Thursday, February 4, 2016

From Omnipotence To Impotence.....CENTRAL BANKS HAVE A MAJOR PROBLEM

From Omnipotence To Impotence

The primary trend for stocks is now lower!

The Fed could ignorantly adopt more stimulus such as negative interest rates, in which case 2016 will prove not just a challenging year but a disastrous one.

The surge in credit risk across the global financial system is starting to get to the point where investors are being forced to pay attention. With every central banker "all-in" with "whatever it takes" or "no limits" monetary policy, the fact that US, European, Chinese, Japanese, and Middle-East banks are all seeing credit risk spike should be a major concern to all.

But trying to stop the current crash with more credit and lower interest rates is not just foolish, it is insane. One way to always lose the current war is to focus on preparing to fight the last war.

"The last war" in 2008-09 was a battle to save heavily leveraged centralized financial institutions from default and liquidation--commercial and investment banks, insurance companies, etc. The concentration of capital, leverage and risk in these behemoths rendered the entire system vulnerable to their collapse (or so we were told). The current financial meltdown is not like the last war and it is global in nature.

By refusing to allow a house-cleaning of risk, leverage and mal-investment, central planners have simply pushed the risk into systems they don't control: foreign-exchange (FX) currency markets, shadow banking and the economy that depends not just on available credit but the willingness of qualified borrowers to take on the risks and costs of more debt. Central banks have created abundant credit and liquidity, but no productive places to invest that ocean of nearly free money.

The national debt recently hit $19 trillion for the first time ever, it came in at $19.012 trillion. It took a little more than 13 months for the debt to climb by $1 trillion. The national debt hit $18 trillion on Dec. 15, 2014. It took about 14 months for the debt to climb from $17 trillion to $18 trillion, and about the same amount of time to go from $16 trillion to $17 trillion.

When credit has been abundant for decades, what's scarce isn't credit--it's productive investments that are scarce. Central banks are powerless to create productive uses for the credit they create. !!!!!

The inevitable consequence of this failed strategic error is defeat. Central banks issued trillions of dollars, yuan, euros and yen in new credit to stave off defeat in the last war (the Global Financial Meltdown of 2008-09), but the problem wasn't a lack of credit and these policies have failed. 

Now, seven years into the strategy of flooding the global economy with credit, the problem is one of a scarcity of productive uses for all that money sloshing around the global economy.

There won't be a "Lehman Moment" in the 2016 meltdown, because central banks can prop up or "save" any new Lehman with a few keystrokes. What the central banks cannot do is create productive places to invest the credit they've generated in such excess, or force qualified borrowers to swallow more unproductive debt.

The global economy is choking not just on an excess of debt, it's also choking on the consequences of an unprecedented mal-investment of the credit central banks have issued in such over-abundance. Issuing more credit will only make the 2016 crash worse.

Why after all the promises, low rates and cheap money is Europe still a disaster?

Why after several decades of 0% rates has the Japanese economy failed to respond?

Why has the U.S. only averaged 2% real growth since the supposed end of the Great Recession?

Great questions that the people that think they are the smartest people in any room should be able to answer. Sadly they only have excuses.

Who is more powerful? The ECB or reality? We're going to find out soon.

Who is more powerful? The Bank of Japan or the oil market? We're going to find out soon.

Who is more powerful? The Fed or the free market and too much debt? We're going to find out soon.

For over six years, the markets have been moving based on Central Banker actions and promises.

The first phase (2009 to 2013) was dominated by action (ZIRP and QE).

The second phase (2013 to the present) was increasingly reliant on words (verbal intervention) as most Central Banks had by then used up 90% of their ammo.

As former Fed Chair Bernanke himself noted in his recent memoirs:

"Monetary policy is 98% talk and 2% action, especially when short term rates are near zero"

However, we are now reaching the point at which even actions AND words are losing their effect on the markets.

Last Friday, the Bank of Japan introduced Negative Interest Rates or NIRP. The ensuing rally in the Nikkei lasted roughly 30 minutes before reversing all of its gains. It was only through concerted manipulation by the Bank of Japan that the Nikkei finished the day in the green.

Fast-forward to Wednesday, and the head of the Bank of Japan, Haruhiko Kuroda, is already promising to engage in even more NIRP if needed. He stressed there was "no limit" to monetary easing measures.

Yes, this took place only a few days later.

So… the Bank of Japan launches NIRP for the first time in its history. And within THREE trading days is already promising to do MORE, going so far as to say that it has "no limit" on what it will try.

This is what it looks like when a Central Bank loses control and finds itself in a state of total desperation.

Bear in mind, the Bank of Japan has been at the forefront for ALL monetary policy for decades. The US Federal Reserve launched its first QE program in 2008. The European Central Bank launched its first QE program in 2015. The Bank of Japan first launched QE back in 2001.

In short, the Bank of Japan has two decades of experience with QE AND ZIRP. It has launched the single largest QE program in history (an amount equal to over 20% of Japan's GDP). And it has expanded its balance sheet to over 65% of Japan's GDP.

In short, the Bank of Japan has gone "all in" to attempt to reflate its financial system. It has completely failed. And now it is so desperate that it is promising to do even MORE only three days after its latest monetary surprise.

After a decade of consensus forecasts for rising rates, and countless head-fakes higher along the way, one would think that market participants would have learned their lesson by now as it pertains to expectations for rising rates. Yet, like Charlie Brown, they keep flailing at that football only to see Lucy yank it away every time.

What's the moral of this story? How about, stop expecting rates to rise. Yes, the Fed can have a demonstrable effect on the short-end of the yield curve especially. Longer-term yields seem even less likely to rise, given the less-than-stellar state of the economy, as well as the considerably lighter influence on the part of monetary policy.The only factor in favor of rising long-term rates, is a cyclical one. There has been a distinct, approximately 54-year cycle in interest rates going back hundreds of years. This cycle is overdue to bottom now, by a couple of years, no doubt delayed by the actions of central banks. 

The economy and market are too vast and momentous to be permanently sidetracked by exogenous forces using the wrong tools to solve serious problems. Therefore, while these long-term cycles are not pin-point accurate, we are squarely in the bottoming "window" right now. While it is forgivable to have been duped by Lucy's rising rates ball trick once or twice years ago, at some point folks have to stop falling for it. Rates will rise regardless of central bank actions going forward.

The End Game for Central Banks has officially begun.


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