Blog Archives

No Matter How Much Money the Fed Prints, We Still Can’t Afford Nice Things

You’d think that with the Federal Reserve printing trillions of dollars since 2008, we’d all be able to afford nice things. But you’d be wrong: after 11 years of Fed money-printing, nice things are even more out of reach for all but the favored few who’ve received the Fed’s bounty of freshly created currency.

The Fed’s trillions were supposed to trickle down into the real economy, but they never did. All those trillions boosted asset prices and the wealth of the $100 million yachts and private jets elite.

Instead costs have soared while wages have stagnated. If this widening gap between wages and costs were accurately presented, there would a political revolt against the Fed and those few who have benefited so immensely from Fed money-printing: the banks, financiers, corporations buying back their own shares, the owners of high-frequency trading computers, etc.

Despite the best efforts of the government’s “suppress all evidence of runaway cost inflation” functionaries, a few facts have slipped through. Let’s start with income from 1980 to the present, as per the Congressional Budget Office (CBO). Note that this is all pre-government-transfer (Social Security, food stamps, etc.) income, both earned (wages) and unearned (investment income).

The top households have done very, very well in the past 20 years of Fed largesse, while the incomes of the bottom 80% have gone nowhere.

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Instability Rising: Why 2020 Will Be Different

Economically, the 11 years since the Global Financial Crisis of 2008-09 have been one relatively coherent era of modest growth, rising wealth/income inequality and coordinated central bank stimulus every time a crisis threatened to disrupt the domestic or global economy.

This era will draw to a close in 2020 and a new era of destabilization and uncertainty begins.

Why will all the policies that have worked so well for 11 years stop working in 2020?

All the monetary/fiscal policies of the past decade were simply extreme versions of tried-and-true policies that central banks and governments have used for the past 75 years to restore growth in a recession or financial crisis: lower interest rates, increase credit/liquidity, and ramp up government spending (i.e. deficit spending) to compensate for declining private-sector spending.

These policies were designed to be short-term stimulus programs to jump-start the economy out of a slowdown (recession), which typically lasted between 9 and 18 months.

These policies are now permanent, as the system is now dependent on these policies. Any reduction in central bank stimulus causes a market crash (witness the 20% drop in 2018 as the Fed slowly raised interest rates from near-zero) and any reduction in deficit spending threatens to trigger a recession.

The problem is that these policies create distortions that cannot be fixed with more of what caused the distortions in the first place: more extreme monetary and fiscal stimulus.

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409Ks, 90% Gains, The Fed and Darth Vader’s Warning

In case you missed it, here’s a snapshot of the most recent Federal Reserve board meeting:

It’s certainly a peculiar moment in history when the President chides everyone who hasn’t gained 90% in their 409K (sic), seemingly unaware that only the top 5% have enough in a 409K to make a difference.

President Trump and the Federal Reserve agree: the “solution” to inequality and malaise is to boost the 409Ks of the top 5%, leaving the rest of the American workforce as glorified servants of the few who benefit from a record-setting stock market.

Note to the Prez and the Fed: goosing the stock market only increases wealth/income inequality. There’s only so many dogs owned by the top 5% the peasantry can walk, only so many Priuses and Teslas to wash, only so many preciously over-scheduled children to tutor, only so many $50 steak dinners to bus, only so many bedpans of the top 5%’s parents to empty. The top 5% who benefit from the stock market’s relentless melt-up can’t generate a tide that raises all ships; all they can do is further enrich themselves on the debt-serfdom of their servants.

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Just a Friendly Heads-Up, Bulls: The Fed Just Slashed its Balance Sheet

Just a friendly heads-up to all the Bulls bowing and murmuring prayers to the Golden Idol of the Federal Reserve: the Fed just slashed its balance sheet–yes, reduced its assets. After panic-printing $410 billion in a few months, a $24 billion decline isn’t much, but it does suggest the Fed might finally be worrying about the reckless, insane bubble it inflated:

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The Two Charts You Need to Ignore or Rationalize Away in 2020 (Unless You’re a Bear)

We’re awash in financial charts, but only a few crystallize an entire year. Here are the two charts that sum up everything you need to know about the stock market in 2020.

Put another way–these are the two charts you need to ignore or rationalize away–unless you’re a Bear, of course, in which case you’ll want to tape a printed copy next to your wall of curled Post-It notes for future reference.

These charts show that all the potential gains from a thee-year advance (2019-2021) in P-E multiples and stock valuations have already been front-run in a mere three months. This is a key dynamic in the diminishing returns on Federal Reserve stimulus. This is an important point that few seem to observe.

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The Fed’s “Not-QE” and the $33 Trillion Stock Market in Three Charts

The past decade has shown that when the Federal Reserve creates trillions of dollars out of thin air (QE), U.S. stocks rise accordingly. The correlation is very nearly perfect.

This has given rise to the belief that buyers of stocks will always be rewarded because “the Fed has our backs.” The evidence for this belief is the near-perfect correlation of Fed money-printing and stocks soaring.

This near-universal belief in the omnipotent Fed raises an interesting question: how much actual control does the Fed have on the U.S. stock market? One way to approach this question is to plot the size (to scale) of the Fed’s current money-printing campaign of $60 billion per month, “Not-QE,” to the market cap (total value) of U.S. stocks, using the Wilshire 5000 as the measuring stick and the St. Louis Federal Reserve database (FRED) as the data source.

This first chart shows the Fed’s $60 billion per month “Not-QE” in relation the $33 trillion market value of U.S. stocks.

The nearly invisible thin red line is $60 billion in relation to $33 trillion. So exactly how does this signal-noise sum translate into “the Fed has our backs”?

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The Hour Is Getting Late

So here we are in Year 11 of the longest economic expansion/ stock market bubble in recent history, and by any measure, the hour is getting late, to quote Mr. Dylan:

So let us not talk falsely now
the hour is getting late
Bob Dylan, “All Along the Watchtower”

The question is: what would happen if we stop talking falsely? What would happen if we started talking about end-of-cycle rumblings, extreme disconnects between stocks and the real economy, the fact that “the Fed is the market” for 11 years running, that diminishing returns are setting in, as the Fed had to panic-print $400 billion in a few weeks to keep this sucker from going down, and that trees don’t grow to the troposphere, no matter how much the Fed fertilizes them?

When do we stop talking falsely about expansions that never end, and stock melt-ups that never end? Just as there is a beginning, there is always an ending, and yet here we are in Year Eleven, talking as if the expansion and the stock market bubble can keep going another eleven years because “the Fed has our backs.”

Take a quick glance at the chart below of the Fed balance sheet and tell me this is just the usual plain-vanilla, ho-hum, nothing out of the ordinary Year 11 of a “recovery” that will run to 15 years and then 20 years and then 50 years–as long as the Fed panic-prints, there’s no end in sight.

So after 9 years of “recovery,” the Fed finally starts reducing its balance sheet, peeling off about $700 billion over the course of 18 months.

Nice–only $3 trillion more to dump to return to the pre-crisis asset levels of less than $800 billion. In other words, the Fed’s “normalization” was a travesty of a mockery of a sham, a pathetically modest reduction that barely made a dent in its bloated balance sheet.

Knock a couple trillion off and we’ll be impressed with your “normalization.”

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OK Boomer, OK Fed

Much of the cluelessness and economic inequality behind the OK Boomer meme is the result of Federal Reserve policies that have favored those who already own the assets (Boomers) that the Fed has relentlessly pumped higher, to the extreme disadvantage of younger generations who were not given the opportunity to buy assets cheap and ride the Fed wave higher.

OK Fed: you’ve destroyed price discovery, driven housing out of reach of all but the wealthy and hollowed out the economy, all the while patting yourselves on the back for being so smart and fabulous.

OK Fed: you’ve waged generational war without even acknowledging how disastrous your policies have been for younger generations. You’ve bloated the paper wealth of everyone old enough to have bought a home 20, 30 or 40 years ago and who’s had a Corporate America or government job who’s seen their 401K or pension soar because “the Fed has our back” and Fed policies have inflated one bubble in stocks and bonds after another for 25 years.

OK Fed: as a direct consequence of your free-money-for-financiers policies, inflation has gutted the purchasing power of younger generations. As the bogus consumer price (CPI) claims inflation is near-zero year after year, two generations of Americans have been crushed by student loan debt that tops $1.5 trillion– a debt serfdom that would have been impossible had interest rates been settled by market forces.

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A “Market” That Needs $1 Trillion in Panic-Money-Printing to Stave Off Implosion Is Not a Market

A “market” that needs $1 trillion in panic-money-printing by the Fed to stave off a karmic-overdue implosion is not a market: a legitimate market enables price discovery. What is price discovery? The decisions and actions of buyers and sellers set the price of everything: assets, goods, services, risk and the price of borrowing money, i.e. interest rates and the availability of credit.

The U.S. has not had legitimate market in 12 years. What we call “the market” is a crude simulation that obscures the Federal Reserve’s Socialism for the Super-Wealthy: the vast majority of the income-producing assets are owned by the super-wealthy, and so all the Fed money-printing that’s been needed to inflate asset bubbles to new extremes only serves to further enrich the already-super-wealthy.

The apologists claim the bubbles must be inflated to “help” the average American, but that claim is absurdly specious. The majority of Americans “own” near-zero assets that earn income; at best they own rapidly-depreciating vehicles, a home that doesn’t generate any income and a life insurance policy that pays off only when they pass away.

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What’s Holding Up the Market?

What’s holding up the U.S. stock market? The facile answer is the Federal Reserve (“the Fed has our back,” “don’t fight the Fed,” etc.) but this doesn’t actually describe the mechanisms in play or the consequences of a market that levitates ever higher on the promise of more Fed money-for-nothing injected into the diseased veins of the financial system.

As Gordon T. Long and I discuss in our latest half-hour video program, What’s Holding the Market Up? (34 minutes), the primary prop under stock valuations are corporate buybacks, which total in the trillions of dollars since the 2008-09 Global Financial Meltdown and the Fed’s “rescue of the rich,” which continues to this day.

Rather than risk capital in productive investments, U.S. corporations have borrowed trillions of dollars and used the cash to buy back their own shares. The Fed’s suppression of interest rates has incentivized stock buybacks in several ways:

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Markets That Live by the Fed, Die by the Fed

All eyes are again on the Federal Reserve, as everyone understands that the Fed is the market— the stock market, the bond market, the art market, the housing market, etc. All markets have been driven higher by one force: central bank money creation and distribution to the financial sector of financiers and corporations, the richest of the rich.

What few seem to grasp (because they’re paid not to?) is the Fed is powerless over what actually matters in a healthy economy:

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Nothing Is Guaranteed

The American lifestyle and economy depend on a vast number of implicit guarantees— systemic forms of entitlement that we implicitly feel are our birthright.

Chief among these implicit entitlements is the Federal Reserve can always “save the day”: the Fed has the tools to escape either an inflationary spiral or a deflationary collapse.

But there are no guarantees this is actually true. In either an inflationary spiral or deflationary collapse of self-reinforcing defaults, the Fed’s “save” would destroy the economy, which is now so fragile that any increase in interest rates (to rescue us from an inflationary spiral) would destroy our completely debt-dependent economy: were mortgage rates to climb back to historical averages, the housing bubble would immediately implode.

Hello negative wealth effect, as every homeowner watches their temporary (and illusory) “wealth” dissipate before their eyes.

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