will always be with us has been immensely and artificially exacerbated by the central banks.
That’s because businesses have been encouraged to deplete their balance sheets of buffers and shock absorbers in order to cycle cash flow and debt-capacity into stock buybacks, M&A deals and other forms of financial engineering; and have also been incentivized to extend their supply chains to the far corners of the planet in pursuit of the cheapest labor obtainable on the assumption that the central banks are omniscient and omnipotent and will never allow a material interruption of trade flows and GDP growth.
Yet that’s why auto and pharmaceutical plants in Europe and America will soon be shutting down for want of a few cheap parts or materials and intermediates from China, and because they have no just-in-case inventories on their balance sheets—-the funding capacity having been used to buy back stocks and otherwise pleasure Wall Street with relentless financial engineering gambits.
As one astute auto industry veteran recently noted, auto company inventories today often amount to a mere fraction of the levels that prevailed in the 1980s before Greenspan led us into the brave new world of monetary central planning:
“In the 1980s, we had about $440 million worth of auto parts, six or seven weeks’ worth, sitting as backup” in the industry, said David Collins, chief executive officer of Shenzhen-based China Manufacturing Consultants and a former senior manager for Chrysler Corp. That figure now is less than $50 million, he said. “That means you don’t have a whole lot to fall back on.”
Likewise, the false signals that have gone out to government fiscal authorities are destructive beyond all prior imagination. Earlier today, virtually every bond issued by European and Japanese governments was trading at near zero or subzero yields; and in the case of the supposed ultimate safe haven—-the UST maturity spectrum—-even 30-years bonds were trading at merely 80 basis points.
Given that the core inflation rate is now running at 2.26% (CPI less food and energy) on a year over year basis and has been above 2.00% for 23 straight months, today’s long bond price is sheer madness. That is, either yields are going to snap back harshly and destroy the speculators in the bond pits or savers are being permanently euthanized and the very viability of the financial system put at extreme peril.
For want of doubt, consider the true poster boy for the current unhinged speculation in the global bond markets. We are referring to the 100-year bond issued by the Austrian government in September 2017 at a miniscule coupon of 2.1%.
At the time, the running inflation rate in Austria was about 2.5%—-so the investor was either signing up for a century of continuous negative real yields, which is to say perpetual capital destruction, or needed to be sufficiently clairvoyant as to know for certain that the price level will be falling steadily and virtually without interruption for the entire next century.
Indeed, it also required knowing that the rump state of Austria, which was carved from the corpus of the Austrian Empire 101 years ago at Versailles, will be around for another 100 years to make good on its redemption pledge.
But never mind. During the 30 months since the bonds were issued, there has been nary a sleepless night among the gamblers who bought the Austrian 100-year bond. In fact, most undoubtedly think they have died and gone to heaven because that bond has appreciated by 148%!
That’s right. The entire central bank-fueled malignancy in the bond pits has permitted eye’s wide shut gamblers to earn a 75% annual return on a lunatic bet that would never, ever see the light of day in an honest financial market.
Is there any wonder that virtually no country in the world save for Germany and a few cousins has used the 11-year expansion since the Great Recession ended in 2009 to rectify their fiscal accounts?
Of course, politicians everywhere and always gravitate toward free lunch economics. But the central banks have euthanized whatever minor spark of fiscal sanity that remained, and have turned once and former advocates of fiscal rectitude in the legislative halls into pariahs and relics of a bygone era.
Moreover, not withstanding that the US Treasury will borrow upwards of $1.2 trillion this fiscal year (counting off-balance sheet funding), Wall Street is already out beating the tom-toms for a big fiscal stimulus allegedly to counter-act the economic dislocations stemming from Covid-19, but in truth to provide a catalyst to lure the days traders, robo-machines and everlastingly stupid “retail” money back into the casino.
This morning, for instance, Cramer was pimping for an open-ended program of cheap or no interest Federal loans to any small business which may face several months of impaired cash flow from supply chain interruptions or the quarantining of consumers in their homes., whether by government order, personal prudence or social panic.
Then again, once upon a time that’s why businesses–even small ones—found it prudent to buy business interruption insurance or keep serviceable pools of excess liquidity on their balance sheets. That is, run a business based on the real world of risks, not the misbegotten presumption that the state and its central banking branch is always there to socialize losses, even as it subsidizes private upside gains via relentless financial repression and price-keeping operations in the risk asset markets.
In his note this AM, Gary Kaltbaum pulled no punches in denouncing this latest bald-faced Wall Street raid on the taxpayers.
After all, it is other people’s money they wish to deploy but not to save thousands of imprudent businesses that deserve to hit the wall. No, the real purpose is to ensure that the impending hole in the GDP is small enough and short-lived enough to enable the casino to be reflated by the next round of money pumping by the central banks.
It sickens us that everyone is looking to DC and the fed for help this morning. Yes…let’s look for help from the people who have put us into $23 trillion of debt and let’s look to the fed who has enabled not only this debt but the debt of many companies who were able to go to market at ridiculously low yields while enabling the massive leverage that is in the system. How many times have we complained about the massive debt/deficits and leverage throughout the years? You can get away with it when markets go up but when they go down?
Still, the most outrageous bright idea of the day was helicopter money for the public at large from the fiscal authorities, which would be funded with new Treasury debt sold to the Fed.
The very idea makes Bernie’s free stuff look tame because his plans at least presume some level of human need and suffering or social obligation via the lights of the left-wing.
But today’s Wall Street plan for helicopter money was to be available to one and all US households who face interruptions of their paychecks for the several months that it may take public health authorities to subdue and extinguish the Covid-19.
Of course, once upon a time, that very prospect was the reason for household savings and raining day funds. You weren’t supposed to spend every penny you earned while the sun was shinning, to say nothing of plunging permanently and hopelessly into debt.
But central bankers have destroyed savers and Keynesian doctors have preached a false doctrine holding that spending, not work, production, investment and invention, are the motor force of prosperity.
So here is what we have gotten. To wit, the virtual destruction of household savings and a hand-to-mouth economy that apparently cannot even wheather a bad case of the flu.