Last Wednesday the markets plunged on a vague recognition that the central bank promoted recovery story might not be on the level. But that tremor didn’t last long.
Right on cue the next day, one of the very dimmest Fed heads—James Dullard of St Louis—-mumbled incoherently about a possible QE extension, causing the robo-traders to erupt with buy orders. By the end of the day Friday, with the market off just 5% from its all-time highs, the buy-the-dips crowd was back, proclaiming that the “bottom is in”. This week the market has been energetically retracing what remains of the October correction.
And its no different anywhere else in the central bank besotted financial markets around the world. Everywhere state action, not business enterprise, is believed to be the source of wealth creation—at least the stock market’s paper wealth version and even if for just a few more hours or days.
Thus, several nights ago Japan’s stock market ripped 4% higher in the blink of an eye after the robo-traders scanned a headline suggesting that Japan’s already bankrupt government would start buying even more equities for its pension plan. And that comes on top of the massive ETF and equity purchases already being made by the BOJ.
Likewise, this morning the European bourses soared on a self-evident trial balloon enabled by Reuters that the ECB might start buying corporate bonds—in addition to asset-backed commercial paper, covered mortgage bonds and targeted loan advances to commercial banks. Moreover, all this prospective asset buying with freshly minted ECB credit was supposedly a prelude to outright QE—-that is, adding sovereign debt to the ECB’s already bloated balance sheet.
The thing is, however, the last injection is never enough in today’s stimulus addicted casinos. In the case of the ECB, the market’s pandering for more monetary stimulus is especially disingenuous. The pot-bangers claim, of course, that the ECB’s current balance sheet inflation plan is just retracing old ground; and that it simply needs to fill a $1.2 trillion “hole” to get its balance sheet back to where it was in mid-2012 when Draghi’s “whatever it takes” ukase was delivered to Europe’s roiled bond and equity markets.
Let’s see. In just the eight year period leading up the crisis of 2012, the ECB’s balance sheet had exploded by 4X. And the the truth of the matter is that the subsequent shrinkage shown below is a dangerous pro forma illusion. The ECB’s bloated portfolio of discount loans to member banks which were collateralized by sovereign debt was not really liquidated; it has just slithered to an off-balance sheet parking lot for the interim.
What Draghi’s undeliverable pledge actually did was to incite the fast money crowd into frenetic peripheral bond buying on the usual front-running presumption that smart guys buy now what the central banks announce they will be buying later. Soon the prices of these sovereign junk credits were ripping higher, and the rest of the market piled on—- especially the very same Spanish and Italian banks which had previously retreated to the ECB discount window to fund their stranded books of own country bonds.
Stated differently, in return for three cheap words Mario Draghi was able to access a vast financial parking lot, which was quickly filled with the previously shunned peripheral nation bonds. Accordingly, European banks, especially in Italy and Spain, began to liquidate their LTRO borrowings and, presto, the ECB’s reported balance sheet shrunk drastically.
In truth, however, Draghi’s parking lot is inhabited by an assemblage of day traders who can make a bee-line for the exits as fast as they piled-on to the original “whatever it takes” trade. In fact, Draghi’s desperate jawboning and serial announcements about balance sheet expansion ploys are proof positive that the parking lot has a tenuous hold on its tenants.
That means that virtually any unexpected catalyst could start a run on the trillions of Greek, Italian, Spanish, Portuguese and Irish debt that is now insanely over-valued. Accordingly, the European bond market is a massive conflagration waiting for an ignition. Worse still, Germany now has all the matches, and it is becoming more evident by the day that its politicians and financial statesman have finally drawn a line in the sand. There will be no outright QE, and, therefore, there is no way to keep Mario’s parking lot from experiencing an eventual stampede for the exist gates.
In that context, today Reuter’s leak was just a probe—-an attempt by the ECB apparatchiks to see whether the German resolve against “state financing” extends to corporate debt as well as outright government bonds. That this desperate ploy elicited an excited equity rally is just a measure of how sick stock markets all around the world have become.
Yet today’s headline was probably worth no more than a one-day rip, and that’s all the casino cares about. It does not discount the future of the real world economy; it only chases the concurrent emissions of central banks liquidity and word clouds.
Indeed, if the European bourse were actually discounting the real world future they would have panicked long ago. And not just because Europe is heading for a triple dip or because the German export machine is faltering owing to the swoon in its heretofore bloated and unsustainable export markets in Russian and China.
In fact, Europe is stuck in a deep rut of socialist tax and debt burdens, economic dirigisme and excessive financialization, and has been so for most of this century. Here is what has happened to the euro area economy while the ECB printing presses were running red hot. As shown in the first panel below, total industrial production (less construction) in mid-2014 is no higher than it was 14 years ago.
Likewise, the euro area has had no net employment gains since 2006. Accordingly, the unemployment rate for the EU-18 as a whole had soared, notwithstanding sharp improvement in Germany and northern Europe.
At the same time that the private sector has been stagnant, the public debt has continued to soar, and is now 50% higher than the already bloated levels of 2008. Moreover, with a triple dip all but certain, and virtually no growth in nominal GDP in any event, there is virtually no chance that the aggregate debt of the euro-zone nations will not soon catapult past 100% of GDP. In that context, it is plainly evident that the real agenda of the Brussels bureaucrats and the Draghi gang in Frankfurt is to monetize the public debt, not ignite a miracle of private economic growth and rising corporate profits.
On this side of the pond, the equity market puppy is just a sick. Consider the actual gibberish uttered by Bullard last Thursday:
“I also think that inflation expectations are dropping in the US. And that is something that a central bank cannot abide. We have to make sure that inflation and inflation expectations remain near our target.
And for that reason I think a reasonable response of the Fed in this situation would be to invoke the clause on the taper that said that the taper was data dependent. And we could go on pause on the taper at this juncture and wait until we see how the data shakes out into December…..So… continue with QE at a very low level as we have it right now. And then assess our options going forward.”
The underscored sentence says it all. Bullard has been drinking the central bank cool-aid so long that he does not even recognize that the “inflation expectations” which he cites as reason for more Fed money printing are actually authored by the FOMC itself. The chart below represents the so-called 5-year breakeven—-which is the subtraction of the inflation protected TIPS bond yield for that period from the regular treasury note. That is, its represents nothing more than trading noise—- the random differences between treasury securities being massive impacted and manipulated by the central banks and the carry trade gamblers that they enable.
So Bullard espied a wiggle in the graph below, and declared it an intolerable breach of the central banks plan for just the right amount of inflation—-that is, 2%, no more and no less. Accordingly, more bond buying was warranted. Never mind that the Fed has pinned the money market rate at zero for 71 months and unleashed the greatest carry trade gambling spree in recorded history; or that $3.5 trillion of debt monetization during that period has deeply deformed yields and pricing in the entire fixed income market.
No, the job of the monetary politburo is apparently to sift noise out of the in-coming data noise—-even when it is a feedback loop from the Fed’s own manipulation and interventions. So the stock market rallies strenuously because an incoherent central banker starts randomly gumming about self-evident financial noise.
(to be continued)