The Free Money Illusion

Since 2008 central banks have intervened in global financial markets in one form or another, primarily via low/zero/negative interest rates, but also with various, repetitive and ongoing quantitative easing programs.

It’s 2017 and they haven’t stopped. Nothing new there, but still it is worth to factually document the extent of the financial distortion that permeates financial markets to this day.

So far the cumulative total in intervention year to date has now hit $2 trillion:

“so far in 2017 there has been $1.96 trillion of central bank purchases of financial assets in 2017 alone, as central bank balance sheets have grown by $11.26 trillion since Lehman to $15.6 trillion.”

$15.6 trillion with no negative consequences according to Mario Draghi as he outlined last week:

“Question: Do you have any information on negative side-effects of the quantitative easing programme yet that you can tell us?

Draghi: The negative side effects of the quantitative easing programme I don’t have. It’s not that I don’t have any information; we don’t see negative effects of this program.”

Well there you have it. $15.6 trillion in artificial intervention and no negative effects in sight. Then why stop? If it’s so fantastic why ever stop?

Indeed perhaps we will never see central banks not intervene.

After all the ECB is going out of its way to extend intervention until kingdom come. Following Draghi’s super dovish communications last week the train continues today: ECB’s Coeure: “Compared With Past Demand Shocks, Policy Will Remain More Accommodative For Longer”.

As the ECB  is still intervening at a clip of 60B Euro/month we are still poised seeing almost a quarter trillion Euro in QE through the end of this year from the ECB alone, not accounting for the BOJ buying ETFs in Japan, or the SNB buying US tech stocks directly.

And even the US Fed looks mightily suspicious in that M1 money supply keeps printing new records ever so gently hugging the S&P 500 along the way:

And for the historic record I have to outline:

The ECB’s 2017 QE program is larger than the US military’s entire annual budget.

Central banks are running QE programs in 2017 significantly larger than it costs to run all the militaries in the world COMBINED.

I don’t know how else to put these extraordinary numbers into any meaningful context.

And yet central bankers are claiming they are not distorting global financial markets. Of course they have to say that otherwise their actions would be indefensible.

This is what is called playing tennis without the net.

Indeed Draghi did his expected 2 step last week. Growth is solid and doing well he says, but the ECB will have low rates for far beyond the end of QE (whenever that happens) and he didn’t commit to any specific slowdown in QE other than to hint at discussions to come and various options being evaluated.

Promises, promises and more promises. Actually they are not even promises as all central bankers are promising to expand stimulus again as soon as a downturn may be in the works.

The message: We will never see them not intervene again.

So all is well for investors then? A permanent backstop? After all stocks never go down again as the all world index has not seen a single down month since October 2016:

Yes, $2 trillion in artificial intervention within just 8 months creates asset inflation.

And consequence free to boot.

Well, except for that valuations are screaming high across the board:

with mutual funds being all in:

…and investor optimism being at 17 year highs:

As to promises that central bankers will stop QE and raise rates again? Don’t hold your breath:

Damage after this? I’m not saying Kashkari is incorrect, actually he may well be correct which supports my larger assertion: Central banks are trapped in their own construct and we have yet to see markets tested with no expansion in stimulus.

Indeed the macro charts I keep posting scream trouble ahead as the world is loaded up on debt while loan growth, productivity growth and real disposable incomes continue to slow.

No, Mario Draghi may not see any danger. But has he looked in the mirror lately?

$15.6 trillion of QE with no negative consequences. Central bankers have created an environment where risk has been eliminated and stocks never go down.

And that’s an illusion only free money can buy.

Categories: Opinion

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