By Bill Blain of Mint Partners
Blain’s Morning Porridge – August 22nd 2017
“”Forty-two,” said Deep Thought, with infinite majesty and calm.… ”
I’m wondering if I’ve stumbled into a parallel universe after coming back to the office yesterday. Its too damn quiet out-there! Everybody else is apparently still on holiday. It’s scary. Every headline is about thin markets or how markets have shrugged off last week’s sell off.. (what about next week’s?) There doesn’t seem to be anyone actually at their desks… That’ll change…
This week? Since no one is out there.. I can say what I like.. It’s no wonder news flow noise is being magnified out of proportion..
It used to be the summer was the right time for big Jackson Hole style gatherings – safe on the basis holiday markets weren’t paying much attention. Central bankers/economists/investors and other influencers could gab and pontificate without upsetting anyone. But today.. well maybe there are just too many journalists, bloggers and other market parasites just desperately keen to make sure folk are acting upon their supremely important insights into what Stephen Mnuchin’s wife was wearing during his visit to Fort Knox and what it means for global asset prices.
There is a “last days of Rome” feel to the news these days…
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But some stuff is still well worth thinking about, so I have to comment on a great Bloomberg Article this morning: “Unintended Consequences of Quantitative Easing” by Jean-Michel Paul.
Regular readers of the morning porridge will know I’ve been deeply suspicious about QE since Day 1. I’ve been writing about the dangers of QE and asset price inflation, for years. Cassandra like, I’m probably right to be concerned, but was anyone listening?
THEY ARE NOW!
The end of QE is now very much “of the moment”; central bankers around the globe are finally waking up to the threats and understanding just why Normalisation is now so critical. That is what the real sub-text at Jackson Hole will be about this week.. although I doubt we’ll hear much about it.. its just too scary..
Can you imagine how global market sentiment would react if a phalanx of Central Bankers were suddenly to admit.. “Er.. we’ve just figured out we’ve profoundly broken the global economy through unforeseen financial asset price inflation, while negative interest rates have killed capitalism and destroyed the underlying processes of market based economies?”
Believe me… that would not go down particularly well…
I’ve long argued it’s the unintended consequences of QE, aka: massive financial asset price inflation, that are storing up enormous trouble for the future – including breaking the current financial system. Mr Paul points out the value of “investible assets” (broadly parallel, I suppose, to what I call “financial assets”, ie bonds and listed stocks) has grown by 40% from $350 trillion to $500 trillion since 2008. He notes the real assets behind these numbers have barely changed… meaning we don’t have $150 bln of new airports, planes, roads, ports, factories, etc actually visible.
But that cash has to be somewhere…
The reality is simple. In 2008 the global economy just about crashed and burned. It was saved because Governments (the Authorities) poured aid into the broken financial system at enormous expense to tax-payers. Following the crisis, sage politicians announced they would never, ever, never again give tax-payer cash to bankers or financial markets.
Yet, subsequently, while trying to financial engineer recovery and financial stability, what they did was pump massive amounts of cash into the financial system. At what point did they not figure out that would 1) create massive inflation, and 2) build up enormous future tax obligations as central bank balance sheets expanded like balloons (hold that vision).
What has QE created? Massive Financial Asset Price Inflation – which is just as pernicious and damaging as any other form of inflation eating away real value. In fact, it’s causing untold additional unintended consequences – including a massive explosion of wealth and income inequality.
Paul notes in his comment that financial asset inflation is killing the processes that drive Capitalism. We see that in the end of “creative destruction” and the number of Zombie Companies held together solely on low rates. A massive Credit Bubble – what? You never spotted it?
Massive Financial Asset Price inflation has not been matched by consumption – in fact low rates have made us all poorer at a time when inflation could be set to jump from the unreal financial asset world into the real world of real assets! Prices are going up and people can afford less – That is what you might call a sell signal!
What’s the solution?
Don’t know.
I suspect we’re into completely uncharted waters here. The central bankers know we need to normalise and rebuild the broken structures of capitalism and market based economies, without it becoming too apparent they are so broken – which would cause financial panic… On the other hand the cure might prove as painful as the self-inflicted injury of QE – analysts who assume a gradual slow steady normalisation of real interest rates will not prove impossibly painful may be kidding themselves…
Arg! It’s all so Bleak.
I have to start reading happier stuff in the morning…
Which is why I come back to Stephen Mnuchin and his wife.. I, for one, will giggle when the whole Trump thing implodes, but I don’t reckon its as important as some folk think.. Washington will carry on indifferent to whatever fool sits in the office. Cynical and dangerous view.. but checks and balances and all that..
But folk hate shocks and uncertainty… Which is why what what Mnuchin’s wife was wearing matters.. The rationale goes something like: We’re all doomed because it turns out one of the saner members of the Trump cabinet has married a “let-em-eat-cake” Marie-Antoinette without enough common sense to STFU. (Unfortunately… although I’ve never heard of her before, apparently his wife, Louise Linton, is a famous Scottish Actress… Really?
Enough.. back to the day job!
“Following the crisis, sage politicians announced they would never, ever, never again give tax-payer cash to bankers or financial markets.”
——- from the article
Raise your hand if you actually believed that at the time. Ha!
Ranks right up there with “I won’t come in your mouth.”
This is not a case of central banker wanting to change course, it is a case of central bankers HAVING to change course. See, they are in this “tip of the arrow” situation. They have starved real savers (insurance companies, pension funds etc.) basically large bond investors, of income for a decade. Well, the problem is that they have promised pensioners an 8% return. Hmmm. With laddered bond portfolios, their long duration bonds have rolled off for the last ten years, and they have had to purchase new bonds at much lower rates. If the feds were to change course right now, it would still take another ten years for the lower yielding stuff to roll out. This is why these pension funds are blowing up. On the other hand, you have debtors that are extremely stretched, at historically never before seen low interest rates. Remember, these are nothing but bonds as well. One person debt is another’s asset. These assets will blow up if interest rates just eek up a little bit. The feds are in a major pincer movement, and literally have no escape, so they just try and give the illusion that all is ok, but the math speaks very differently. They are walking a VERY precarious tight rope, and continued stability is going to be like threading a needle in your living room from space. This should be very interesting, and historic to see. If they indeed pull it off (which their odds are not great) it will definitely be one for business school study years from now.
I truly believe the forces at work in the American economy between business and government (note no industry) Elon Musk getting subsidies from a bankrupt government by squeezing taxpayers is not industry , are right on schedule to blow up the US and world economy after the greatest transfer of wealth from the many to the few . This track is deliberately designed and any common sense ways to stop it and fix it were thrown overboard along with the American middle class 40 years ago . Now the powers that be will tell us great unwashed we must pay up because the pensions for government people are underfunded while ours have vaporized .
I think I smell tar and feathers burning somewhere !