In efforts to spur lending and increase the rate of inflation, central banks in the US, EU, and Japan have engaged in dubious tactics.
Every time their actions fail, they double down in failed strategies.
The Bank of Japan and ECB are now running out of bonds to buy. To circumvent the imagined problem, the former is already buying equities. Will the ECB follow? Does it even matter?
Let’s address those questions with an eye on social mood.
The Wall Street Journal writers Brian Blackstone and Tom Fairless ask Could the ECB Start Buying Stocks?
By failing to properly analyze social mood, they come to the wrong conclusions.
Some central banks already invest in equities. Switzerland’s central bank has accumulated over $100 billion worth of stocks, including large holdings in blue-chip U.S. companies such as Apple and Coca-Cola.
If the ECB decides to raise its stimulus by extending its current bond program, as many analysts expect, fresh questions will be raised about how it will continue to find enough bonds to buy. The bank is already purchasing €80 billion ($89.2 billion) a month of corporate and public-sector bonds to reduce interest rates across the eurozone. Its holdings of public-sector debt reached €1 trillion last week, the ECB said Monday.
With a key policy rate already below zero, ECB officials hope that buying bonds with freshly printed euros will reduce interest rates further. But policy makers face a practical constraint: The ECB is running up against self-imposed limits on how much of a country’s bonds it can hold.
“The obvious reason for the ECB to buy equities is they have almost run out of German bonds to buy,” said Stefan Gerlach, chief economist at BSI Bank and a former deputy governor of Ireland’s central bank. “The basic idea is that the central bank can put essentially anything on its balance sheet and there is no reason to be straight-laced about this.”
When policy rates approached zero, central banks in the U.S., the U.K., Japan and the eurozone turned to bond purchases to reduce long-term interest rates. Buying equities would likely yield some of the same effects in terms of encouraging consumption and investment through higher household wealth and lower cost of capital.
“I don’t see a reason not to do this,” said Joseph Gagnon, senior fellow at the Peterson Institute for International Economics. “It isn’t obvious to me why a central bank wouldn’t always want a diversified portfolio, including equities.”
Straight Laced
Indeed, central banks can put anything on their balance sheet. But there is no reason to be straight-laced about how counterproductive the concept is.
If buying bonds stimulated inflation, Japan and the ECB would have it in spades.
Spotlight on Social mood
With round after round of QE, central banks have accomplished nothing but a reinforcement of already negative social mood.
Peter Atwater discusses social mood in his excellent column Why Central Bank Stock Purchases Are a Really Bad Idea.
“Buying equities would likely yield some of the same effects in terms of encouraging consumption and investment through higher household wealth and lower cost of capital,” [say Blackstone and Fairless] …
While there are many reasons for the disparity in moods today, I am afraid, the decoupling of Main Street mood from Wall Street mood will represent a clear headwind to the economic thinking behind today’s proposed central bank actions. Based on what I see, little will be gained by additional asset purchases, especially stocks. In fact, as I discuss below, I think we have now reached the point where further asset purchases risk derailing confidence rather than boosting it.
Underlying today’s central bank actions and the sentence offered above by Blackstone and Fairless is the “wealth effect” – “a psychological phenomenon that causes people to spend more as the value of their assets rises. The premise is that when consumers’ homes or investment portfolios increase in value, they feel more financially secure, so they increase their spending.” (Investopedia) To believe the principle, for individuals, higher asset prices lead to a positive wealth effect that, in turn, leads to greater consumption.
To be clear, I think economists have it backwards. As a socionomist, I believe that increases in confidence boost both financial asset prices and consumption simultaneously. Mood precedes action, rather than lags it. We act as we feel, driven by our level of confidence. With high confidence we see permanence to our financial condition expecting it to continue long into the future.
Sadly, today’s central bankers don’t see confidence/action causality operating this way.
Looking at today’s stock-hungry central bank plans, I see three problems:
First, unless Main Street sentiment changes dramatically, low confidence by itself is going to continue to limit how much higher stock prices impact consumption. Without greater Main Street confidence there simply won’t be a positive wealth effect – a necessary requirement for increased spending.
Second, the further central bankers decouple the markets from the broader economy, the more contradictory the mood “mirrors” will become to investors. I think we are already seeing signs of this given the investor “anxiety” referenced above. While they may not be able to put their finger on it, investors know something is wrong.
Rather than the mood “mirrors” offering cognitive ease as they did at the peak in 2007, today’s “mirrors” are offering cognitive strain.
Those contradictory mood “mirrors” run in both directions. If investors are strained by the messages out of Main Street, voters on Main Street are irate at the contradictory images the financial-elites are reflecting back on them. From $100 million condominiums to super-sized, stock-driven compensation packages, consumers are having a difficult time reconciling their own post-banking crisis personal experiences with what they see among the moneyed class.
The more – and more openly – central banks act to simultaneously boost financial asset prices and to press savings rates lower, the more voters have good reason to question the motives of the Federal Reserve, ECB and other central banks.
Third, the cognitive strain evident on Main Street and among a growing group of investors is even clearer in corporate investment decision-making today. While stock prices may be soaring, organic revenue growth is anemic. Many executives, like Starbucks’ CEO Howard Schultz, are openly worried about the impact consumer economic and political anxiety is having on business. While stock prices suggest it is the best of times, the cash register is saying something else, entirely.
While this morning the Wall Street Journal highlighted the benefits of central bank stock purchases, it is time to throw out those wealth effect dream-filled Econ 101 textbooks and replace that thinking with something more grounded in today’s reality:
“Buying equities will put additional pressure on corporate CEOs to cut expenses and to postpone investments, fostering even greater Main Street resentment toward the financial elite. Consumer confidence won’t rise as consumption and economic growth stagnate. Having so clearly sided with owners of capital, rather than the employees of capital, global central banks are likely to become an easy target for populist ire.”
Mish’s Rule of Social Mood
Think back to the housing bubble. By holding rates too low too long, the Fed certainly added fuel to the housing bubble. Baby step hikes by Alan Greenspan did not slow the bubble, they fueled it.
At some point, the collective wisdom of the masses changed, suddenly and without precedent. The event was totally expected in this corner, predicted in advance, and timed correctly.
Those seeking proof can easily find it here: US vs. Japan Land Prices Pictorial Update
In Winter of 2008 I had the housing bubble looking as follows: Housing Update – How Far To The Bottom?
In Spring of 2011 I even caught the bottom: Reader Seeks Help/Advice on US Housing/Economy; How Far to THE Bottom?
My analysis was far from perfect. I failed to predict the echo bubble in both housing and the stock market. If you believe anyone has all the answers you are mistaken.
Let’s return to social mood.
What Happened?
In a nutshell, the Fed fueled a housing bubble.
Social mood already embraced the notion “housing always goes up” and along comes the Fed holding interest rates way too low all the way.
Conventional wisdom and Greenspan apologists say the Fed was not to blame. They are wrong. While it’s true the Fed cannot change social mood, the Fed actually reinforced social mood.
Pool of Greater Fools
At some point, the pool of greater fools is guaranteed to run out. It happened with the Fed-sponsored dotcom bubble and it happened again with the housing bubble.
How did I time the top?
Time Magazine went gaga over real estate.
In December 2005 I wrote It’s Too Late.
When you see stuff like this, not only is it too late, it’s way too late.
“When you see stuff like this, not only is it too late, it’s way too late.”
People in were standing in lines, wrapped way around the corner, for the right to enter a lottery to buy a Florida condo.
That is extreme sentiment.
Timing Sentiment
Timing sentiment is extremely difficult. Those were obvious, but the Fed did not see what they had done.
They fail again now. So do central banks in general. Nonetheless, I can make a disturbing claim.
Social Mood Will Get Extremely Ugly
Actually, social mood is “already” extremely ugly. The powers that be do not see it for the simple reason they are not affected by it.
Murders in Chicago are at an all time high and Brexit was totally unexpected.
The rise of anti-establishment candidates and parties such as Donald Trump in the US, AfD in Germany, Beppe Grilllo in Italy, and Marine le Pen in France is proof enough of rising social anger.
Masking Social Mood
The only thing masking already ugly social mood is a high and rising stock market. It’s not only high, it’s in bubble territory.
Bubbles pop, by definition. Perhaps the bubble orderly deflates, like Japan, as opposed to a 1929-style crash.
That’s my prediction actually. But it won’t matter. If anything, an orderly asset devaluation over 7-10 years would be worse.
Perceived wealth will vanish. Pension plan promises will be exposed as lies.
Increasingly Worse Off
A McKinsey study shows 81% of US Worse off Than in 2005, France 63%, Italy 97%.
Social mood reflects that study. Sponsoring asset bubbles in hopes of trickle-down spending will do nothing but increase the anger.
There is not a damn thing central banks can do about this.
Central banks created the problem. Let me phrase that more accurately: Central banks and their bubble blowing tactics are the problem.
Mike “Mish” Shedlock
“If buying bonds stimulated inflation, Japan and the ECB would have it in spades.”
At some point it has to have an impact. I’m pretty sure a 50 trillion dollar QE program would cause inflation.
No – it would destroy what is left of the economy and make those first in line on the money insanely wealthy.
It doesn’t work
And then it would lead to war.
Yep!
Zimbabwe.
Obama and Hillary are praying every night to keep this Ponzi scheme going until the election…
Turn those machines back on!
“Perceived wealth will vanish. Pension plan promises will be exposed as lies.”
After Oct 14, 2016 people may start getting refusals when they try to withdraw funds from their money market funds. Others will allowed on a limited basis, subject to a fee schedule.
You think people are mad now? Wait until you’re made to pay a withdrawal fee to get your funds from a lousy money market fund. The law was passed two years ago and your brokerage has likely already sent out the fine print heads up. Did Joe Sixpack read his? Or is he still fuming that the money market funds stopped paying any interest years ago?
People who still think that MM funds are secure also believe that the UE is below 5%.
“joe sixpack” likely doesn’t have a measly $500 available to invest in anything because he is wasting money on cable TV, booze, dinners out at chain restaurants, multiple SUV payments etc..
Hey, I like my TV, booze and dinners, thank you very much.
You forgot to mention health premiums( compelled), car insurance, fed & state taxes, other taxes(7.3%), insane finance charges because banks don’t refinance, etc. I sold the SUV to cut costs on gas and insurance and I downsized. I stock up on my booze at the state border and I can’t eat the crap they serve at most restaurants because it’s been crapified anyhow. And people wonder why the economy is doing so bad? Nick, you need to pull your head out of your *ss! How’s that for social mood!!
Sold my house in Arlington, Va. in April 2005. The guy who bought it from me did about three months of work and then tried to sell it for another quarter million (!). He ended up selling it for half of what he bought it from me on a short sale.
I remember worrying in March/early April that I had waited too late. I was right on time. Sold it for three times what I bought it for in 1995. The other shoe’s about to drop in this semi-reflated bubble.
Doom!
Got gold?
Right on, Ben. I also sold a bunch of real estate in 2005, and told my RE broker it looked to me like the market had topped. Of course she said she could not see any sign of that. Moral of the story: Do not listen to “experts”, do your own thinking.
There is a house under renovation near me, an LLC fellow owns it. He bought it as a bank foreclosure last spring with intentions of flipping it. Talked to him Friday and he’s not happy. If the market price was on the up swing, as it has been around here for the last 4-5 years, you can adsorb some cost over runs. His problem is he’s over his expected repair budget and the market has slowed a lot over the spring-summer and he figures he’s way under water now. Two other houses on the street, that seem fairly priced, are not getting any potential buyer traffic. His description of his situation was kind of alarming. He said. “It’s all going back to the way it was” (2008-9). I think what I saw and heard sounds not so much of a “social mood” problem… it sounded more like a broken social contact.
I’ve got one on my street that has been abandoned since 2009. The family who lived there took out $300,000 in home equity, bought new cars (one was a jag), bought a 40′ hatteras for fishing, and I’m sure a bunch of stuff I know nothing about.
The wife’s mom died, so they moved into her house and let the old one go into foreclosure. The bank is suing them for the money and back mortgage payments. When it’s all done, I’ll buy the house for a song and flip it for beer money.
The RE market in the Seattle area remains hot. A neighbor just sold their home for $750,000. They purchased it in 2010 for $520,000. Ka-Ching!
It is easier to “predict in advance” than it is to predict after the fact, which, of course, is impossible.
“Predictions are really difficult, especially when they’re about the future”
please….. more doom & gloom LOL!!! Did you miss the statistic about job openings at an all time high?? There are an Unusual number of unfilled high paying job openings in the Boston area that cannot be filled because of lack of qualified applicants..
Consumer spending hasn’t slowed at all – increased by 4.2% in the 2nd quarter as part of the GDP and looks like will be similar to higher this current quarter
Consumer spending is a lagging indicator. No value unless you need confirmation.
Re jobs: about 75% of new jobs are low-paying. If you are not earning over $100,000 a year, or aren’t a cop, fireman, sanitation worker, teacher (in a decent state), then your annual income is probably about $25,000. Higher-paying jobs may have outrageous requirements attached to them. And consumer spending certainly has slowed; the numbers are skewed by statistical rigging. I spend several hours daily reading a few dozen legitimate websites and it is obvious the U.S. is back in recession.
Live in Florida. I was looking at a population estimate of the County I live in and followed the link to the population of all Florida Counties. Looked at one in the panhandle (Dixie) and saw average household income was $33K. Average male makes about $22K and average female around $18K.
You can also get 50 acres of Suwanee River side property for $200K. Thinking of moving up there and having servants.
Anybody holding stocks right now is tiptoeing through a mine field. God love ya. You got much bigger ones than I do.
When it pops it’s going to be heard around the world. The domino effect. Globalism is so very dangerous since we get royally screwed if China or Japan or the EU steps in it. We are no longer sovereign. Now we pay for the sins of others. Precarious.
I don’t know about you…but I wouldn’t want to be born today. I lucked out. I’ll probably turn to room temperature about the time it all gets flushed. I do feel sorry for the kids. But what can I do about it? I apologize to the older ones in high school or college for what we’ve done to their futures. But most of them haven’t a clue. I get that deer in the headlights look. So I just shrug my shoulders and give them a pat on the back and say “good luck”.
But I have to admit. I harbor some guilt for being a member of the most selfish, conceited and arrogant generation in the history of this once great nation.
Almost totally agree with you OldTimer, except, It’s been a long time since I felt like I was a member. I realized the Libertarians were the only ones who were on the right course over 40 years ago.
You know, those guys like the Founding Fathers, who thought the People should control the government, not the other way around.
What I see in the stock market right now, looks just like the end October 2007.
Meh, our generation just gave away all of the benefits our fathers and grandfathers fought and died for. There are no more pensions, fully employer-paid healthcare, unions covering your back when your employer wants to outsource your job to India.
But these things come and go. The kids will start it all over and hopefully the grandkids will live as well as we did.
This is simply what happens when an entire global civilization gets invested in a Ponzi scheme. From Mars observers can feel sorry for us earthlings as we go through the five stages of grief: denial, anger, bargaining, depression, and acceptance. The debt bubble was created when banks decided price justifies price, instead of earnings justifies price. Now, in the end game, stocks price justifies margin loans collateralized by stocks current selling price, houses sell to buyers using recent neighborhood sales prices for appraisal for collateral calculations. Central banks had a little to do with this but mostly it was private banks ignoring old rules: houses are worth 100 times monthly rents. Not! Stocks are worth ten times earnings. Not!
CBs are reacting to, not causing this reality. They are supporting prices lest the Ponzi reality be revealed. Denial phase. Now Mish predicts anger. Me too.
Bargaining and depression will follow quickly.
Partially right. Banks have always loaned against ever increasing asset prices, causing asset prices to increase. This has historically been what banking is all about. There was a brief period from the 30’s to the 90’s where banks were strictly controlled and kept from doing this with rules about interstate banking, strict reserve requirements, Glass-Steagal, and tough rules from FNMA.
What happened is that we forgot how unregulated banks worked. So we got rid of all those nasty regulations and here we are. I agree the Fed reserve is just reacting to the problem. But they were the ones fighting the hardest for deregulation.
Banks came out of the Great Depression and WWII rubbing their ass and saying: Never again. Private debt to GDP was 50%. Banks loaned against collateral valued strictly on earnings. Over time just as described by Minsky banks moved from super cautious to bold to bolder to care free over the past 70 years. As you say, here we are.
That “acceptance” thing doesn’t work for me.
Our Fed will be buying spiders by the end of next year if Hillary wins. Those 7.5% return promises on public pensions are critical for the Ds. If Trump wins, who knows?
“Perhaps the bubble orderly deflates, like Japan, as opposed to a 1929-style crash.”
May not too, because Japan had dotcom bubble, housing bubble and China as tailwinds to cushion the fall. This time round, what will be the tailwind given that the Fed, ECB, BOJ, PBOC and BOE are all in and are probably out of ammo (one does not really know with these lunatics), bankers are not willing to lend and consumers are not willing to borrow. May be this bubble cannot be deflated slowly and has to crash and burn and result in a change in monetary order (I am an incurable optimist:) ).
The Automatic Earth has 2 great pieces (and 2 more coming) on negative rates and what is coming. I cannot believe that developed countries like Sweden, Norway and Denmark have so many imbeciles who are not able to understand that going cashless (needed for negative rates to work) is nothing but legal confiscation by government.
Social mood is indeed ‘already very ugly’ as you point out Mish but for the wrong reasons, most of the chatter I detect from social media and the like, is fixated on immigration and how Muslims are taking over America or how the ‘Black lives matter movement’ is ‘the racist’ not the white population or the police and the never ending rhetoric concerning the pro’s and con’s of a Trump or Clinton victory in November. Yes the population is indeed ‘pissed off’ but not about the economic woes of the nation or the rise and fall of the stock market that resembles the rise and fall of a ‘whores knickers’, which speaks volumes about the behavior of main stream media and its obvious bias and appetite for the dumb down of it’s citizens.
In many ways I would welcome the arrival of the impending ‘crash’ if only to see attitudes change from petty social issues to real life ‘oh shit’ problems, it might just kick start the citizenry into actually giving a toss. Meanwhile, there are some concerned people with pent up frustrations and it wouldn’t take much in my opinion, for the working classes of America to boil over into a fit of ‘crazy’ but the reality is that most people are way to busy and nothing will happen. The economic misery will drag on for years to come or until the powers that be manipulating it all decide to throw in the towel.
How about the huge number of MMT proponents? A huge group of morons is sure that government spending is all good and should always be increased and that debt does not matter.
I think we are near some extreme point.
Dick Cheney famously proclaimed that “deficits don’t matter”. He said that because he knows something about government financing that you don’t. And, he is absolutely correct.
Though I agree that government spending is not a panacea for the problems we face today.
Misha has one thing right; central banks are incompetent.
The financial system has become extremely complicated and it is no longer possible to predict knock on effects of changes.
When you are in a hole stop digging. Central banks should return to being lenders of last resort and no more. Of course the ECB should cease to exist as the Euro dies. It maybe a cold winter and the Euros printed to buy bonds etc will be more use for fire lighting.
The central banks ate lendets of last resort. We are stoll using emergecy measures and nothing is working.
Why not just buy the entire market? Then when you own the companies you can force inflation by forcing a raise in prices or force a increase of wages for the companies you now own.
Would a central bank allow a company it owns stock in to see it’s share price go down? At the point that central banks own stock I think that would mean that country no longer has a real market and that the central bank would prevent it from any real decline, after all at that point a hit to the market would be a hit to themselves.
I think that’s called Communism.
See: Japan.
“Central banks and their bubble blowing tactics are the problem.”
Yes, bankers have become oppressors of the people. Especially the poor and elderly.
One of Mish’s better recent posts.
As for the “elites”….
The elites?
They will end up like the elites during the French revolution. Social mood is a bitch.
with BIG political change coming in the EU [LePen wins in may]….it will not be a slow decline….it will be an avalanche.
Mish, I think you provide some great information to us and I’m grateful for that. I hope you will continue to pursue Socionomic’s more. Thought leaders like Peter Atwater will help you interpret the data you provide to us and will make you even better. Please continue this path. Also see Socionomist monthly publications.
Things might get very ugly when the world makes a major shift and we see the value of one investment gain support over another as investor seek firmer ground. Derivatives, currencies, plunging stock prices, air rushing out of a bond market bubble, how debts are structured, and the timing or direction from which problems arise are all elements that must be considered. Several factors determine just how much influence can be applied to how current economic policies unfold.
Using the metaphor of “let the chips fall where they may,” things like the size of the chips, the rate or speed at which they fall, and the number of chips in the air may make them uncontrollable. We could find ourselves up to our neck in chips in a blink of an eye, at that time all bets are off as to how successful efforts to stem a catastrophe might be. The financial overlords may be losing control and this means during the final stage of the global shakedown events will be chaotic and become very wild. More below on how violent the crash might be.
http://brucewilds.blogspot.com/2015/08/the-final-shakedown-will-be-uncontrolled.html
Please continue to incorporate socionomics in your analysis. I think you provide some of the best information, but this will help your analysis.
Sent from my iPad
Thank you Mish, you nailed it. My hair is on fire because of Central Banks cornering the stock market. They will never, ever sell the shares they buy. They will never allow the market to go down.
They have monetized the stock market by printing money to buy stocks. They nationalized private companies without any discussion at the political level. They are doing this in a desperate coordinated effort to prevent the final meltdown.
Real price discovery will only come if private personal debt becomes too much to bear, and there are signs that is happening, or if the anxiety you reference becomes overwhelming and that results in major wars or civil unrest. At that point, they can blame external factors beyond their control, give themselves a big retirement party and slip away in the night.
Financial firms like Blackrock think this great because they will be advising Central Banks on what stocks and ETFs to buy. For these firms to call this move prudent in order to create a diversified portfolio is acknowledgment that they recognize that this is their last and final customer, the biggest fish in the barrel.
The only good news is that we don’t need financial news anymore.
Eventually all assets are owned by central bank and an equivalent amount of cash is circulating in the economy. What then ? Is it all really about unity of control for assets and government sectors. The people have then become slaves at that point.
HOW can anyone think that central banks buying stocks, in Japan a large part of the entire market, is anything other than absolutely insane.
A few prior predictions:
“Thus, most likely, we can brace ourselves for new lows on U.S. and global equities in the next 12 to 18 months.”
—Nouriel Roubini on March 12, 2009
Dow Then: 7,170
“Stocks are very overvalued. Stocks peaked in September and are back in a bear market.” The S&P 500 will probably fall “ substantially below” 676.53, the 12 -year low reached on March 9, he said. His projection implies a drop of more than 34 percent from last week’s close of 1025.21. It rose to 1031.77 at 10:05 a.m. in New York.
—Robert Prechter on Oct. 1, 2009
Dow Then: 9,509
“The U.S. market will drop below fair value, which is a 22% decline (from the S&P 500 level of 1098 on October 19).”
—Jeremy Grantham around Oct. 19, 2009
Dow Then: 9,972
I think we very well could go back and test that 666 on the S&P, maybe go a bit lower than that. And this decline may very well spill into next year.”
—Gary Shilling on Oct. 23, 2009
Dow Then: 9,972
Rage, rage, against this conclusion if you wish, but the six-month rally in risk assets—while still continuously supported by Fed and Treasury policymakers—is likely at its pinnacle. Out, out, brief candle.”
—Bill Gross on Oct. 27, 2009
Dow: 9,762
________________________________________________________________________
Now, I’m sure that these “experts” eventually changed their tune as the market continued to advance, but the business of making specific forecasts is what they get paid to do, no matter whether they are right or wrong. And these guys are still around earning 7 figures or more.
And they continue to preach doom and gloom, just like everyone else commenting on this blog today. When, oh when, will we understand that the future cannot be accurately predicted but that there is money to be made in convincing people that terrible things are just over the horizon. But not quite yet.
There is only one investment method that responds to the challenges presented by investing in the market, and has a decisively profitable track record. If you don’t know who the loser is at the table, it is you who rely on predictions from persons with failed track records.
Of course, a stopped clock is right twice a day.
Quoting the “experts” is always fun. Here’s some more:
In September 1929, Irving Fisher famously said “Stocks have reached what looks like a permanently high plateau.” He died 18 year later, having never seen stocks at a higher level than when he made that statement. A few weeks earlier, a more glaring, yet overlooked contrarian signal was provided by John J. Raskob, the builder of the Empire State Building. He wrote an article in Ladies Home Journal: “Everybody Ought to Be Rich”.
“There is only one investment method that responds to the challenges presented by investing in the market, and has a decisively profitable track record.”
Okay Okay …. where do I send my check? … and, uh, for how much …. for your newsletter …
Actually quite a few called housing bubble in 2005. But it came unhinged in 2008. So would you say they were wrong. Also in this case the interventions by CBs have been so much that but for it these predictions may well have been true. We HV underestimated how deranged these guys are but that does not mean the market has a surreal feel and the end result is a given. Can it extend to 2024? Who knows I definitely donot
You can add Hussman (who has been bearish since at least 2004) to the Roubini,,Prechter, Shilling,Grantham stable of forecasters.
Stocks such as AAPl, GOOGL, SBUX and others were dirt cheap in 2009 on a Growth at a Reasonable price basis. No excuses !!
Great post. Stocks are at all time highs. But what I don’t see, unlike 2000, is every yokel in the office talking about the latest company they’ve invested in and how they’re expecting stocks to go to the moon! I’ve watched this market climb a mountain with doomsayers all around. The dumb money has not been in this market. This thing is owned by the big boys and they are going to hold it up no matter what.
The only thing that can bring this down is another major financial crisis. The central banks are not going to let that happen.
“The obvious reason for the ECB to buy equities is they have almost run out of German bonds to buy,” said Stefan Gerlach, chief economist at BSI Bank and a former deputy governor of Ireland’s central bank.
The FED as a monopoly.
“Those contradictory mood “mirrors” run in both directions. If investors are strained by the messages out of Main Street, voters on Main Street are irate at the contradictory images the financial-elites are reflecting back on them”
The Rise of Trump all you need to know regarding Main Street’s thoughts on The Establishment.
“Buying equities will put additional pressure on corporate CEOs to cut expenses and to postpone investments, fostering even greater Main Street resentment toward the financial elite
Central banks buying equities extremely shortsighted.
First, how the heck do you get them OFF the balance sheet? Bonds can be held to maturity and $$s ( liability for a CB) brought back onto balance sheet. Stocks have no expiration (unless company goes bankrupt … taxpayer will have to eat loss) and selling them would tank the market if the need arose to soak up liquidity.
Second, if CB plan to put a perpetual bid on equities … why on earth would ANYONE invest in the real economy? If someone had $250K to invest in a startup (and hire employees), why? Economy barely moving and risk is real to lose most / all of investment. Why not just take the $250K … sit back and relax … and bank on 10%+ returns in the stock market every year?
Third, how will they buy equity? ETFs or shares in individual companies? Massive opportunity for corruption if someone at CB leaked what they were going to buy to Wall Street.
Four, will put the growing wealth inequality on steroids. And a rising stock market will allow Congress to DO NOTHING. Even now with years of tepid growth there is no ground swell for Congress to do anything but the same old.
I think there is a massive groundswell for Congress to do something. Its just that nobody agrees on what that is. More government spending? Nope. Cut military spending? Nope. Cut SS and Medicare? Nope. OK, good luck with that.
Karl Marx had no imagination. Who needs revolution when you can socialize capital as easily as this. Brilliant.
And the CB can’t sell anything. Imagine the bad press if CB selling of equities made the market drop.
Life is so much fun to watch.
Mark Cuban preparing for a crash: If Donald Trump wins, the ‘market tanks’
http://beta.dallasnews.com/business/economy/2016/09/07/mark-cuban-donald-trump-hedge-plan-ready-wins-market-tanks
this debt bomb will explode and make ’08-’09 look like a rally……all it takes is one default and the house of cards comes down……the social mood accelerates it.
How exactly?
1. Press the savings rate lower? https://fred.stlouisfed.org/series/PSAVERT
Before the crises the savings rate was about 2.5% now it is a bit more than double that. Roughly speaking, the interest rate is about half what it was but the savings has doubled. Saver’s are actually getting about as much ‘reward’ as they were before, there’s just more savers today than there was in 2005 so a fixed amount of reward is spread over more people.
2. Why would the purchase of bonds and even stocks by the CB raise asset prices? When the Fed buys bonds or a central bank buys stock, on the other side of that transaction is someone who has decided to sell those assets.
That person either:
a. Is selling because he needs to buy stuff (say a retiree who is cashing in his 401K). In that case you’re boosting consumption, not asset prices, and that presumably helps Main Street more directly than Wall Street.
b. Is selling because he doesn’t think his particular bonds or stocks are good investments to hold anymore. So here you have someone who is already thinking about value and the future so why would he mindlessly turn that cash over into buying other paper assets (stocks, bonds, or deeds to real estate even)? This bubble hypothesis assumes that the financial markets are not very liquid….but in fact they are super liquid and the people being rewarded first are those who are skeptical about holding at least some financial assets.
“Why would the purchase of bonds and even stocks by the CB raise asset prices?”
Because stocks and bonds are priced at the margin, and the CB has determined it is going to buy x amount of those assets, regardless of price. It incentivizes current owners of those assets to hold onto them, reducing supply. Supply curve shifts left, price goes up.
“It incentivizes current owners of those assets to hold onto them, reducing supply. Supply curve shifts left, price goes up.”
Errr no. First if demand increases that by itself doesn’t change the supply curve. That would be movement along the supply curve as the demand curve shifts.
More importantly, say the central bank buys $50B a month of bonds. That’s all well and good unless bond holders get it in their head that the central bank has gone crazy with the printing press and will kick off inflation. If that is the case you don’t want to own bonds, which are not indexed to inflation normally.
If that happened, bond holders would sell off not $50B in bonds but $75B or $100B. Bond prices would fall and rates would rise. If the Central bank tried to ‘double down’ by upping their purchases it would just increase inflationary fears even more causing bond holders to sell off even faster.
The idea that just because the Central Bank buys bonds the entire market dynamic vanishes is popular here but makes absolutely zero cents.
But why would investors think inflation is going to increase just because the fed is printing money? Most of the “investors” in this scenario are giant banks. They know that they are just going to have more cash on their balance sheet and fewer treasuries. That is not a cause of inflation in any way. Dudes on the Internet think “more money chasing fewer goods”. Banks know better.
And if I know that the Fed is going to buy bonds at any price, I am going to want to be the last guy selling into a forced buy. Hence I am going to hold onto those bonds as long as possible, drying up supply and driving up price.
If a giant bank sells all of its bonds then it ceases to be an investor in bonds. The problem with your hypothetical is that it ignores those who are holding bonds. If they see the Fed printing money to buy up bonds, that’s fine as long as the Fed is not going to set off inflation. If the Fed does, then the value of any bond you are holding is at risk…and if you’re holding bonds that will mature in 20-30 years inflation is a big concern. Just look at what inflation looked like in 1965 versus what happened from 1965-1985.
On top of that bonds not being purchased by the Fed are no less vulnerable to inflation. So even if the Fed purchases the entire market of, say, 30 year Treasury bonds what’s going to happen to bonds of 30 year mortgages or 30 year corporate bonds or 5-10 year car loans? If investors think that central bank purchases of bonds will create inflation by pumping too much cash into the economy, they will sell faster than the central bank can buy.
In the end though, don’t get me wrong. The Fed hasn’t been doing QE for almost 2 years now and bond prices are lower than ever. So I don’t think the Fed is “holding down interest rates”. The market is at this point.
The Fed just stabilized the market enough that rates could reflect the deflation at hand. Not that that was what they intended.
I agree there, the argument among many here seems to be that the Fed is somehow overriding the market with QE therefore the fact that rates are low is somehow all ‘artificial’ therefore can be ignored. Fact is the market is perfectly capable of reacting the opposite way to QE if it thought that it was a problem.
Pray tell … what exactly is the purpose of QE in your mind?
From what I gather, in your opinion, it has no effect on the markets … so why bother?
The purpose of QE is to increase the amount of money in the economy to move it towards full employment. There’s two paths that could cause that. First, lower interest rates make real investments more affordable thereby increasing Investment (the ‘I’ in the GDP equation). Second, spending increases since those selling assets like bonds now get cash (the ‘C’ for consumption in the GDP equation).
My argument is not that QE has no impact on markets. My argument is that markets are perfectly capable of reacting if they thought QE was too strong and their lack of reaction indicates that it is not.
The argument here seems to be QE must be bad because it seems unusual, or that the Central Bank is buying stuff it doesn’t usually buy. Unfamiliar, though, is not an argument against something. It would be strange if I put my air conditioner on in the middle of January but hey, if I get a week where temps are 90 degrees that would be very sensible.
Well, what EXACTLY is the impact on the markets?
Aside from your admittance in first paragraph “lower interest rates”*
*lower interest rates = higher price for debt security
Quacks like a market “distortion” to me.
The impact on markets is that it increases liquidity. If there’s too much liquidity, interest rates will start to rise (see previous comments on inflation fears). If there’s too little liquidity, interest rates will fall.
QE from other nations like Japan and the EU are imperfect substitutes. More Euros and Yen means more liquidity in Europe and Japan but not as much so in the US since you can’t use Yen or Euros for most transactions in the US unless you first add another transaction to trade the currency into US $. On the other hand last time I was in Canada most businesses happily took US dollars so you could say that increased liquidity in the US means to a lesser extent more liquidity in Canada.
If you’re going to complain about ‘market distortion’ you should have some coherent definition of an undistorted market. Why would interest rates of 3% or 4% be ‘undistorted’ while 0% are not? Who decided that rates that were common in 2005 or 1995 or 1955 were the ‘normal’ rates rather than simply the market rates that happened to dominate in those times and places?
“…the argument among many here seems to be that the Fed is somehow overriding the market with QE therefore the fact that rates are low is somehow all ‘artificial’ therefore can be ignored…”
I feel the the Fed and other CBs are overriding the market for these reasons:
1. The constant intervention by the Fed and other CBs. Market goes down 0.5%, immediately you have all of them coming out of the woodwork. The most famous of all was Bullard low, next only to Draghi’s whatever it takes. Why this cooing whenever the market sneezes? What are they scared of? If everything is fine why this constant panic.
2. Are you saying NIRP is the way to go?
3. Why the sudden rush to ban cash? Don’t tell me that it is to collar criminals please. The only reason is legal confiscation.
Earlier the central bankers were anonymous but today they are celebrities and not a day goes goes by without Kuroda, Bullard, Draghi, Carney, Lacker, Evans etc. shooting their mouths off. You have rate increase by the Fed, BOJ and ECB are there as standby. You have Brexit, we the central bankers are at the money pump. Who do they think they are, providing answers to all the world’s problems.
I would be glad to have a day when the Fed will STFU and their interventions will stop. My point is will they allow it or will they be scared shitless for ever. My theory is 2008 has so scared the Fed (will scare anyone if you are just hanging by one hand from the edge of a cliff) that they are seeing ghosts every time the market sneezes, seeing a credit seizure and like a Pavlovian dog immediately go out and assure markets.
Want to see a good Central Banker (was now)… read up on Dr.Raghuram Rajan. He not only did a damn good job but also did not play god.
IMO the market probably cares about only liquidity and assurance that it will not be allowed to break and the CBs are doing a great job there. Just because the market is rising does not mean the guys who are showing the Fed up for what they are doing should be treated as fools. These guys looked like fools during 2005-2008 but in 2008 they looked like geniuses.
In short, what the central bankers are doing cannot have a good ending. The ending is assured but the timing is not. Just because the markets are going up it cannot be right. The day the last marginal buyer arrives is the day the game is up.
You say intervention I say adjustment. The market wants more liquidity and the ‘intervention’ is just adjusting to that fact. Because the interest rate is near 0% CB’s are spooked out about normal adjustments that they would have made easily if the interest rate had begun around 8%.
Liquidity is global.
The Federal Reserve may have stopped, but ECB and BOJ are QEing full bore.
Someone here last week posted a chart done by some bank showing between the two $180 billion / month being dumped into the system
@Brian,
I meant intervention… verbal mostly. Not only the Fed, BOJ, PBOC, ECB and the pygmy BOE.
When do you think market does not want liquidity. It is mother’s milk for the markets. Earlier they will reduce and at some point they start raising. Now they are not able to raise the rates. Why? weaning is going to cause a fit…. and they are scared of it. Now does not weaning going to avert the crash. Yes it will avert the crash today but whenever you wean what happens or is the idea to perch the markets on the Fed’s tits for ever?
Why would markets not want liquidity? Why would an engine not want oil? After all, oil reduces friction and friction causes wear and tear on an engine therefore more oil = good for the engine. But of course you know if you flood an engine with too much oil it won’t work.
In a hyperinflation environment there’s plenty of liquidity but there’s so much so that you lack the necessary friction to make things work. If the Central Banks provided too much liquidity you would see evidence of that by rising interest rates.
I’m not buying the ‘markets are used to low rates’ argument. As I pointed out in the US rates are like half of what they were a few years ago but the personal savings rate is double. So roughly you have an equal amount being paid to saving, it is just that since there’s more saving happening that gets spread out among a larger group…hence lower rates.
Eventually what has to happen is either investment will pick up because depreciation will wear out enough capital that increased investment must happen…or savings will decrease in favor of consumption which likewise has to increase investment spending. At that point you’ll see rates start to rise again and will be evidence that the time has come for the CB’s to cut back on QE’s.
Maybe the Fed will buy up all the media and internet related debt and equities, then filter and regulate any and all blogs, news programming and websites that distribute negative economic information?
Maybe? Hell, that is exactly what is on the agenda. FDR nationalized the media, it will be done again. As was said here before, many years ago under a different name, when this site goes dark, you’ll know the circle is complete.
Really, if they can control the price of “Money” they will certainly find a way to control consumer sentiment. They just need some Edward Bernays clones on the payroll, and presto!
“If we understand the mechanics and motives of the group mind, it is now possible to control and regiment the masses according to our will without them knowing it” Edward Bernays
Mechanism,not mechanics. Damned spell check🤖
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