Thursday, July 4, 2019

Race To The Bottom Of The Stupid Bin

By David Stockman

You have to wonder how much longer Wall Street's incorrigible dip-buyers can deny the  obvious.

The Fed and its global convoy of central banks have flat-out ruined financial markets.

The latter have become, in fact, an unstable, unpredictable roller-derby divorced from the main street economy and uncoupled from the financial fundamentals.
Accordingly, the only remaining tools of navigation in the stock market are the fickle lodestar of momentum-chasing and the eternal hope for yet another round of monetary stimulus.

But the latter assumes that our monetary central planners know what they are doing, when, in truth, they constitute a posse of the financially deaf, dumb and blind, stumbling around in the monetary darkness.

After all, central bankers and economists even a few decades ago would have been at least at DEFCON 2 in response to the absurd yields posted in the bond markets this AM.

To wit, the 2-year Italian government bond yield fell into negative territory, while its 10-year bond at 1.79% is below even the meager 1.99% yield on the UST. Yet Italy is an ungovernable fiscal basket case with a 133% debt-to-GDP ratio and a population, labor force and economy which will be contracting as far as the eye can see.

There is not any objective reason whatsoever for these pitiful yields....except, except for the front-runners piling-on again after Draghi's recent assurance that a new round of QE is just around the corner.

Indeed, with today's announcement that Draghi will be replaced as ECB head in October by Christine Lagarde that's a dead-to-nuts certainty. After all, if there are four places on the planet where there is exactly zero respect for the verdicts of the private marketplace, it is the French Agriculture, Trade and Finance Ministries and the IMF, where Lagarde has been drinking the statist Cool-Aid for the better part of this century.

For want of doubt, be assured that the Madame Miniplenty from Gucci, Chanel,
Dior, Hermes etc. is a true believer in the elixir of free money. She said so just this past weekend (perhaps auditioning for the job publicly):

“If we had not had those negative rates, we would be in a much worse place today, with inflation probably lower than where it is, with growth probably lower than where we have it,” Lagarde said. “It was a good thing to actually implement those negative rates under the current
Negative interest rates “improve confidence and financial conditions in the euro area, which will further aid the recovery.”
No, negative rates are never a good thing under any circumstances. They are the price of money and it damn well can't be free. They are also the reward for foregone consumption and savings, meaning that central bank engineered NIRP is a form of state thievery.

So, too, they are the signaling mechanism for the allocation of scarce capital, but in a world of NIRP/ZIRP---capital gets squandered and malinvested, not efficiently allocated. It also gets misappropriated and wasted by the state because policy-makers and politicians are falsely told that the carry-cost of massive public debts is easily manageable.

Needless to say, these points are such elementary tenants of Economics 101 that it is almost embarrassing to repeat the obvious. Yet central bank officialdom around the world utterly ignores them for at least two reasons that absolutely do not hold water.

The first of these is the GDP Weakness Fallacy. That is, an alleged all-knowing bond market has espied a macroeconomic slump or even recession just around the bend and is therefore discounting a significant reduction in credit demand and a marketbased easing of rates, which would follow hard thereupon.

Except in modern-day interventionist welfare states, as we have previously
demonstrated, credit demand does not abate during a recession.

On the one hand, government borrowing soars owing to so-called automatic stabilizers (viz. unemployment insurance, food stamps etc.). And the latter are
invariably augmented by discretionary "shovel ready" stimulus packages like the Obama $800 billion boondoggle, which was enacted in less than 10 weeks during the winter of 2009.

At the same time, private credit demand does not fall owing to the heavy structural indebtedness of the household and business sectors alike. In fact, private sector credit demand actually grew by more than $600 billion during the Great Recession.

Accordingly, overall nonfinancial credit demand (government + households + business) increased by $3.3 trillion or 10% between the pre-crisis peak in Q3 2007 and the recessionary bottom in Q3 2009.

That is to say, the bond markets are not discounting weak credit demand owing to an impending economic downturn. Instead, they are front-running an anticipated return to massive central bank bond buying, which amounts to a big fat thumb on the supply/demand scale.

Secondly, our monetary central planners ignore the profound injustice of savaging savers and the abiding economic cost of plenary capital mis-allocation because they are manically focussed on the Keynesian task of goosing aggregate demand.

Indeed, once central bankers got in the serial stimulus business, it was Katie-bar-thedoor on interest rate repression. That's because by the lights of the statist academics and apparatchiks who run the central banks, private capitalism is always threatening to under-perform or even tumble into recession/depression.
So there can never be enough central bank-induced credit flow to counteract these failings. As the ECB's new president-designate insisted in the same interview, it's all about more credit flow--even in China and on top of its madcap debt explosion from $2trillion to $40 trillion in barely two decades:

“So let’s see whether it kick-starts the process of fueling credit to the
economy, changing the behavioral pattern of people and changing the
strategy of banks as well.
Separately, Lagarde said the IMF may raise its 6.3 percent growth forecast for China due to the nation’s planned economic reforms and stimulus.
“We believe China will continue to grow,” Lagarde said. “If those reforms are implemented and the stimulus announced also directed to the most efficient leverage in societies, which we believe is more consumption than necessarily investment that would be fueled by credit, then the recipe should be quite good for China to lead a continued quality growth.”
Needless to say, it never occurs to our Keynesian central bankers that there can be too much of a good thing. That is, when incomes and economies get leveraged to the hilt and reach a state of Peak Debt, interest rate repression policies---which always have illeffects by definition because they falsify financial asset prices---become progressively more destructive.

That's because cheap money market credit never really escapes the canyons of Wall Street, wherein it encourages and subsidizes ever more egregious forms of speculation.

In the instance at hand, bond markets have been literally disabled, if not totally
destroyed. What we have is speculator-driven bond yields that had been bid down to the very bottom of the stupid bin complements of the fools who run the central banks.

And we do mean fools. Anybody with an even passing acquaintance with the greed-riven sharpies who ply their trade in the bond pits should be able to figure out that the very last thing central bankers should do is to be transparent about their pegs for interest rates and plans for bond purchases. It amounts to handing front-runners their own risk free license to print arbitrage profits.

After all, there is no other way to explain why at this moment the 10-year bonds of the basket case that used to be the Greek state are trading at 2.13%, or just barely above the UST at 1.99%.

Needless to say, since the 2011-12 crisis and the subsequent multiple EC bailouts, Greece has not reduced its crushing 180% of GDP public debt burden by an iota, even as its economy continues to stagnate and its people grow increasingly desperate.

Greece Public Debt To GDP %

Then again, Japan's fiscal condition and outlook is even worse, yet its 10-year bond was yielding an even more absurd -0.18% in the wee hours this AM.

The only lower rate among the major countries was Germany at-0.36%, and that says it all. Why would anyone pay any government for the privilege of lending it money---even the relatively sober Germans?

The answer is obvious enough. Whether they acknowledge it or not, owners of German debt are simply rank speculators who are foolishly banking on the endless capital gains that have resulted from Keynesian central banking and the massive financial repression inherent in the ECBs $5 trillion balance sheet.

Still, such pitiful yields are not even a close call and they are not some kind of
clairvoyant recession indicator.

They're simply nuts---the financial flotsam of central banking gone haywire.

David Stockman was Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.

The above originally appeared at David Stockman's Contra Corner.


  1. It all makes sense when you realize that the purpose of the Fed and other central banks is to protect and grow the wealth of the crony and connected classes. The productive classes can pound sand.

    1. Thanks to this worldwide transfer of wealth, those same cronies have turned the stock market into a casino.

      Unfortunately, the president is not one who dislikes the role that cheap credit has played in making people less thrifty and in distorting financial markets to the point of distorting true wealth. He wants cheaper money. Pete Navarro alluded to this, this morning on CNN.