Well, my fellow Slope-a Dopes, your favorite intrepid seafaring Frenchman got blown out of the water by Benjamin Moby-Dick Bernanke once again. I have to hand it to captain grey beard, for a guy with a curiously quivering lower lip, who seems so utterly unsure of himself every time he opens his moronic mouth, he sure does have some pair of ballistic brass balls. Not only did he delivered on his QE3 promise, but he actually turbo charged it into a terrifying trifecta! Boatswain BDI was left for dead, desperately drowning in a sea of red DOOMs. So now that Moby Dick has breached and surged the equity waves to new highs, where do we sail from here?
It now seems clear as day light, that our crazed calculating captain has definitively decided to go all in full monty, embarking on Dalio's deft deleveraging design "hook, line and sinker". What exactly is this beautiful course our asinine Admiral has set sail for? For specific directions, be sure to read bearded Ben's most trusted tactician Ray Dalio's definition of beautiful deleveraging:
Enough “printing” occurs to balance the deflationary forces of debt reduction and austerity, in a manner in which there is positive growth, a falling debt/income ratio and nominal GDP growth above nominal interest rates.
I get this cool clever concept, and can see why it appeals to astute academic anuses, as on paper it does have a certain calculable credibility. Mr. Dalio goes on to further explain exactly what this newly chartered course we have been on since 2008 looks like thus far:
unlike both the US in the 1930s and Japan since 1990, the US has quickly entered a reflation and ended the “ugly deflationary deleveraging” phase of the process (which lasted from July 2008, just before Lehman fell, to March 2009, when the Fed instituted its aggressive program of quantitative easing to monetize the debts). During the “ugly” phase, incomes fell, debt burdens rose from about 340% GDP to 370% and stocks lost almost half their value. Because so much debt around the world is dollar denominated, the contraction in global credit and dollar liquidity created a squeeze for dollars, and the dollar strengthened significantly against a trade-weighted basket. Exports collapsed faster than domestic demand. Following the reflation that began in March 2009, incomes recovered, debt burdens fell below their initial starting level to around 335% and stocks recovered all of their losses.
At this time, the credit markets are largely healed and private sector credit growth is improving. Thus far, this deleveraging would win our award of the most beautiful deleveraging on record. The key going forward will be for policy makers to maintain balance so that the debt/income ratio keeps declining in an orderly way.
I must admit so far so good, all seems to be going swimmingly smoothly, as per the plan's perfectly precise presentation. However, this is the real world we are talking about here, not some PHD graduation thesis on dispay at the Princeton economic petty officers club. Call me an idiot, but somehow I highly doubt that the advanced global economy, with all its complex inter-connected machinations, can be so easily & readily tamed by a few seasick sailors in the captain's quarters, no matter how much Rum they have run through. As the saying goes; many a slip between the cup and the lip.
Are we really going to thread the needle here with this bold balancing act, or are the spinning plates going to come crashing down on us all? Should we entrust the entire fate of the world's economic ecosystem to few fancy fellows' fabulous footwork? Myself, I would have much preferred to have let the free markets dictate the pace. Central planning of this monumental magnitude is absolutely antithetical to USA free market capitalism. Beware the immeadiate unintended consequences dopes of hope!
Let us now explore a few things that could rock this beautiful banana boat:
1) The price of Oil. The life blood of modern global based trade, could well spiral upwards out of control. For the first time in history, the national average gas price for the 2nd week of September were over $4.00. Not a good look for a largely consumption based economy.
2) Will this unprecedented action blow up the Petro-Dollar? As of this September 6th, China and Russia have decided to trade oil in non-petro dollars. Also, Iran can sell their oil to them without worrying about US sanctions. This is a huge development which has not fully sunk in to the general public yet. Perhaps the rest of the world will soon refuse to play ball with a the juiced up Fed as a cheating opponent. Will Asia increasingly turn away from the US capital markets, spending its hard earned reserves elsewhere? I sure as hell would.
3) Agricultural commodities. The price of domestic Corn & Wheat are already at or near all time highs. A devalued USD caused by excessive money printing increases the cost of imported foodstuffs as well. QE3 will only make matters worse. Again, not a good look for a consumption based economy.
4) Much of the recent social upheaval / military conflicts in MENA, have at their roots the caustic effect of high food & oil prices in the region. The US open ended QE policy is exporting inflation, and therefore misery to many impoverished parts of the world. Will the continued instability in the area rapidly lead to even larger major military conflicts which we can already ill afford, not to mention the ominous oil price spike that would ensue?
5) The last thing that Europe needs right now is a weaker USD. Germany the only remaining ezone economic engine will suffer significantly, as their exports become less competitive vis a vis the US. The poor pathetic periphery counties will have zero chance to compete at all. While the ECB's printing money ability has increased within the past year, they don't have the same structural capacity as the U.S. to do so. Ben's destruction of the USD will adversely affect Chinese exports as well. We could soon see a collective Japanese/Chinese/European intervention in the currency markets buying up the USD to counter the effects of QE3, and this could quickly descend into Jim Rickard's dreaded currency wars.
6) ZIRP forever. Are we not penalizing all savers by keeping rates so low for so long, and thus keeping the money they would have earned in their savings accounts from ever entering the real economy? And won't inflation and a weaker dollar further erode their purchasing power? Ben's policy hurts most retired folks living off a fixed income, and all who have a conservatively allocated retirement account they are counting on for future living expenses. Also, anyone who buys insurance, will now have to pay higher rates because insurance companies can't make money on their premiums anymore. Again not too cool for a consumption based economy.
7) Every municipality, town, city and state that consistently adds to their conservative Government bond holdings, will now earn less income from those fiscally prudent investment portfolios. The Fed's forever ZIRP policy is now effectively forcing comptrollers of already dangerously over leveraged fiscal budget balance sheet all over the country to take on even more risk, by shepherding them towards a questionable search for higher yields. Sounds dicey to me at best.
8) QE does little to promote job growth. QE1 cost $1.7 trillion. QE2 cost $600 billion. Using Bernanke's math, it cost the Fed $2.3 trillion to create two million jobs. The average annual salary in the U.S. for 2010 was $41,674. By the math given to us by Bernanke himself, each job created by QE has cost the Fed $1,150,000. Doesn't seem to be very cost effective. Can't we figure out a better way to spend the Nation's limited financial resources. Is bailing out a busted bloated banking system all that matters in the world! Where is the outrage???
9) Effect on the Federal deficit. The continued unabashed monetization of debt actually encourages the fiscal cliff to become the greatest divide. Why would the easy money law makers be induced to significantly cut Governement spending if they are not penalized for further borrowing. Giving too much candy to a baby is usually not a good thing. Money for nothing and your chicks for free, is that the new American way?
10) The wealth effect. The Bernanke puts way too much emphasis on the positive impact of a "feel good" consumer. He has directly mentioned the stock market & consumer sentiment as very important drivers of further economic growth. Does he not realize that most people actually don't own any stocks, other than a 401K, which cannot be touched until retirement. The average consumer uses regular savings to make additional discretionary purchases, not 401K gains. By keeping rates near zero, their meager savings returns are not even keeping up with real inflation, which is much higher than he admits to begin with. Not to mention that real wages have been staganant for decades now. Dr. Feelgood has it backwards, the man on main street feels mainly the pain of QE, and not the gain.
11) QE3 and home prices. You would have to draw the 10-year yield down close to zero in order to get more people then are currently refinancing to refi again. This further MBS purchasing program by the Fed will only bring in a handful of new refinancings for the banks, and if you were looking to buy a home, you still have the same problem of selling your current residence because you owe more then its worth. This means you need to qualify for a new loan with your old mortgage counting as reoccurring debt. Not many can do this. As far as new home buyers go, interest rate levels on mortgages are not the problem, they are already at historic lows. This Mortgage purchase program announced as part of QE3 has much more to do with the Fed buying the MBS from Fannie and Freddie, because no one else will want to touch these zombies once the draw down requirements are imposed on the Federally chartered mortgage finance companies after the 1st of the new year. I'm afraid there is no housing boost news here at all, just more duct tape & baling wire.
12) QE3 Inflation acceleration. Unlike the mega yet sterilized bond buying announced by ECB, the FED's reckless QE3 to infinity program does not mention anything about sterilization. This implies that there is no promise to contain the newly minted money via sterilization operations whatsoever, as was the case with QE1, QE2, and all other previous mortgage security purchases, instead it appears that the fubar fabricated funds will free flow directly into the economy, on a potential unlimited basis. $85 billion created per month out of thin air, $40 billion of which are perpetual unsterilized high octane fuel injections into an energetic economic engine is simply mortifying monster truck madness. This drastically increases the immediate dangers of an inflationary inferno flame out.
13) Effect on future US interest rates. Here is where I believe we may see an immediate and very lethal blow back. If we are to assume that this new QE to infinity policy will quickly ignite new growth / jobs for the economy as advertised, it will also inevitably put upward price pressure on non-discretionary essentials such as food and energy, which have clearly shown their propensity to move up in tandem along side every previous QE operation. This real inflation felt at the ground level will not only reduce direct consumption by the cash strapped classes, but it will also force the cash flush classes away from low interest earning financial accounts of all kinds, and into existing hard non producing assets of every kind (commodities, PM, art, land, real-estate). Furthermore, prudent investors will soon understand that most corporate earnings suffer mightily from inflation, and thus will stay away from equities at these elevated levels. The elite financial institutions will face a double wammy here; not only will they lose straight low end deposit savers, but they will also suffer massive equity & bond account draw downs from the more affluent. At the end of the day, if they are going to keep excessive capital flight from accelerating, they will have no choice but to raise rates of return on funds deposited with them.
Higher rates are just what the Bernanke was trying to avoid! Get ready for a midair mid flight stall into a deadly death spiral captain Ben, you have clipped your own wings. We are heading straight into an inflationary depression storm of epic intensity. Inflation in the things we require, and deflation on the things we already own. The greed trap has been hatched from the heavens above, same as it ever was.
Up until now, the stock market has enjoyed the free QE bus ride no questions asked, however when the prosperous peeps are surprisingly startled by the tremendous thundering QE3 tailpipe backfire blast, they will quickly realize that the vehicle is running on nothing but fumes, and will all jump off at once before it runs out of regular real gas. Be sure to be the first ones out before the passengers crash the plexiglass doors.
Holy hubris ! Inflation Nation ! The Bernanke has blown the lid off his chrome dome!
Fear no beard………………..P3 is here.
Lift off………Rocket launch failure………Houston we have a problem………Evil Plan 83.0