He Knows

Last week we found out that Dallas Fed president Kaplan knows that the Fed is creating excess and imbalances in stocks. Yes, bloating the Fed’s balance sheet by over $400B  in four months has a massive impact on stock markets. And billions of repo liquidity unleashed each day can be seen impacting the daily action as well (see: Repo Lightning).

So what’s Jerome Powell have to say about all this? Silence. Not a word. Of course he doesn’t have to because the crack reporters never confront him on the issue in his post Fed meeting press conferences. Bubble away accountability free. Why bother asking the hard questions? That may just get you disinvited from the next press conference. Too strong of an assessment? I let you be the judge, but why are the hard questions not asked when it matters?

But actually we don’t need to wait for the answer from a press conference. Why? Because we already know the answer and the answer is: He knows.

Powell knows exactly the behavior he’s instilling in investors, the artificial levitation of asset prices and the disconnects and dangers that is poses.

All one has to do is dig in the Fed minutes from October 2012. Pages 192-194. It’s all there:

“I have concerns about more purchases. As others have pointed out, the dealer community is now assuming close to a $4 trillion balance sheet and purchases through the first quarter of 2014. I admit that is a much stronger reaction than I anticipated, and I am uncomfortable with it for a couple of reasons.
First, the question, why stop at $4 trillion? The market in most cases will cheer us for doing more. It will never be enough for the market. Our models will always tell us that we are helping the economy, and I will probably always feel that those benefits are overestimated. And we will be able to tell ourselves that market function is not impaired and that inflation expectations are under control. What is to stop us, other than much faster economic growth, which it is probably not in our power to produce?”

Why stop indeed? Clearly he’s not stopping now, he just went into overdrive launching the most aggressive balance sheet expansion since 2009:

And he knows perfectly well what’s happening as a result:

“Second, I think we are actually at a point of encouraging risk-taking, and that should give us pause. Investors really do understand now that we will be there to prevent serious losses. It is not that it is easy for them to make money but that they have every incentive to take more risk, and they are doing so.”

” Should give us pause” Cute. Except he’s not pausing now is he? The Fed’s official mission is centered around low unemployment and stable prices. “We will be there to prevent serious losses”. That is the Fed’s actually primary function, hence constant interventions at the first sign of trouble. And Powell knows that expanding the balance sheet takes on more risk taking.

He continues:

“Meanwhile, we look like we are blowing a fixed-income duration bubble right across the credit spectrum that will result in big losses when rates come up down the road. You can almost say that that is our strategy”.

You think?

Mission accomplished.

But then he gets to the fun part:

My third concern—and others have touched on it as well—is the problems of exiting from a near $4 trillion balance sheet. We’ve got a set of principles from June 2011 and have done some work since then, but it just seems to me that we seem to be way too confident that exit can be managed smoothly. Markets can be much more dynamic than we appear to think.
Take selling—we are talking about selling all of these mortgage-backed securities. Right now, we are buying the market, effectively, and private capital will begin to leave that activity and find something else to do. So when it is time for us to sell, or even to stop buying, the response could be quite strong; there is every reason to expect a strong response.

That’s right and that’s what we saw in December 2018. Markets fell apart and Powell went back to grab the Fed’s safety blanket. More easing and back to balance sheet expansion.

Powell knows. The entire cabal knows.

And so the easy money train has created the most ridiculous debt load ever hanging over the global economy:

And now we’re back into a Fed created asset bubble.

And who benefits from all this?

The few, not the many:

And I see absolutely nothing changing this paradigm until something serious happens to force the system to change.

What’s the incentive for the global power structure to change any of this? I submit there is none unless they are forced to. But central banks with cheap money give license for politicians to do nothing. And so the runaway train continues.

The crisis of 2008 was the opportunity to change things. Instead we now have more debt, much more debt, more easy money, a lot more easy money, and ever wider wealth inequality.

Yes, it’s different this time. It’s worse, much, much worse.

And Powell knows.

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Categories: Opinion

11 replies »

  1. Ah, but just do what my 21 year old daughter does…… get another credit card to solve your credit problems. Sounds like she’s qualified to work for Powell.
    I agree with your ending comment, Things are different this time! Yikes

  2. Let’s face it….they will print until they fall dead. It’s simply amazing what’s happening…especially when one considers that at least 90% of the population is totally unaware of all this “money printing”…

  3. Feel free to email or respond.
    We, who understand the destructive force and deception of these actions, need to stand up and do something. Whether it is educating the masses or submitting letters to our politicians, I am presently unsure.

    But I’m sure there we are few “conspiracists” during the Weimar Republic whom were like… hold the phone more debt and free (repo) money doesn’t solve a debt problem…. I’m not sure if they left or even were able to make a difference, but it might be worthwhile to try.

    Sure beats the complexity of owning a second home in a foreign country, outside the jurisdiction of our beloved United States…. although that now sounds like a good hedge.

    • History is very clear: “money printing” always eventually ends in a total disaster. Always. If “money printing” is the miracle solution for wealth creation….why do people then work? Let’s give everybody a couple of million so that we can all live in Disneyland.

  4. I would encourage everyone to study the French revolution….because of all the wars, the French King had made too much debt….so he decided to “print money”….a couple of years before he lost his head

  5. Meanwhile money is being given for free to big banks and huge corporations while “our” money gets the same old 10%-30% interest treatment on any kind of loan from student loan to credit cards. Consumers basically pay the same high interest for the past 2 decades. This free money policy changed nothing for us, it just made us poorer while top 1% doesn’t know what to do with the money. Something VERY big is brewing….cities will burn.

  6. KICK THE CAN DOWN THE ROAD !!!!! Powell in the end will cause a market crash. This all feels like there’s no Risk in markets and that’s not good. The Federal reserve is like a Dealer feeding drugs to a user. Just watch CNBC and you can tell they just drinking the Cool aid. Sad

  7. The ultimate long-term damage will be borne from the suppressed volatility that the repo and “Not QE” has forced onto risk assets. The fed is somewhat correct in assuming the repo is too short term to create long term artificial asset inflation, as long as they keep on the proposed taper schedule (starting with $5b/day reduction this week). At best we get a three to four month temporary risk asset spike, with the taper taking repo back to zero and risk assets fad with the taper. At worse, repo continues until end of year, markets go 20% higher, and it all crashes down a few months after elections when forces the fed somehow does not comprehend overwhelms the money printing.

    The volatility snap-back is the real long-term risk. Forced artificial stability has proven to unleash counterintuitive instability on natural systems when balance is lacking, and economics is no different in that regards. Yes the patient looks alive and healthy on the artificial breathing machine, yet each day the patient’s own lungs get weaker because of the artificial support, and ultimately you end up forcing that in which you are attempting to delay and save.

    The fed knows this all too well, so I can only assume that odds favor the fed is attempting to “delay and save” a bank and/or hedge fund from destroying the fragile global economic monetary order, by forcing artificial stability, via suppressed volatility, onto the system. The only real question is when does natural instability become inevitable? The fed understands the law of diminishing returns, at which the level of “benefits/profits” gained is less than the amount of “energy/money” invested. Simply put, the fed has inevitably “invested” unwisely…and at some given future point in time will have destroyed more than they have temporally saved via known and unknown unintended consequences and a furious return of counterintuitive natural instability.

    The best solution I would give the fed at this point is repeat the Socrates phrase “I know nothing except the fact of my ignorance”, back away from the monetary God fantasy, and let natural instability clean up Wall Street before Wall Street ultimately takes out Main Street on a global scorched earth scale (at which point it could take decades, versus a few years, to find the new natural equilibrium). At best it becomes a “God Complex” to even consider than one human being can predict the time value of money more wisely than seven billion human beings currently living the time value of money daily, yet not isolated in your fed induced, reality void, ivory tower bubble. At worse, you will be known as the most economically and socially destructive human force of our generation. Your single choice “omnipotent” fed, our collective consequences unfortunately. “Invest” wisely oh great fed, “invest” wisely…

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