One of the premier features that was to help markets interpret upcoming policy moves made at the Federal Reserve was the idea and implementation of: forward guidance. This new feature was enacted by the former Chairman Ben Bernanke. The reasoning? In a nut shell it was no more than a heads up to the financial markets of what the Fed. would do, and when. i.e., Hit this metric of X and the Fed. will do Y. So – position accordingly.
Although that’s an extreme over simplification, in effect, that’s precisely what it was supposed to be when contrasted with one “Fed. talk” laden speech against another. This way the markets (as well as other central bankers and/or governments) could take solace (in theory) of not being adversely surprised by some sudden, unannounced, or unforeseen policy decision and announcement from a FOMC meeting.
An example might be: “We’ll do X if Y is reached. However, if Y is not – one can take solace that we’ll stand pat until the next meeting.” Rather than leaving everything from A-Z a guesstimate in between. Why? Because the natural conclusion is when it comes to money: confusion, or guessing equals selling or, at the least, non-participation. i.e. Sitting on hands.
Again, it was in 2012 this type of communication strategy was implemented by Ben Bernanke. Then, he himself, did the exact opposite. To wit:
“IN DECEMBER 2012 Ben Bernanke, then chairman of the Federal Reserve, reached deep into the central banker’s bag of tricks and pulled out something novel. Using a new trick which became known as “forward guidance”, the Fed declared that it would not raise interest rates until America’s unemployment rate dropped to at least 6.5%, so long as inflation remained below 2.5%. In August 2013 the Bank of England followed suit. Mark Carney (pictured), its governor, promised to leave rates low until unemployment was down to at least 7%—again, so long as inflation and financial markets remained well-behaved. In both America and Britain, unemployment fell quickly toward the thresholds. Yet neither central bank reacted by moving to boost rates, leading critics to argue that forward guidance had failed and should be scrapped. Central banks are instead tweaking their guidance: the Bank of England will update its guidelines on February 12th, and the Fed may soon do the same.”
As one reads the above you can’t help but be astonished. Again: “…the Fed declared that it would not raise interest rates until America’s unemployment rate dropped to at least 6.5%, so long as inflation remained below 2.5%.” How’d that work out? Yes, it’s a rhetorical question.
Using just the aforementioned criteria given by the Fed. in 2012 as “to give guidance” we could go on to list a litany of similar examples. Never-minding how many FOMC meetings were held where this criteria was hit, and hit, and hit again – and a policy move of raising rates was ever done. Well, there was actually one move. What move you ask?
Lower the criteria. 6 became 5, and now since we’re at 4.9. It’s not a number that means X,Y, or Z anymore. It’s now ___________(to be announced….maybe…and subject to change….definitely.)
As confusing and obtuse many a Fed. dissertation has become. What has been even more confusing too me is the near zealot manner I’ve heard one economist after another state with surety they know, or can interpret, precisely what the Fed. will do next based on what the Fed. has communicated.
It doesn’t matter if it’s some “next in rotation” guest economist, or their own resident “Chief economist.” The inclinations are always the same. i.e., “The Fed. will do this when that happens. And, that has yet to happen. So, those who say one should worry, or think different, just don’t know what they’re talking about and should be ignored.”
If one puts aside all of the moving metrics and policy talk that happened during Mr. Bernanke’s tenure. How would one assess “the guidance” or the “communications for clarity” we now have emanating from not only the Fed., but also, central bankers globally? Crazy Town is the only thing that comes to my mind. (Hint: look to the SNB or BoJ for clues)
The Federal Reserve itself has made so many pauses or “moving of the goal posts” since 2012 alone, there is not enough digital ink to list them all. While as of today under Ms. Yellen’s tenure it’s been communicated that those once aforementioned data points are now no longer as weight-bearing for policy moves as they once were. Now instead of unemployment data, or inflation data, we’re now “data dependent.” And “data” represents whatever the Fed. decides whether today, tomorrow, or right now. I guess 4.9% which once represented statistically full employment doesn’t mean what it once was. Unless they decide it does. Or – doesn’t. Maybe.
Just look at the communication delivered at the latest FOMC presser that took place just this past December. The Fed. declared in a unanimous voting of the affirmative it was fiscally prudent to raise interest rates, even if it were ever so slightly, as to begin the path towards more normalized accommodation. This was all predicated on what everyone was made to believe not only “the data” but more importantly, “a fulfillment of their forward guidance.” For remember, that “forward guidance” was thwarted in August and delayed because “data dependent” morphed into “international developments.” There was no “guidance” for that one was there?
As soon as the markets showed weakness following that “international development” that hit the U.S. developed markets in the form of a market selloff. The Fed. reversed course and did exactly what it implied it would not do – and punted till the next meeting. All against a backdrop that “data” was not supposed to mean solely “market” data. Yet, that’s what the move implied as was interpreted. Whether rightly or wrongly. And no official “communique” was going to change minds regardless.
And here we are just two months since and we’ve had one Fed. official after another insinuate future “rate hikes” are both on the table and off the table. While QE will not be forth coming – unless it’s needed, definitely, if and when. Maybe. But don’t count on it – unless you need too. I think.
This is the near insane way one has had to look to monetary policy makers and try to both run a business, as well as for others – run a country. Having to decide what policy means today or, if it means today, what it meant yesterday. Then; try to formulate and put to work real business plans or national policies for growth based on current directives, insinuations, flip-flops, and more. This is not only frustrating – it borders on lunacy trying to even comprehend.
This communicated confusion also helps to elicit precisely the greatest, most dangerous of monetary manifestations to come into fruition. Here is where companies, people, as well as governments won’t commit to anything other than: Nothing. Or, worse – sell everything. Which is the antithesis of what today’s Keynesian devotees are trying to manifest. This is what “forward guidance” has wrought: directives straight to “Crazy Town.”
There is one more extreme example coming up that may show just how much central banks have lost any remaining credibility. Where participants of all stripes or markets will no longer heed, or wait, to see what move a central bank may take in the future. That event happens later tonight in the U.S. or Monday morning in Asia as the markets react to what many believed (and possibly positioned for) might be a watershed event for coordinated, along with sizable interventions, via the G-20 participants that concluded Saturday. Many were implying, and inferring, possible “Plaza Accord” styled accommodations.
There was great enthusiasm expressed by many of those participants and inferred the same by the markets. Only problem? It seems once again it was a meeting of all talk – no action.
Now we’ll just have to wait and see if the markets will act first and ask questions later once its realized it was they who were crazy to think anything other than jawboning would take place.
Over the years since what is now known as “The Great Recession.” There has been one dominant factor that pushed most – if not all – collective business reasoning and acumen aside, while simultaneously, allowing even the most rudimentary “investor” to believe they were a genius. That factor was: The Federal Reserve and its iterations of one QE (quantitative easing) initiative after another.
If you were a public entity for instance (e.g., shares listed on the various stock exchanges) financial engineering tools once inconceivable were now, at-the-ready in both availability and acceptance via the Fed. e.g., Low interest financing for stock buy backs, etc., etc. Along with the rampant acceptance of adulterating true earnings and more by employing Non-GAAP financial measures as one laid off, fired, downsized whatever to give a favorable Wall Street appearance so that the “hot money” being facilitated by the Fed. would find its way into your company lifting shares based solely on “momentum” strategies, rather, than anything resembling true business fundamentals. (Do I need to also point out “loan loss reserve” games?)
However, there was also an overarching meme held by far too many. That meme was: It was all dismissed by most as some sort of “Well that pertains to them – and not me” reason or argument. i.e., It’s about Wall Street and such – not about me and my business, or interests. I argued (and continue to) against that premise.
I have stated too numerous to count that everyone from the solo-practitioner, business executive, Mom and Pop operation, and more needed to understand the bigger picture in far more detail. Along with, at the least, a commonsense (working) overall understanding of not only Wall Street and the global markets, but also the political manifestations inherent within both as it pertains to business.
No one else was doing it. I know this because when I was looking for it myself back in ’07/’08 during the crisis, I could not find it either. So, I took to the task.
My readership back then? I think my mother visited my site once and that was my highest ranking day, if you get the hint. Yet, this was where and when I began trying to articulate my arguments based on my prior business acumen.
So much of what was transpiring at this time was absolutely confusing to many a business person, big and small. They would hear this, that, and the other thing from not only the financial media at large, but also, from the main stream media peppered with touted spokespersons or well-known figure heads in the field of Business/motivation, finance, and the whole Silicon Valley/VC/social everything set.
I’m not picking on, nor do I have anything against these people, so let that point stand and remain straight forward here and now. I only bring this up because they were some within my own genre of business/motivation seeming to be gaining further notoriety or influence near daily on what I felt were flawed assumptions and/or conclusions. Again, I felt their argued positions or interpretations were flawed. Nothing to do with them personally. So with that said…
Whether or not anyone agreed with me was irrelevant. The point was – no one, and I do mean – no one – seemed either willing or understood the complexities as to point these flaws out. I truly believed then, as I do today: not understanding the intricacies, as well as, the true implications, along with, blindly following much of the recommended advice that I saw coming out from many of the popular talking heads was not only going to come back and haunt them. It may be down right horrifying.
For others, it might also lead to finding out not only might their business life may be upended, but also, their personal life with no understanding of why it happened. And worse – why it might or keeps happening.
This is where Einstein’s argument for insanity shows true. For the issue for many would soon be: They keep doing the same thing – and keep getting the same results. And worse: Not knowing or understanding why because – they’re doing precisely what the so-called “experts” are telling them to.
A classic example of this which had the same characteristics, as well as, being just as prevalent (and in some HR circles still is) is where people heard or “learned” from “experts” why they could, or could not, do something because: they were either “left brain or right brain thinkers.”
This lame brained drivel has since been disproved by science itself as garbage. Yet, that hasn’t stopped many a speaker, or HR department to dispense another version of this trite as “new and improved!” Why? The “answers” sounds so easy. The “assumptions” made and the remedy to “fix” sounds so simple. Problem was, as long as the underlying issues remained simple – even simply wrong advice can take on the appearance of maybe right.
On the surface it did seem to be some magic bullet for insight and remedy. So people walked away believing they now had the answers to workout their “issues” in the future. i.e., “Oh, I didn’t understand that because I’m left brained and that pertains to right brain thinking. So I’ll just disregard it.” Till all of a sudden those “issues” move from the surface level to having far more reaching consequences. These insights could have been as easily explained away with the same averages as reading and applying one’s horoscope found on some generic web site.
The problem as always is, inevitably, when the real “issues” of the day do in fact show up. They suddenly find themselves in far worse shape. Again why?
Because they “believed” they were prepared in the first place based on flawed thinking and/or assumptions. Whether thought through the left or right side.
Now, not only might they have done the wrong things, at the wrong times, applying the wrong tools as to deal with an “issue.” Depending on the circumstance – it may be too late to salvage anything going forward – for the damage might be too far along.
All of the above is a direct, applicable analogy, if one wants to extrapolate its underlying message to fully understand what myself, and very few others, have warned about: e.g. The Just Buy The F’n Dip mentality crowd. aka BTFD.
Here is the one function not only enabled by the Fed. But was also: rewarded and back stopped ever since the financial crisis.
For the last 7+ years, no matter what investing strategy you were told or sold, as long as there was QE running down the “drip tube?” Those investment “strategies” that you were either told (via the financial media at large) or sold (you bought the book, attended the seminar to hear this weeks version of a speaker just killing it etc., etc.) it was hard to argue against what had all the appearances of pragmatic insights. After all: BTFD and you too were in the same boat were you not?
And yes you were – then suddenly the boat begins leaking, then splitting, and now even the people who seemed to have all the answers on how you needed to get in the boat are now appearing to have that same blank stare you are beginning to have. Reason? The BTFD mentality allowed one to think there was no need for life preservers on the boat. And now, you find out rather inconveniently – there aren’t any.
This is the reason why I have made such an adamant stand against anything rewarding BTFD behaviors, as well as, the assumptions that it is was something other than what it truly was – a Fed. supplied addicting monetary drug enabling mind altering suggestions that people were smarter than they thought. The drug of QE enabled BTFD genius and paradise.
However, once, and now since, the I.V. drip did in fact close – it was inevitable there was going to be a lot of withdrawal and hurt to go around for far too many people who bought in not only to the hype, but also, to the hype promoted by those whom dispensed financial and or business advice based on BTFD reasoning during this period.
This problem has not been exclusive to just the business/motivation, finance, Silicon Valley, social marketing, or VC, field. It’s been rampant everywhere. It’s even in the world of consulting and other venues as well. At all levels. Trust me – it’s rampant.
Just to give an example, I know one of the most highly respected consultants in the U.S. He consults and advises businesses, CEO’s, at the Fortune 50™ level and mentors many more around the world.
Personally I have great admiration for him for he truly is a one of true thought leaders on the world stage today when it comes to consulting. Yet, when it comes to the financial markets, their global impact, and just how precarious a knifes edge and the possible resulting disruption that may manifest at any given time? Circumstances which I believe to be far more devastating or consequential than possibly the original ’08 crisis? Absolutely numb to the whole idea or premise. Furthermore – dismisses the whole premise as “nonsense.”
And why not I suppose? After all, as the counter argument goes: “Things always bounce back. Just look at where we are today! It’s not ’07/’08 all over again. That’s preposterous. We’re in far better shape to handle another such crisis today than then. After all, look what we’ve learned and done from the past. Banks are better capitalized, Unemployment is at great levels, GDP is low but getting strong, etc., etc., etc.” You would think you were listening to a recording from some next in rotation fund manager or economist. Oh wait – that’s who he is listening to. So, I guess it should come as no surprise then.
Suffice to say, that’s the argument and viewpoint a great many currently hold today. And the BTFD manifestations that have taken place over these subsequent years have allowed that viewpoint to be held even tighter. After all – that’s what they hear, see, and read from the many a mainstream media source. And more importantly – see in their current 401K monthly statements. And so, ergo, it must be true.
Problem is, as I always try to emphasize: “We’re here only via the effects of QE. And, not only has that stopped, even if it comes back – it may not work this time. It’s all now a crap shoot. And if you don’t have a working understanding of that, along with the ability or foreknowledge as to pragmatically make adjustments, as well as, preparations to either hunker down if needed. Or, better yet – effectively take decisive actions as to leapfrog your competitors as they become frightful and frozen with indecision in what may be another monumental business upheaval. You are going to find yourself not only behind-the-8-ball, but maybe, something far worse. Period.
A few cases in point:
Back in November 2014 Tony Robbins released his first new book in some two decades. What was it about? Stocks. In it he argued (just like many) the way to make money and other things was to do what he outlined in his book. I totally disagreed and argued on more than one occasion (here and a year later here) why I felt it was flawed. I stated my reasons and stood by them. And then was besieged from people making statements like “What do you know?” and “Who are you too say?” While others for the sake of decency I won’t express, but you get the idea.
I don’t shun from criticism, and like I’ve always said when I feel there is “a fair point” I’ll then articulated why not only did I have a right to argue (vis-à-vis in the same business) but also I showed de facto I had more published writings about the financial markets than even he did.
However, that mattered about as much as a ticket to one of his seminars the day after a great many found out via a trip to the emergency room that fire can indeed burn no matter how much you tell yourself it wont. (That’s not me trying to take a cheap shot though many will have that first reaction. I believe it’s a fair point when looked at in this context. For remember, as I’ve stated numerous times, I like Tony. I just don’t agree on every point.)
So let’s take Tony’s book since it validates my point. If you followed the advise of that book it is in my humble opinion and estimation that you are currently – very uncomfortable. Or, worse.
As I stated then: “Anything less than under-the-mattress styled thinking for safety and/or actions or, as close as one can feasibly come to it, is all that one should currently be focusing on. For it’s now all about the old adage ‘the return of one’s money as opposed to a return on.'”
After that argument which took place in Nov. ’14 when the book came out. The subsequent year (being 2015) was the first year in 87 years – Cash (i.e., the holding of no other asset stocks, bonds, diversification this or that) outperformed every other asset plan. Period.
And, as of this writing? How’s any “diversification” of asset plans currently working out? Hint: Even for the biggest names in finance itself like Hedge Fund managers, some are not only bleeding assets under management, others like Carl Icahn’s own firm was downgraded to “watch negative” from “stable” on declining portfolio values and higher leverage implying a cut to junk may be possible.
Then there was tweet-storm between the self-described “America’s Most Trusted Personal Finance Expert” Suze Orman pleading with non other than CNBC™ fame Jim Cramer on what the Fed. should or should not do.
I argued then, as I do now, if this is how two of television’s “experts” are handing out advice. Then there really is something wrong with this whole business/motivational genre. And as of today? I’m becoming more right with every passing day. For if you’ve listened and taken any of Mr. Cramer’s since that time – you are far, far, from happy. And as for Ms. Orman? The silence on what people should be doing as of today has been deafening. But hey, “What do I know about such things?” And, “Who am I too say?” otherwise.
Then there was the whole social media, Silicon Valley, VC narrative. I personally argued against many of the “insights” as well as “must do’s” articulated by many of the aficionados. When it came to “everything social” not only did I articulate ideas of why many a business should not focus on this medium as some “holy grail” business modifier which far too many were proposing, But rather: I showed using myself as the example of how not using it as prescribed and focusing on other business principles and ideas could be far more meaningful, as well as, beneficial. (Need I remind anyone how many suddenly found “their audience” was no longer their audience when many of these platforms overnight, and without notice, changed their rules?)
Where applicable I openly demonstrated using actual provable stats and metrics (not pie in the sky based on magical thinking) my reach dwarfed in both readership and/or potential audience many who not only relied solely on these platforms, but also, sold others that they in fact needed to be on these platforms almost to the exclusion of anything else.
As I’m quoted, and still stand by, “The only people making money from social media – are the people selling you social media.”
So with that in mind: If you don’t think there’s a sea change currently taking place in Silicon Valley since the ramifications of the Fed’s QE no longer fueling the brilliance is starting to take hold. (One that I have argued, argued, and argued some more where I was told by many of “The Valley” itself insisted I had no clue) I’ll use this screenshot of an article that was posted at Pando™ dot com a few weeks ago. (you have to be a member to read the articles) To wit:
For those who argued “I just don’t get both “The Valley” or the whole meme of “social” and/or “VC” as it pertains to it.” Let me remind some of a few facts…
2015 was an absolute bloodbath for IPO’d unicorns with many losing some 90% of their once lofty highs. While a preponderance still remain under their initial IPO price debut. And, as of this writing? Where it will be March in mere days. There has not been one, that’s zip, zero, nada “Unicorn” IPO’d so far this year.
I thought it was always a great time to IPO thise unicorn dreams to riches? At least that’s what everyone was saying back then. Oh right – back then. I guess “it’s different this time,” right? Funny how all the “genius” stuff along with portfolio swagger seems missing since QE has stopped, no? But hey, “What do I know.”
And just when (if ever) another Unicorn does bear fruit and IPO this year? Again, no one, and I do mean zilch, just like the IPO’s of late, knows. Yep, it sure is a different time – isn’t it.
Again, as long as the Fed’s QE faucet remained open financial, VC, social advice, and a whole lot more seemed hard to argue against. However, now that the faucet has closed? Just read that screenshot again and see if that once tightly held meme started, as well as, articulated in the past is still the viewpoint to have today? It’s for you to be the judge – not me – as it should be.
The only reason why I detailed the above (and that is the condensed version) is that I believe: it is important to both the discussions at hand, as well as, future discussions.
For it’s one thing for people to make arguments, or try to espouse ideas others should take. It’s far different on whether one should heed or act on those the contemplations or insights when it comes to formulating what actions one should take, or more importantly, what actions to avoid in both tough times as well as good.
For if you can navigate the bad, taking advantage during the “easy” makes it even all the more profitable and palatable. Both for one’s bank account, as well as, one’s sanity. And I believe one’s sanity is far more important than wealth. For one you can always recover from losing wealth. When it comes to one’s sanity? Sometimes – not so much.
So now with that all said (and I know it’s been a read-full) let me share with you what many have been asking me about as of late and where I see things going. e.g. The financial markets in general.
Below is an updated version of the chart I began posting well near a year ago, and have updated it when I felt we were at critical, or at the least, significantly important times in its evolution. Today is another one of those times. To wit:
As one can see, we have pretty much done precisely what I speculated previously followed by nothing more than returning to the area which started the previous down-run in earnest. In particular where I placed that lower oval, then implied “needed to hold” has indeed not only happened, but was once again tested as I’ve denoted with the smaller ovals just below that demarcation line. Why is this important you might ask? Fair question, and here’s my best assessment for those who may want to know…
The implications from a purely technical viewpoint, as opposed to anything fundamental is this: The fact that a major support level held (that level is also referred to as the “Bullard Bottom”) but (and it’s a very big but) the subsequent bounce only brought it back as far as the original level e.g., a gap that could have been also acted as support if filled. Was filled – yet – did not hold.
Then (once again) convincingly turned around and retested that lower level within days. Then (once again) returned to that area to (once again) fall right back down, only to be saved from an out right panic selloff going even lower by (once again – are you seeing a pattern here?) Fed. officials (such as Mr. Bullard himself – once again) jawboning reasons why they may or may not do this, that, or the other thing.
And where has all that “once again” repeating action stalled? Look at that #8 position “once again” for clues.
It is in my estimation: if we are to fall “once again” (I’m not trying to be coy or funny, the reference is actually quite relevant and important) over the coming days or weeks to test that “Bullard Bottom.” I am of the mindset: it does not hold. And, there very well could be a panic induced selloff too much, much lower levels. Quickly.
Just how far and how deep is anyone’s guess. However, from what I’ve concluded from the ways in which these markets have been acting, along with many of the other concerns mounting outside of the U.S. It could very well rival similar episodes witnessed in ’07/’08.
Remember: No one knows for sure. Yet, that doesn’t mean there aren’t, nor hasn’t been enough clues to look to as to speculate just what is possible under the prevailing circumstances. And, the reason for my concerns, and why I’m even saying what I have is – all I’m currently hearing from the so-called “smart crowd” is the resulting market actions over the past week and a half has been indicative of “a bottom” where the next moves will undoubtedly be higher – much higher.
I believe those assumptions are wrong. And quite possibly – dead wrong.
Again: all I’m saying is – be prepared for what everyone else has said is “long since passed and won’t be seen again in our lifetimes.” Because, in my estimation: It’s very possible what we were told “we’ll never see again in our time” just might be over the horizon waiting to make shore.
Take it for what ever it’s worth. I just thought it was important to point out for I feel we could be at another of those critical junctures.
And for those who may be new and are thinking “Why or, on what basis should I take his argument as to contemplate what I might or might not happen?” All I’ll use as evidence is that above chart. For I started it, and began annotating it, where you see the #2. All that has happened after is what I argued was more probable or likely – as many of the so-called “experts” argued it would not. And as readers who’ve been here for a while will attest – I’ve made my arguments and stated observations before they occurred. Not after. Just as I’m doing now.
I might be just as wrong this time, as I’ve been right on all the previous. Again, no one knows. However, what you do from here can only be done by you. No one else.
Just make sure you can handle the consequences no matter how they play out. Whether for gain or, the prevention of loss.
There are times you try to connect the dots. There are others where those connections warrant adorning your trusted tin-foiled cap of choice; for you just can’t get there unless you do. This I believe is one of those times. And if correct? What at first might appear apocryphal, may in fact, be down right apocalyptic. And besides, what good is a tin-foil capped conspiracy theory anyhow if it doesn’t have the potential for doom, correct?
So, with that in mind, let’s venture down some roads full of conjecture where if it’s found to have more of a footing in fact as opposed to fiction? The implications for everything we now take for granted such as: money, enterprise, global commerce, and a whole lot more may be far closer to a “Minsky moment” than any of us dared to imagine.
Today, one can’t begin without scrutinizing the latest example of monetary flip-flop. e.g., The Bank of Japan’s (BOJ) surprise announcement of implementing negative interest rates.
Although “surprise” is the correct word, it is also an understatement. For it was only days prior current Governor Haruhiko Kuroda made statements to the contrary implying that he was not even thinking about adopting such a policy as of now. Then; he did precisely that. And the fallout is still being registered and assessed via the shock-waves continuing to resonate throughout the global markets, let alone, Japan’s own Nikkei™ and currency.
For those that watch the markets daily, you know what happened next. For those who don’t, I can best explain it this way: It had the exact opposite reaction that many (especially the so-called “smart crowd) believed would happen. I.e., More easing invokes a reflexive stocks up, and weakens the host currency simultaneously. Instead: stocks fell rather dramatically, as their currency (the ¥en) spiked higher. Again, the complete antithesis of what was thought “should” take place. And I’ll reiterate, the resulting aftershocks, in my opinion, are far from over.
If you look at this monetary flip-flop as an isolated event, it’s fair to assume there’s not too much more to see here than what we witness from any political flip-flop that happens on a daily basis across the globe. i.e., A President, Premier, or other elected official says X one day only to do Y the next. It’s far from anything new. However, that’s politics. “Monetary policy” is quite another. i.e., We are told it’s far more stable and less prone to the daily political swings inherent in elected politics. After all, isn’t that what “independent body” run by “appointed members” is supposed to represent in the first place? i.e., Less susceptible to the politics of the day.
With all that said, the more I toiled with the idea of the resulting calamity the BOJ now has to contend with following this obvious reputation of more intervention, along with, just what made them feel compelled to do it in the manner which they did. My mind kept coming back to a previous article I wrote on this topic a few weeks back. To wit:
“Did the BOJ’s out-of-the-blue reversal on its monetary stance which was refuted just weeks prior by Mr. Kuroda himself take place because after listening to the arguments, suggestions, as well as concerns, from the participants at Davos he concluded much like what the movie “Margin Call” depicted: It was all about to unravel? And if so: is this him deciding to be “first” and considered it his only choice?
And if so, what does his actions pose for the credibility of his brethren bankers? Do they now act from a place of “Who can they trust?” And what does that mean for the rest of us? The implications are staggering when you begin to open those doors for they have the potential of making Pandora’s box seem harmless in comparison.”
In actuality it was more of the second line or paragraph that kept nagging on me. And, in particular, the “Who can they trust?” Why you may ask? Fair enough, but be forewarned we’re now venturing down what some might call “conspiracy alley.” So, in the spirit of safety: the proper helmet is now required.
Let’s remember when it was the BOJ Governor changed his mind (or had his mind made right?) It was right after returning from the annual meeting where all the other like-minded, dependent upon, and similarly employed brethren gathered: at Davos.
Why this is important to the speculation is this: Were his (meaning Kuroda) actions based on some self assessed need to “panic first” from distilled information he gathered, processed and concluded was his only option? Or, was it something far more nefarious, as in: the information he garnered was intentionally supplied, boogeyman’d and actually spurious? Expressed solely by a select few for the sole purpose to make him conclude his only choice was – to “panic first?”
If it were the latter? The implications are very far-reaching indeed.
It’s one thing to assess and make the wrong conclusions on your own. It’s quite another if your conclusions were made or based on deliberately signaled false pretenses.
Case in point: What if he was somehow either told, or was insinuated via some type of pretense of surety that some other bank (or China?) was going to do _________ (fill in the blank) leaving the BOJ far behind any curve they could overcome if they didn’t act first? Only then to realize after the move, what he was assured would happen by some other bank – did not happen. Leaving him along with the Japanese economy any currency in the monetary equivalent of – up the creek with no paddle.
Furthermore, as of this writing, if a Chinese Yuan severe devaluation was said to be imminent, today shows proof positive, that to be false. For it has yet to happen. And, so far; no signs to show to the contrary concluding the BOJ did in fact have time to signal the move first, rather than “stun” the markets.
Not only is all that within itself problematic. If true? (as in being goaded) It would also imply just how desperate, as well as frightened, central banks currently are. And, more importantly, the depths they’ll now go as to save whatever it is they believe is now unraveling.
The implications as I iterated would be dire if so. For, it would signal – they really don’t have anything left. Or worse: haven’t a clue as what to do next and are panicked by it. After all, one only needs to look at the latest market gyrations and market data points to realize the Fed. itself is coming to the conclusion (just listen to any Fed. speakers public testimony of late for confirmation) the rate hike of December was a policy error. Just how much of an error is what’s to be seen.
Back to Japan: Why or how could I come to such a conclusion you ask? Fair enough. Let me take you back just one year ago to another “shocking” and “stunning” monetary policy move that nearly mirrors this one: The un-pegging of the Swiss Franc.
It was January of 2015 just prior to the annual Davos gathering when the Swiss National Bank (SNB) decided to unpeg the Franc (CHF) from the €uro. The resulting consequences within the forex markets was akin to the destruction of Alderaan “Where millions suddenly cried out in terror.”
Some will deduce because it happened before, (only a week thereabouts) rather than during, that it sets the SNB decision apart from the same influences possibly inferred by the BOJ. After all, as thinking will go, they (the SNB) subsequently weren’t privy to the information at the meeting since this happened beforehand.
Au contraire I would argue. For if one understands exactly how, or what takes place before meetings such as these. (i.e., agenda setting, other speakers, or panelists insights and more.) One would know that there is a lot of “what’s to be said or announced, and by whom, prior to the actual meeting. I know this because, I myself, partake in similar types of conferences or venues where both speakers and panel members are involved having participated as both a featured speaker and panel member at the same event.
It’s done so everyone has some idea of what is entailed, and by whom, so you’re not completely blind going in as to what may, will, or be expected to be said or take place. There are also acquaintances and/or confidants you know and have discussions with prior, on your own volition, so as to have an even more informed concept going in. Any prudent speaker does it.
So with that in mind; remember what was being contemplated (or at least rumored) at that time? Hint: How much (or how effective) would the much-anticipated (as well as begged for) ECB’s QE initiative be? And more importantly: especially now that the Fed. had ended its QE program just months prior leaving the ECB effectively – on its own.
“So let’s move back into today with the SNB decision and the “set up” hypothesis. What would this move do that would reward the party responsible for the “set up”?
It may very well solve an issue that scared the implementer far more than the SNB. And that issue just might be where the “Full Monty” monetary bazooka that was about to be revealed, was in fact, going to be witnessed for all to see – a pee-shooter. In other words, possibly far more restrained in nature by what the German (imposed) side of the argument would allow. And nothing brings the fear of losing one’s “omnipotence” more than needing to actually show it and there’s no there – there. Again.
Maybe the monetary threat of words this time were directed at the only place where words still might matter (for that’s all he has left) i.e., Directly at the Swiss as to make them cower into monetary panic.
The ECB would clearly know what would happen to the SNB if it were to release monetary mayhem with a its own version of QE with the Swiss Franc peg. Yet, how could one resolve the dilemma of efficacy if that so-called bazooka wasn’t as grand as its been suggested?
What if you could convince another monetary body (the SNB) into an outright panic; relieving your own condition? Regardless if the assistance it allows one (the ECB) for more time is temporary or not. For the key is – additional time. Any amount of time is better than none. For the implications of “no more time” are far too consequential for the ECB as a whole.”
Since that time it’s been well-recognized the initially implied round of “what ever it takes” was seen as highly inadequate when it became public as to back up the “bazooka” underpinnings jawboned incessantly by Mr. Draghi prior.
There were many subsequent articles from what is known as the “mainstream” financial press (e.g., WSJ™, FT™, and others) that the SNB probably did over react and could have endured the resulting fluctuations made manifest via the ECB at a far less cost than what resulted with their own highly charged flip-flop of their peg. For remember; just like the BOJ – the SNB had also just days prior refuted such a proposal. Then – they went ahead and did it just that. And from what I’ve been able to garner – that worked out just fine for the ECB. Not so much for the SNB. Are you starting to see the similarities (or pattern) here?
What if (again it is all conjecture) some, or possibly many, of the participants at Davos selectively dropped spurious hints or specious hypotheticals to the BOJ Govenor in order to scare the daylights out of him (China! China!! CHINA!!!) and have him react in a way he near assuredly would. Let’s not forget: the ¥en is a Wall Street trader’s darling.
Yes, the $Dollar is used as for carry trades while simultaneously the “flight to safety” choice currency. However, the ¥en is the currency of choice for “the carry trade.” Effect (favorably) the dynamics and carry costs associated within these trades, and poof! You single-handedly eviscerated many of negative effects associated with the incurred incremental cost of trades carried in a rising $Dollar. i.e., Partially negating, or cancelling out the cost effect of the 25 basis point increase via the Fed. rate hike. After all, who cares how or where anything is done as long as the effect is the same. Don’t let that point be lost on you. It really is a distinction with a difference.
Could the BOJ have been goaded to make such an about-face in policy by a meaningfully led concerted effort of participants who would both benefit politically (i.e., if it all went right it might give the Fed, ECB, and others some breathing time and/or room) and from others who would profit monetarily (i.e., all the Wall Street’ers) whose current portfolios are melting away almost as fast as an ice wall does around a reactor meltdown? I think you’re starting to understand if you’ve read this far. Intriguing, no?
And if you believe monetary policy isn’t the place for intrigue or things that make you go hmmmm bordering on some high-end Hollywood big screen release. May I remind you of anther “tin-foil” laden, made for gawking, spectacle that happened not that long before the whole SNB debacle? It too has three initials: DSK. Remember those? They represent the name of one Dominique Strauss-Kahn. Former head of the IMF (International Monetary Fund.)
Back in early 2011 then head of the International Monetary Fund (IMF) Dominique Strauss-Kahn (DSK) suddenly was charged with rape, sexual abuse, and unlawful imprisonment. DSK at the time was considered the rising star in the world of European monetary policy and politics. So much so that he was also considered a credible challenge to Nicolas Sarkozy for the French presidency. In a blink of an eye all that was wiped from the ledgers. And none seemed more surprised than DSK himself. In retrospect – all with good reason.
With little fanfare (for it doesn’t make as delectable a story for the main stream media as the original accusation) DSK was cleared. The case against him? Dropped. His name, career, political aspirations? Gone. As we now know he was replaced with a far more “banker” friendly head Christine Lagarde. Conspiracy? Who knows. However, if you read the article I referred to earlier you’ll see one thing seemed obvious – he was sticking his nose around places one might infer others did not like. And some still think banking is so much safer and cleaner than the loading docks of any major port. Sure they are.
As troubling as it may be that the above actually transpired paving the way for “tin-foiled” inspired scenarios to even be contemplated. What may be worse is the fact what the BOJ did, no matter how they came to the conclusion: had exactly the opposite effect than what anyone (especially I’ll wager central bankers themselves) reasonably expected would happen. And with it – has now caused an absolute quagmire of evermore serious increasing problems.
We’ve only seen what many would compare to “a storm surge.” The full brunt of the storm is yet to make landfall. And when it does, it may intensify as it comes ashore rather than dissipate. And we won’t know just how intense it may be till it actually bares down and shows its teeth. Which is one of the more frightful ways to experience any storm in my opinion.
Then again, this all might be a fanciful thought experiment laced with a bit of conspiracy and/or controversy to make it interesting as food for thought over the weekend. And if that’s so, then we can get to the news of the day that is more straight forward, to the point, and matter of fact where conspiracy theories could never take hold. Such as the death of Supreme Court Justice Antonin Scalia. After all, everything’s pretty straight forward there, right?
Many times when I’m speaking with others and make reference to “Ivory Tower” types I can tell the reference either gets lost or, is not fully appreciated for what it actually means in today’s world of monetary policy, and its direct correlation to business in general. Some take it as just some reference to a certain crowd acting aloof from the realities of such interventionist policies. In other words, i.e., They understand the concept where many a business professor in today’s academia may hold that title having never run a business themselves. However, what I refer to as the “Ivory Tower” types is something far more pernicious in today’s economic climate, as well as, malaise.
Nowhere was this more on display than what I witnessed on Bloomberg™ television this morning. On one of their morning shows called Bloomberg <GO>™ a discussion took place on what is now the topic du jour – negative interest rates.
The guest was editor in chief emeritus of Bloomberg News™ Matthew Winkler. The discussion revolved around the efficacy, as well as, why they (negative rates) should not be feared. The reasoning? (I’m paraphrasing) “Plenty of people (e.g., Larry Summers et al) would argue negative rates are a segue or an extension of QE such as former Fed. Chair Ben Bernanke.”
As scary as that rationale is knowing what we know now of the former Chairman having left his indelible mark on U.S. monetary policy, and the resulting mess we are all trying to get out from under. It was his follow-up argument that caught me broadside just when (which seems more common with every passing day) I had taken a mouthful of coffee. Luckily this time – I was near the sink. Ready?
In defense of negative interest rates he stated, “Keep in mind for historical perspective the United States had negative rates in the 1930’s, OK. That was the best time to buy stocks, OK.”
It was after this statement I felt even one of the hosts understood just how tone-deaf this statement appeared and tried to step in with “Well we don’t really want to go back through that. (i.e. The 30’s is when the Great Depression happened remember?) However, he wasn’t through. He went on to finish with, “The point is, we’ve lived through this before.”
All I’ll say is – Yeah, no kidding. And it seems far too many think it’s just the thing we should go through again! Absolutely mind-boggling.
However, here’s the real issue: This is the type of group think that is running rampant within the circles of the very people in charge of conducting, then implementing, monetary policies that you, me, and everyone else has to try to circumvent, navigate, and at the very least – survive. This was exactly the point I was trying to make when I wrote the article “Too Many Think Tanks Are Just Kool-Aid Fueled Group Think.”
Too my eyes and ears this was a stunning example why this form of group-think is able to be fostered and perpetuated. After all, if the financial media “Ivory Towered” are hosting or moderating many of these conferences and other venues – then they all must be right. Right?
These “Ivory Towered” types wax and wane about economic theories that you and I must deal with in the cold harsh reality of business. That’s the real issue at hand. Like I said before, I believe the economic malaise we are currently in is a direct result on the continuation of the central bankers of the world, continuing to tinker and subjugate the economy through interventionist policies that are choking the life out of capitalism at its very core. Unlike Mr. Summers who likes to argue in reference to whether monetary policy does more harm than good, e.g., “Monetary policy is a response, not a cause.” Sorry, I do not agree.
If I had to sum up how the “Ivory Tower” archetypes are arguing monetary policy, and their “fixes” today here’s my analogy…
Imagine the economy as someone laying on the ground, while another has their foot placed squarely on that person’s neck choking the very life out of them.
Today’s version of monetary policy and the “fix” it can bring being argued within the halls of academia and Ivory Towers is not that “the foot on the neck” is what’s causing the issue. Rather, what type of shoe are the central banks wearing?
Their rational and arguments as to what they should employ next in policy measures runs akin to:
Should they raise being less accommodating? i.e., Adorn a boot?
Should they stand pat at simply accommodating? i.e., Switch to maybe a sandal?
Or, go full easing in negative territory? i.e., Go barefoot?
After all, as the thinking goes – It’s not like we haven’t drummed up policies historically and lived through them that nearly choked the life out of the economy before.
Well, yes we have. But no, I personally don’t think that would be very smart. No matter how many Ph.D’s tell me otherwise.
Personally, I take the complete opposite view of those who hold or ague the view held by people such as Mr. Summers, Ben Bernanke, Matthew Winkler, et al.
I believe current monetary response is the root cause of much of our economy’s current malaise. And if one wants to prove me wrong, all they have to do is get their foot off the economy’s throat. For it’s the foot that’s the problem – not what it’s shod with. Period.
“Remember: If the farmer/rancher can’t trust the packing house checks to clear – they’ll be no food going to market. A disruption of only a week can send a rippling effect many have little understanding of.
If businesses suddenly infer that they can not get paid accordingly or properly – it grinds to an absolute halt, where disruptions of supplies and far more can cause not only panic, but also, a complete breakdown in society
Watch how fast any metropolis or big city morphs into Mad Max styled overtones if the food supply chain that supplies grocery stores breaks down or grinds to a halt. Having spent my early career in the food business I can state with confidence the much touted “3 days supply within any supermarket” is not only accurate, it’s a best case scenario when folded over any potential “normal” emergency many have experienced such as a blizzard or blackout. Then your lucky if essentials last 24hrs.”
This reference had quite a few people I talked with today a little perplexed. So much so, it wasn’t until I could show them a clear example of exactly why that “speed and efficiency” was precisely the reason disruption is far closer at hand today than at any time as opposed to the, “I can get it whenever I want it” far too many take for granted. Many thought I was being “a little hyperbolic” considering the way the supply chains work with such expediency with all the logistics here in the U.S.
When I showed a concrete example only then did they seem to relate. I could sense it truly was an eye-opening moment for a few where they fully comprehended why I was stating what I had. So with that insight I thought I would show that example here for those that may not fully grasp or comprehend all it involved. To wit:
Below is a picture I took of one of the most basic necessities we all take for granted that I purchased just a week ago Friday. Yes, it is a package of toilet paper.
What you need to pay attention to is the code that is stamped on it. The code represents the production date – not a sell or use by date. This date was made as it moved from the production line into the shipping and warehouse channel for distribution. The date? January 30, 2016.
Why is this relevant? Easy…
As I iterated, I purchased these a week ago Friday. The exact date would be February 5, 2016.
Let’s understand the ramifications of this in its proper perspective. This innocuous package of toilet paper was manufactured and rolled off a production line (and there are no paper mills within radius of hundreds of miles from where I live) a mere 5 days prior. That means within 5 days that package was: warehoused, sorted, shipped to the supermarkets master hub, sorted again, shipped via their own distribution network directly to the store, received, sorted, then stocked onto the shelf where I purchased it for consumption. All within 5 days.
This can not, I repeat; can not happen unless there is nothing in the pipeline prior, as in, cases sitting in some warehouse waiting to be purchased and distributed. i.e., there’s no warehouse, as opposed to, some giant big building holding days worth of production. Let alone weeks.
This is both the beauty, as well as, the Achilles heel of “just in time” inventory systems. They are a thing of beauty to behold when everything is running properly. However, just one hiccup? And things go down hill very, very fast.
When it comes to perishable food (e.g., meat, poultry, fish, etc.) let alone something as durable as a paper product? The time from production to market can be even shorter. I know this because it was my business to know, and plan for, in my earlier career. This was why I made the argument to begin with. Far too many (especially Ivory Tower types) have little understanding on what it is, and what it takes, to get things to the consumer. Whether it be the big box type stores all the way down to the Mom and Pop type operation.
Any disruption in whether or not one business can rely on both collecting, as well as, having those collections clear and deposited into their accounts? It doesn’t take someone with a degree in rocket science to put 2 and 2 together and understand just how fast, as well as, how much chaos can be injected into a well running machine known as “just in time” logistics. And nothing will disrupt that chain quicker than the ability to be paid. Period.
Now maybe for whatever the reason you don’t believe that I bought this when I did and that I’m making the whole example up. It would be a fair point. However, even if you use the date of this post – it’s still only been 14 days and would still need to go through the same process. And even at that pace – it still wouldn’t invalidate my point or argument.
In some ways it’s hard to believe just a few short years ago 14 days was considered a colossal logistical feat worthy of praise. However, today?
It’s considered sloooooooowwwww.
Logistics today is truly a marvel only appreciated when seen up close. We take so much of it for granted. It truly is a stunning achievement.
Federal Reserve Chair Janet Yellen gave her bi-annual Humphrey-Hawkins testimony before congress this past week. Although the prepared remarks were much the same as expected with any monetary policy review. What really made “news” to anyone paying attention was the Q&A. Yes, may times Ms. Yellen seemed to give the usual rebuttals of “We would consider this if that …” and so forth.
Yet, in response to questions that took issue with the Fed. paying banks on excess reserves The Chair seemed not only defensive, but rather perplexed, as to why they were even questioning it to begin with. This line of questioning in my view opened up, and brought to light, the Pandora’s box of Keynesian insight and thought processes now emanating from the Fed. In fact, I’m quite sure Ms. Yellen herself didn’t realize just how far she threw the lid open.
However, there was one exchange where not only the answer was revealing. It was the tenor and tone that was not only jaw dropping, rather, it sent shivers. Forget about the old “behind the curtain” analogies. This one is far more troubling not only to business and free markets, but rather: the very fabric of what free enterprise is, and possibly capitalism itself.
Yes, I’m well aware it’s conjecture bordering on fire and brimstone. However, if you make/made your living based on your ability to both ascertain information, as well as, understand its implications by what someone is saying and/or doing, along with the manner in which they are being done, you can’t help but to see things others miss. (e.g., as I’m quoted to say: “You grow in business when your knowledge of product gets replaced by your knowledge of people.”)
From what I’ve garnered having read, watched, or heard from the financial press as of this writing. It seems few caught, or understood, its implication. So what is this exchange or statement that sent me into “The end is nigh!” bewilderment? Fair enough…
In response to push-back as it pertained to paying banks interest on reserves and it efficacy, as well as whether or not there may also be some unfair advantages vis-à-vis where banks are receiving slightly more of a payment than the stated interest rate implies. The Chair argued from what I construed as a far more defensive argument and posture to the program, rather – than merits based. It’s not a distinction without a difference.
And what clinched this assumption to the affirmative, in my opinion, was another part of her defense as to warrant its efficacy. That defense? I’m paraphrasing: “The Federal Reserve has gone from remitting to the Treasury a few $Billion dollars a year to now over $100 BILLION which helps fund the government itself.” i.e., You want to blow a hole in your budget of $100 Billion? Are you hearing me? Hello?!
I strongly suggest one would be prudent to find that Q&A on their platform of choice and view, read, or listen too it for themselves, rather, than just take my word for it. I feel it’s that important.
So what’s so wrong with that one might ask, “The Fed. is paying the Treasury money it’s making from all the bonds and sorts they have on their books. What’s wrong with that?” From my viewpoint: everything. Here’s why…
Regardless of what any so-called “smart crowd” financial aficionado will state. There is one – and only one – construct that keeps what the world deems “monetary policy” afloat: The belief in confidence. Only “the belief” part is what keeps it all together. i.e., What you or I believe to be money, and what its worth today. Period.
Today the world is awash in fiat based currencies. Debt, is priced in fiat based currencies. And, political wealth and power is also based on it. Change “belief” into “assumption” even ever so slightly – and everything you once thought of on how the world works is thrown into the trash pile along side most, if not all, fiat anything. Believe me.
This is the “fire” the Fed. is playing with. For it’s not lost on anyone (“anyone” also includes other governments) who understands business and free markets that the $100 Billion remitted to the Treasury was made possible by the Fed. creating that money ex nihilo. Arguing or using it as a shield to deflect criticism, as well as, implying the benefit for such actions opens the Pandora’s box of just how far off the ranch of sound monetary policy we’ve now come. (“we’ve” meaning the U.S. once considered the “gold” standard of monetary prudence.)
To use the term uber-Keynesian as to describe this rationale is an understatement. Now, not only does the Fed. seem open to, but also, apparently willing and/or eager to pursue going “Full-Krugman” as to facilitate – a negative interest rate policy agenda. Even if, “Currently they’re not sure if they have the authority.” But, (and it’s a very big but) “don’t know of any restriction as to why they can’t.” i.e., Again, if one reads between the lines one may prudently infer: They’ll seek forgiveness, as opposed to seeking permission, first.
So why is this so dangerous? Well, let’s look at the big picture and rationale as I see it for context…
As for the efficacy, as well as, the defending of those increases in payments to the Treasury. One has to argue (or assume) that this is not some form of a “tax” on the economy as a whole.
The reasoning is this: If the banks don’t (or won’t) lend it out for whatever the reasons, that’s money being rewarded (reward meaning it’s making money through interest payments via the Fed.) for sitting on balance sheets rather than working its way into the general economy via loans and such where the multiplier, as well velocity effects, can take shape.
In effect the Fed. is “taxing” the overall economy by making that money “safer” on a banks balance sheet as opposed to moving the banks back into the risk business (e.g. loan making business) where they say they want the banks to be in the first place. And when you’re talking about $Trillions deposited on the Fed’s books. Suddenly that tiny accrued interest payment adds up to truly big bucks.
One could further argue (and I’m of this mindset) that this, along with, the exploded $4 TRILLION balance sheet of the Fed is a fair representation of comparative cumulative figures on just how much potential productive capital the Fed. has unwittingly siphoned out from the economy today. And, in conjunction, pulled forward from future potential of the overall economy. That’s how (or why) I argue the “tax” argument as opposed to the “rewarding” type view-point the Fed. seems to be embracing.
Remember, most (if not all) of the Fed’s balance sheet is made up of bonds. (this is the key point) So, as the Fed. bought and continues to “re-invest” they alleviate the needed fiscal pressure away from lawmakers to make needed policy changes whether it be taxation, or other business incentivizing laws. All while the Fed. itself argues “The Fed. can’t do it all.”
This process no mater how it’s argued as “beneficial” fosters and facilitates negative affects into the business mindset where examples of crony capitalism, as well as, other economic disabilities and/or hindrances manifest in ways far too numerous to list here.
Currently, many (including the Fed.) are arguing current monetary policy and economic malaise as some chicken and egg quandary. This arguing of such a quandary I’d like to point out is not only manufactured, but rather, is now running in near perpetuity – by the Fed. itself. A quandary I’ll again remind those arguing such nonsense only a few years ago was argued by the very same as “preposterous” to even consider. (e.g., monetizing the debt argument) Now it’s morphed into, “Look how much money you’re making with it!.” This chicken and egg quandary takes monetary gene splicing to a whole new level in my opinion.
Understanding this one point is a lesson in uber-Keynesian (or Full-Krugman) economics 101. And, it tells you almost everything you need to know about what’s wrong with the economy in general and why more tinkering won’t help. But wait, I’m sorry too say – it gets worse.
As bad as the above sounds, the reason why it gets worse is this: All of the above is made manifest via the Fed. with money created ex nihilo. Why does that matter you ask? Simple…
Just as I made the argument where the “preposterous” has now morphed into “prudent monetary policy.” So too is that other “Full-Krugman” idea which is not only being contemplated as possible, but now, seems near inevitable: Negative Interest Rates. e.g. NIRP – the ultimate tool in Pandora’s box of monetary policy.
Why is NIRP the equivalent of a Pandora’s box filled with fire and brimstone? It’s for this one simple difference that’s being lost on everyone who claims to be a member of the so-called “smart crowd.” NIRP doesn’t just effect the banks or is some obscure construct for efficacy within the world of economic theory. No, it sets a much more meaningful, as well as, dangerous precedent. Here’s how I see and sum it up. To wit:
Via an incontestable dictate or decree; It (e.g., The Federal Reserve) will directly impose a “tax” and implement the collection of that “tax” on money held directly by the U.S. citizenry without their consent or approval by means of an un-elected supposedly “non government” independent agency. In other words: unless you put it under your mattress or spend it – you’ll be fined a “tax” anywhere throughout the banking system. Period.
Does anyone else but me see the inherent dangerous consequences just lying within this “Negative rates might be just the thing we now need here in the U.S.!” based argument? I’ll contend it may just be the thing to make even Pandora herself more nervous.
Unlike the overall assumptions when talking about Fed. fund rates, or balance sheet and interest payments. Those arguments reside in some monetary construct which is foreign to most people. i.e., “That all effects someone else like banks and businesses – not me” type of mindset.
NIRP in the United States is a-whole-nother matter entirely.
This is because NIRP directly touches the money markets. Yes, those very same money markets that hold many a 401K holders cash, certain checking accounts, savings, and a whole lot more. Not to mention what they hold in lines of readily needed access capital for many a businesses daily operational funding.
I can not stress the implications for the disruption of mindset of not only people in general, but rather, businesses of all sizes and stripes if money can be penalized – for just being. (i.e., you’ll be not only charged but it will automatically be deducted from your balances)
You think this is just some “Hey sounds like we should try that NIRP thing here!” no-brainer that should be enacted willy-nilly as “just another tool in the monetary policy box” based argument when thought through more clearly as to the implications or ramifications in the U.S.?
However, if one listens for such warnings – the silence has been breathtaking. And the Keynesian’s of the world are acting and arguing as if there should be “no big concern.” After all, the question is framed as “Plus 25 basis points or minus (e.g. negative) 25. What’s the big deal?”
Well, here’s what “The big deal” is: One policy (e.g., paying on reserves) is what could be described as a “closed” loop. (i.e., just affects the banks) Whether good or bad is a different argument. However: touch the money markets in an adverse way such as “taxing” it as proposed via NIRP? Excuse me – Is that Pandora I see? And what is that box she’s carrying with the lid open? Is she bringing a gift?
Again, people will point to the EU and say “Look they’re doing it there what’s the big deal?” Yet, they fail to look (or comprehend) at just how quickly everything about the EU is now coming unglued. The current policies of the ECB along with Mario Draghi’s “whatever it takes” initiatives are failing almost as fast as they are being tested. And, if anyone thinks the EU along with current ECB policies are doing “just swell?” I have some wonderful oceanfront property in Kentucky you can turn your dollars into hard assents before the crash. Trust me, the price will be right!
If the Fed. does indeed consider, then implement, a NIRP policy – the backlash and fallout will be devastating to not only businesses that need a well-functioning money market and payment clearing system. But rather, to the citizenry as a whole that relies on those business not just for gadgets and trinkets. But; for the very sustenance of everyday essentials like food at the market, gas at the stations, heating fuels for the home, and a whole lot more.
What has been lost (and not fully understood by many more) is the real crisis that occurred when everything was about to come off the rails during the financial crisis in ’08. It was when the money markets “broke the buck.” Until then the crisis was much more of a financial spectacle on Wall Street for the average person. However, when the money markets came under pressure and showed signs of melt down? That’s when “all bets were off” type arguments and reasoning became manifest.
And, this onslaught of panic was just as intense throughout the business community when payments that were always assumed and needed to clear the banks were anything but. Remember: If the farmer/rancher can’t trust the packing house checks to clear – they’ll be no food going to market. A disruption of only a week can send a rippling effect many have little understanding of.
If businesses suddenly infer that they can not get paid accordingly or properly – it grinds to an absolute halt, where disruptions of supplies and far more can cause not only panic, but also, a complete breakdown in society. Think I’m off base?
Watch how fast any metropolis or big city morphs into Mad Max styled overtones if the food supply chain that supplies grocery stores breaks down or grinds to a halt. Having spent my early career in the food business I can state with confidence the much touted “3 days supply within any supermarket” is not only accurate, it’s a best case scenario when folded over any potential “normal” emergency many have experienced such as a blizzard or blackout. Then your lucky if essentials last 24hrs.
And here we are only 8 years since and one can’t help but think not only does Wall Street and others have a short memory, but rather – the Fed. itself.
If you want clues on just how awry, as well as quickly, things have the potential for unraveling just look to Japan today, and what’s taken place over the last 2 weeks since in the wisdom of the Bank of Japan’s governor Haruhiko Kuroda unleashed NIRP to a stunned market only weeks after saying such a move – was not even being considered.
Suddenly Japan’s stock market is looking and acting in reminiscent fashion mirroring 2008. In a matter of weeks the Nikkei™ is down from just above 20,000 to now 15K and change while briefly breaking that level to test one with a 14 handle. One doesn’t need advanced math skills to comprehend shedding some 25% of its value at any given time (let alone weeks) does not bode well for an economy. Especially when that NIRP policy directly affects the number one carry trade currency in the world. (And I haven’t even mentioned China)
Yet, we’re told cavalierly there’s really “no reason for concern” here. After all, we’re only talking about the impacts that could arise in the worlds most dominant, as well as, bench-marked currency in the world: The $Dollar. Besides, (we’re told) we should take the utmost comfort in the fact the Fed. knows exactly what it’s doing.
If that’s all true I just have one thing to ask:
You mean just like they were some 30 days ago when Ms. Yellen all but touted a banner stating “Mission Accomplished” at the last FOMC presser where she delightedly stated they were finally raising interest rates after so many years, for the economy had improved to such levels where it proved receptive to it? Only to be surprised weeks later amidst a maelstrom of global financial selloffs and upheavals in stunning speeds to now move Wall Street consensus as to cut all expectations of any future rate hike this year, where describing what was only weeks ago as “baked in” (i.e., 4 more hikes) as now “ludicrous?” All the while breathlessly needing to explain (or plead) in great detail why the Fed. is (or should) currently explore options of not only reversing, but rather, going below the zero bound – and into negative territory.
All that comes to mind is that famous quote from Alfred E. Neuman…
The warning signs have been everywhere since the beginning, growing ever clearer with each new valuation round, IPO launch, and earnings cycle emanating from Silicon Valley.
Like a phoenix rising from the ashes of the post Dot-Com ruins people were told not only was it “different this time,” they were also instructed to observe even the phoenix bird itself had morphed into what is now commonly referred to as a “Unicorn.” And any comparisons to the prior meltdown in the land of Dot-Com were met with howls and scowls of, “You just don’t get it!” or worse.
The real issue was, it had nothing to do with “getting it.” It’s all been about Silicon Valley itself acting and arguing as if the past were irrelevant. Now many are coming to a very stark realization that the Valley may in fact once again have repeated all the same mistakes.
Far too many believed all their own press; and acted, spent, and mal-invested in ways that may eclipse the prior folly. Yes, welcome to Dot-Com 2.0. Where unicorns and more are bursting into spontaneous combustion in ways far more spectacular than previous. For it can all be viewed and commented on via the very creation that fueled it: Social media. I garner the news of this unravel will overtake these platforms with a speed, viewership, and voracity that could make the Kardashians jealous.
Another issue that will have an ever-increasing, devastating impact than The Valley currently realizes is: the all encompassing psychological impact such a bursting of a meme can spread and infect the minds of those that bought into all the fairy-tale hype, and pinned their tails on the Unicorn riches they assumed was surely theirs.
After all, if you listened to many now residing within the Valley one could argue that almost to a person today’s newest manifestation of millennial birthright is: Coding = A King’s ransom with a castle in the hills teaming with movie and rock stars, swim suit models, garages filled with exotic cars, and pools or fountains overflowing with champagne. All made possible with shares paid in lieu of salary at the next inevitable IPO cash out in perpetuity. Sadly, many are going to find out differently.
“And this brings on a whole host of other meme shattering, break out the “crying towels” type arguments. For if it can happen there – guess where else it’s going to begin happening? Is ________________ next? Just fill in your current favorite high-flying Non-GAAP social darling on that line – for it’s going to happen at all of them very soon in my opinion. Much sooner than many now even think or ever thought possible.
“Coders” will gladly live in some single bed shared between 8 others apartment somewhere near the Valley. Heck. they’re now reporting stories how one can live in a shipping container on the cheap in San Francisco. Sounds fantastic right? Well, it is. As long as the dreams (and expectations) of landing the dream job in a start-up or similar where riches based in stock options and more are forthcoming or, dangled like carrots in front of wide-eyed dreamers.”
The proverbial warning shot became manifest when Twitter™ recently announced a 15% cut of exactly the type of staff or positions thought unimaginable just a year ago. i.e., Coders. Suddenly the very people once considered as “indispensable” and with an “inexhaustible need” unnervingly found that they were the first to go – in the first round of layoffs. This was the first visible prick to the meme-bubble bursting in my opinion. And as we all are becoming quite aware of: It’s far from the last, for the cannons have yet to begin firing in earnest.
Once high flyers such as the aforementioned Twitter and others are crashing to Earth like the proverbial canary. Companies like Square™, Box™, GoPro™, Pandora™, and now far too many others have watched their stock prices hammered ever lower. Yes, hammered, as in representing one selling round after another with almost no respite. Some have lost 90% of their once lofty high share prices.
What’s further disheartening to those still clinging (or praying) to the “meme-dream” is the ever-increasing reputation of the old “Great companies on sale!” chortles from many a next in rotation fund manager on TV, radio, or print. For it seems every round of selling is being met with ever more selling – no buying. And the lower they go with an ever intensifying pressure, so too does the value of the debutantes in waiting: The yet to be IPO’d unicorns.
Valuation after unicorn valuation are getting marked down in one fell swoops such as that from Fidelity™ and others. However, there probably wasn’t a better representation on how little was left to the unicorn myth (and yes I believed/believe all these valuation metrics were myth and fairy-tales) than the very public meme shattering experienced in both the IPO, as well as the subsequent price action of Square.
Here it was touted the IPO price was less than the unicorn implied valuation. This was supposedly done as to show “value” for those coming in to be next in line to pin their tails on the newest unicorn of riches. The problem? It sold, and sold, and is still selling – and not in a good way.
It seems much like the other company Mr. Dorsey is CEO of (and how anyone with any business acumen argued that was a good idea is still beyond me. But I digress.) this unicorn also can’t fly. And; is in a perilous downward spiral of meeting the ground of reality.
It seems the only interest in buying these once high flyers can garner is wrapped up into any rumor (usually via a Tweet!) that they are to be sold – as in acquired by someone else who might be able to make money with them. Well, at least that would free up the ole CEO dilemma, no?
And speaking of CEO dilemma and acquiring – how’s Yahoo!™ doing? Remember when the strategy for success for Yahoo as posited by the very public adoration styled magazine cover girl articles of its current CEO Marisa Mayer was an acquisition spree? This was all but unquestionable (and much digital ink spilled) in its brilliance and vision inspired forward thinking. Well, it seems all that “brilliance” has been eviscerated much like how the workforce still employed there is yet to be.
Let me be blunt: All you needed to know things were amiss both at Yahoo as well as “the Valley” itself was to look at the most recent decision of Ms. Mayer to throw a lavish multi-million dollar costumed theme party mere months ago. As unquestionably foolish as this was – the rationale given by many a Silicon Valley aficionado that it was nothing, after all, “it’s common in the Valley” was ever the more stupefying!
Now it seems Yahoo is “cutting its workforce by double-digit percentages.” And: open to the possibility of selling off core assets of its business. Of course – at the right price. However, I’d just offer this advice:
Don’t wait too long on that “right price.” For if the current value of Alibaba™ is any indication – “right” is becoming more inline with “any” much faster than anyone dared think just a year prior.
However, as much as all the above is concerning to anyone paying attention. (And it’s just a thumbnail sketch of the most obvious.) There are those who’ll argue that today is far different that the Dot-Com bubble of the late 90’s early 2000’s. Many will point to the amount of start-ups and other metrics as a tic-for-tat type of comparison. i.e., Unless there are 500 new IPO’s this week as opposed to let’s say 255 today (example #’s only) then today is in no way comparison to the Dot-Com bubble is the ensuing argument. And; anything further is met with deaf ears, blind eyes, or outright dismissal warranting the usual “It’s different this time, and you just don’t get it!” point of finality to the conversation much like a teenagers defiant stance of “Because, just because!”
Well, fair enough. However, if I might be so bold as to use one argument that has been used on people like myself to both shut down any further parsing of facts, or outright dismissal regurgitated by many a Silicon Valley aficionado countless times. That argument?
Marc Andreessen’s quote in his Twitter bio from Martin The Martian (one of my personal all time favorite cartoon characters I’ll add) “Where’s the kaboom? There was supposed to be an earth-shattering kaboom!” When talking about another bubble bursting.
The kaboom now has a name, place, and can be seen and heard by anyone brave enough to not avert their eyes or ears.
As the news of the day will certainly contain the debacle being witnessed in the share price of LinkedIn™ this morning, I thought I’d post a few quotes and previous links to articles where I warned of exactly what has taken place for newer readers. There are more but these cover the pertinence of the theme. To wit:
“Here’s something I know first hand from real people. Every single entrepreneur or business owner I know has either never visited the site again after signing up. Or, stopped responding to invitations of linking because; not one of these ever resulted in a worth while business opportunity. Ever!
I know some that have posted directly onto their info the equivalent of “No collaboration offers need apply.” Because that’s all they’ve ever received. Offers of collaboration that resemble offers more in line with letters from a Nigerian Prince. When they ask me what I did with my account and I say: “I deleted it.” the most common response I get is: “Yeah, I think I’ll do the same next time I remember. Only for not remembering is their info still there.”
“I have stated for years: “The only ones making money from social media, are the ones selling people the idea they need social media.”
Just look to, or remember all those stories that are consistently thrown across the financial media and others. All those buzz terms like: “user generation, followers, likes, connections,” and more? All touted as “The” metrics of relevancy for anyone using or purchasing. Now? Seems what’s needed for tangible, reliable, clear metrics is moving from the asking stage – to the demanding stage.”
“With the Federal Reserve’s QE policy set to end this month all these “new economy” juggernauts are going to have to prove that giving away the store for “free” as to entice users, customers, and more; will have to prove they have the ability along with the quantifiable hard numbers accompanied by real “cold cash” they can pay those promised returns to Wall Street.
If this proves to be the case the term “trap door” will not be used in reference to some new gaming app available. It will be to describe serious consequences to people who assumed investing in these markets has been nothing more than a game to be played by “players.”
Just watch how fast the “players” in the world of algos and High Frequency Trading can change the meaning of “liquidity trap” when they decide – it’s not in their best interest to play.”
“Or maybe you’re one that couldn’t wait to sink your 401K teeth into LinkedIn™. Once again, after years of pushing higher, and higher, it seems the new story is same as the “old story.” i.e., They seemingly needed to spend money as to gain potential “integration opportunities” by buying something (e.g. $1.5 BILLION for Lynda™) rather than investing directly and maximizing everything of what LinkedIn currently is involved in. i.e., A glorified resume writing and/or job seeker data base.
In other words: They can’t make money via the old model as to warrant their current valuations. So, instead of doing what they do, and doing it better, enabling higher net profits. It seemed they had better buy something that can. Even if the price paid (again a reported $1.5 Billion) is money spent not from net profits – but from Wall Street’s pocket.”
As I write this (in the pre-market) LinkedIn’s stock price overnight has plummeted by over 30%. That’s not a typo.
If you are one of the fortunate to have not owned any shares currently – I want you to think about it this…
Exactly how do you think this latest debacle is going to be viewed by anyone who still owns shares or, is holding them in lieu of a salary in the now myriad (Twitter™, Square™, LinkedIn™, Pandora™, etc., etc.) of value purging, net worth shattering “social darlings?”
Add to that: How do you think the people not only currently working in these “social darlings” but rather; the ones hanging their hopes and dreams of “Silicon Valley” riches that maybe living in some shipping container as they await their envisioned “payday” to arrive? How do you think this latest debacle will be viewed in connection with all the others as of late?
And what about the “investor class?” What do they now do? Remain invested? Invest even more? (Whether in these or any others.) Truly think about that. For suddenly “On sale at great prices” has morphed into “Do you dare to catch the falling knives?” and now “Will I be solvent by morning?”
But not to worry I guess. After all, Mark Zuckerberg just touted for the $19 BILLION dollars he spent of Wall Street’s money for WhatsApp™ it now has 1 Billion users. Doesn’t make a net profit or anything close, but hey, it’s all about eyeballs, right? Money and profits are secondary unless – Wall Street comes back looking for their promised riches. And they always come looking. Sooner, or later. Don’t they.
I receive a lot of questions from family, friends, and others on the current market actions of Google™ (e.g. Alphabet) as well as Facebook™ since they are now what everyone considers as two of the moniker de jure FANG stocks. (i.e., the momentum players.) Their push ever higher into the stratosphere as the market sells off closing in on 2% is being touted by many as “clear proof these names are indestructible.” Well, that maybe, and only time will tell. However, since they asked I felt I might as well show others what I replied. To wit:
Below are 2 charts the top is Facebook, the lower is Alphabet/Google. What I’m look at is; what may be witnessing in technical charting terms is a phenom known as a “blow off top.” If that is what is playing out the warning signs of such a phenom will be manifest if the price action falls back below the breakout line, and then crosses back through the space where I placed an “oval.” If it does indeed break back below that demarcated area with conviction and remains below it – all bets are off the table in my opinion.
Doesn’t mean it will happen, but for those who want to know what I’m looking at and how I’m viewing it – there you go.