How to Commit Financial Suicide

Guest Post by Bill Bonner

Printing paper money at a printing press in Perm.

(Photo credit: Alexey Kudenko)

Stocks are trading at a new record. Works of art hit a new record too.

From Bloomberg:

“An almost 6-foot-tall Jeff Koons white plaster sculpture of a woman holding three Hermes Birkin bags sold for $4 million last night at a charity auction in New York, 60% more than similar works fetched in the past.

The sale of “Gazing Ball (Charity)” followed last week’s tally of $673 million for Impressionist and modern art sold at Manhattan auctions, setting the stage for a potential record season if high prices continue this week.

“I’m long-term bullish on the art market,” Rajiv Chaudhri, president of Sunsara Capital LLC in New York and an art collector, said at the event at the Four Seasons restaurant in New York. “Prices will keep moving up. There is still so much private wealth being created. Art is the ultimate asset.”

Mr. Chaudhri is wrong about several things …

First, private wealth is not being created; it is being fabricated by central banks.

Second, art is not the ultimate asset but probably a poor and unreliable one.

And third, the art market is not going up the way he imagines. When the money drains away, the aficionados will be punished: They’ll be stuck with their purchases.

Imagine being stuck with this all this plaster, knowing you paid $4 m. for it … of course, for Jeff Koons art, it’s actually cheap (yes, cheap).

(Photo © Jeff Koons)

Oceans of Liquidity

Still, Mr. Chaudhri is right about one thing: There’s a lot of money around. Yes, rich people have gotten a lot richer in the last few years. The top 1% now own 35% of America’s wealth. The bottom 80% owns only 11% of it.

Where did all this money come from? We’ve seen estimates for the effect of QE on the balance sheets of the country’s asset holders. Over the last five years QE has added between $2.5 trillion… to as high as $9 trillion.

Now, with so much loose change in their pockets, the rich can bid for Jeff Koons’ confections… Manhattan condos… or whatever they want. But that still leaves the question: Where does the money come from?

You already know the answer: from the central banks. And you know where they got it: from nowhere. Central banks have created oceans of liquidity. Like water, it had to go somewhere. In the event, it went into stocks, real estate, art… and many other things.

And now that the QE program is officially on “pause” in the US, the Japanese and the Europeans are taking over.

Jeff Koons with one of his balloon rabbits. His “balloon dog” sold for $58.4 million a year ago (see “The Bubble in Modern Art” for more details on what’s been going on this space, including some neat pictures). Now, we don’t know why anyone would pay $58 million for the balloon dog, even in the face of the printing presses running day and night, but we do know one thing: namely why Jeff Koons is laughing all the time (you will be hard-pressed to find a picture in which he actually manages to suppress his nigh-permanent grin). He sure has fooled ‘em. Got to admire the chutzpa and his success, even if it required the help of the NY art dealer mafia. Koons performs a valuable service for mere mortals as well, by proving to them that people who are so rich they are almost literally drowning in money can be complete morons, irredeemably out of their gourd. By the way, this is not meant to be a comment on his art as such: we do think he has great ideas and we personally like the economy and Zeitgeist feel of his stuff. We’d consider buying it too, if the decimal points on the price tags were moved several steps to the left.

(Photo credit: Ben Stansall/AFP/Getty Images)

Trendsetters

“ECB council backs €1 trillion euro-zone rescue,” was the headline in the Financial Times as last week came to a close.

“Mario Draghi has secured unanimous support from the European Central Bank’s governing council to inject €1 trillion to rescue the Eurozone economy from stagnation,” continues the report.

And that comes on the heels of remarkable reports from Japan.
The Bank of Japan has a new governor, Haruhiko Kuroda. Apparently, he is even more reckless and retarded than Prime Minister Shinzō Abe.

Kuroda has upped the central banks asset buying to ¥80 trillion ($700 billion) a year. And part of the deal includes direct purchases of Japanese REITs and ETFs. As the Real Time Economics blog reports:

“In addition to bonds, the BoJ is investing heavily in private assets […] by buying stocks in the form of exchange-traded funds, or ETFs, and real estate through Japan real estate investment trusts, or J-REITs. Those assets had been in the mix before, but will be tripled. The figures are small compared to the JGB purchases – ¥3 trillion for ETFs, ¥90 billion for J-REITs – but can have a big influence on markets.”

“Hey … you want a wealth effect? I’ll give you a wealth effect!”

The Japanese are the trendsetters – at least in the world of suicidal financial policies. So, it probably won’t be long before the Fed gets back into the money-printing business. Most likely, it’ll wait for the stock market to crack. Then it, too, could begin buying stocks directly.

BoJ assets explode into the blue yonder as debt monetization goes into overdrive – good for the Nikkei, bad for the yen – click to enlarge.

The US stock market will fall because there is less and less fabricated money holding it up. The $3.6 trillion in QE helped push up the S&P 500 by 200% since its crisis low on March 9, 2009.

But QE is, as we said, now on “pause.” And the money-printing operations in Japan and Europe will probably not leak fast enough into the US to keep the water level high. Instead, liquidity will drain away – gradually … and then suddenly.

The Nikkei vs. the yen (the yen is quite appropriately mostly colored in red) – click to enlarge.

The Other “QE” …

Not only has QE stopped, but so has the big boost that the US used to get from its trade deficits. At its peak, America’s current account deficit reached $800 billion. That money – largely credit-financed – went out of the US to buy foreign-made goods.

To stop their currencies from appreciating versus the dollar, foreign central banks – particularly the People’s Bank of China – had to print local currency to buy these dollars. They then reinvest these dollars back in the US. This was like QE before there was QE, says our friend Richard Duncan.

The US got a flood of liquidity from overseas money-printers. This is what helped inflate the stock market bubble of 1999 and then the housing and financial bubble of 2008. But that’s gone too.

The current account deficit is only about half of what it once was. And as America’s oil industry coaxes more and more crude from the ground, there will be fewer US dollars headed overseas to buy energy and a lower current account deficit as a result.

This will mean less buying of US assets by the foreigners… and “excess liquidity” to float asset prices. The energy boom will not buoy up asset prices; it will help sink them.

Even though “hot money flows” into China are reportedly on the upswing again, even China’s foreign exchange reserves have dipped slightly of late – click to enlarge.

Image captions by PT

Charts by: St. Louis Federal Reserve Research, Tradingeconomics, StockCharts

The above article is from Diary of a Rogue Economist originally written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.