Courtesy of The Automatic Earth.
Barbara Wright Fruit, flowers and veg stall, Knoxville, Tenn. 1941
It looks like we’ll have a few more days to watch this thing, this alleged market, until on Thursday Mario Draghi launches his modern day version of Greenspan’s oracle years and on Friday the BLS, which can rival any oracle when it comes to confusing utterances, has the US employment numbers. There seem to be people who think those numbers might be quite good, though that might be hard to imagine in the wake of a shrinking US economy. Then again, in an environment where very few numbers make sense anymore, it’s anyone’s call.
This is one of the principal reasons that S&P trading numbers are scraping gutter lows: nobody knows what to do anymore, and therefore many choose to sit on their hands, too afraid to sell as long as easy profits keep coming in, even if they make no sense, and thereby risking to lose those profits. Volatility indexes are at multi-year lows in concert with trading numbers, the MSCI All-Country World Index is trying to break a 1996 record. That’s not real risk, just the perception of it, of course, but in a global economy in which central bank policies have made it impossible for anyone to find out what anything is truly worth anymore, it makes sense that fear and greed should have moved in next door to each other.
Bond markets are so bloated at over $100 trillion that traders, raters and regulators alike find they can just throw away their existing sophisticated models, and what’s true for bonds obviously holds for most other assets. And while the Fed may, at least officially, be tapering, there’s pressure on the ECB, the PBoC and the BOJ to increase stimulus anyway they see fit, so markets may live up to their addiction a while longer, even as it’s killing them. Whether some AA support group should be called, or the morgue, is a bit difficult to gauge, but there’s little hope and cheer to be drawn from the fact that the present experiment is quite a few steps beyond unique in world economic history, and bursting bubbles tend to fall harder and further the bigger they are.
As long as people perceive of dollars and yen as the primary driving forces in their lives, the outcome may well be unavoidable, because the trappings of chasing wealth are so ideally suited to who we are that we can’t shake their shackles on our own volition, and instead depend for our sanity on the system to crash. Well, it will. And with Bernanke et al having played God, delivering 7 fat years at the expense of the poorest in our societies, which today include a fast growing part of the former middle class, don’t count on just 7 lean years on the horizon. QE and other stimulus measures have put such a financial burden on our future that they’ve created a monetary black hole in our economic systems, whose gravity will suck in the vast majority of all debt and liabilities, and there’s no telling who amongst us will come out of it on either this side or the other.
The low trading volumes, which by themselves make price discovery that much harder, the ultra-low volatility, which does the exact same thing, the bloated beyond comprehension and therefore entirely unreliable global bond markets, all these things indicate to us that we no longer have functioning markets. From regulators to veteran traders to Jack and Jill, nobody knows the real value of anything anymore. But still just about everyone wants to find a way to make money in those same markets, be it through purchasing stocks, or a seemingly good deal on a home and mortgage, or gold and silver. That may not be the wisest thing to do. It’s like there’s a rumor going around that free money can be had in the casino, only when you get there, they blindfold you before you can enter.
The Fed debates the end of the stimulus, says the New York Times. The debate seems to center around the speed at which the economy is recovering, not if it recovers to begin with. Kansas City Fed head Esther L. George says: “I would like to see short-term interest rates move higher in response to improving economic conditions shortly after completion of the taper.” The Fed chiefs look at the economy and sees recovery, they only differ on the degree. JPMorgan’s Michael Feroli quotes that eternal source of inspiration for economists, Mike Tyson: “Everybody has a plan until they get punched in the mouth.” Michael Ivanovitch, president of economic research company MSI Global, former senior economist at the OECD and economist at the New York Fed and economics teacher at Columbia Business School, sees the forest for the trees. Or at least he sees part of it. He points to distorted BLS unemployment data and says they should show a 13% jobless number. He also says:
The Fed Should Stop Printing And Chase The Money Out
With the government spending falling at an average annual rate of 2.2% over the last four quarters, and the budget deficit expected to decline this fiscal year to 2.8% of GDP, the U.S. fiscal policy is quite restrictive at the time when it should at least be neutral. By contrast, the monetary policy is wildly expansionary, but its transmission mechanism is largely out of order. What else can be said when U.S. commercial bank lending to households was falling in Q1 at an annualized rate of 8.8%? And when these same banks were holding, on May 28, 2014, at the US Fed $2.6 trillion of excess reserves (i.e., loanable funds) at an interest rate of 0.25% instead of lending them out to creditworthy households at interest rates of 10% or more. In case you suspect that there are no creditworthy households, or that their loan demand is too weak, please note that nonbank (finance companies, credit unions, etc.) lending to consumers rose in the first quarter at an annualized rate of 6%. The message for the Fed is clear: Stop printing more money, but do chase the idle money out of your books.
It’s not all equally strong, but maybe at times we should take what we can get. Ivanovitch is an inside revolving door guy, and he will therefore only arrive at the sole beneficial advice he can give by presuming the economy is growing, even though he, like the rest of the clan, has seen the -1% Q1 GDP stat. But that, it seems, was due to this winter’s latest ice age (cue Ray Romano). Regardless, he’s obviously spot on. What Yellen and the Fed system urgently need to do – but won’t – is to stop QE and chase the idle money (bank reserves directly linked to QE) out of the Fed’s books. Ivanovitch just omits one crucial issue: “we” must chase out of the TBTF banks’ vaults all the smelly debt and virtual ‘money’ and derivatives losses and long lost wagers, all of it. Because if “we” don’t, no matter what else happens, we will be initially be stuck with distorted markets, and then inevitably with seeing them crash.
It’s only human to try and prevent something “bad” from happening today while risking something worse tomorrow. But that doesn’t make it right, or wise, or smart. They way financial markets are (not) functioning today should be a warning sign for individuals to go away, because having no price discovery is a recipe for being wiped out, and for regulators to clean up the system. I have little faith in either happening, but that only makes it more vital to get out and find something more useful to do with your life than chasing idle dollars.
