I rarely do full re-posts. Yet, when I come across something I believe is emblematic of the time today as it was prescient when I wrote it, I will. And this is one of those times.
Below is from an article I wrote back in 2014 titled “Keynsian Shangri-La From Myth To Reality” At the time of this article people like myself questioned why Wall Street would both relentlessly and brazenly purchase every and any dip after the poor results QE1 and QE2 displayed the moment the Fed ended them. For the idea that they (Fed) would continue this monetary experiment ever further were not only perplexed by it, but actually, straight-out dumbfounded. None of it made any sense, repeat, none of it.
As a refresher: In December of 2011 after two attempts of QE (quantitative easing) the results were mixed at best – and – the markets had only retraced little more than half of the fall from their once lofty peaks.
Then, beginning in 2012, everything changed, emphasis on “everything!”
This was the period where “BTFD” (buy the f’n dip) became not only a mantra, but an investing and/or trading philosophy and reality. It made absolutely no sense from any rational, prudent or, fiduciary business perspective. None. Period. Full stop.
But then, once again, suddenly, it all fell together in perfect Technicolor® detail in 2017 as the headlines across the financial media reported they were shocked (shocked!) with the sudden resignation of Federal Reserve Bank of Richmond President and FOMC member Jeffrey Lacker. The reason? To wit:
At issue is a phone call with a Medley Global Advisors analyst in October 2012. During the call, the analyst discussed an “important non-public detail about” a monetary policy option being considered by the Federal Open Market Committee.
“Due to the highly confidential and sensitive nature of this information, I should have declined to comment and perhaps have ended the phone call,” Lacker wrote. “Instead, I did not refuse or express my inability to comment and the interview continued.”
Lacker said that he did not report to FOMC personnel that the analyst was in possession of confidential information. Medley later published a report by the analyst that revealed the FOMC’s deliberations. The Medley report related to the size and timing of the FOMC’s Treasury buying program and a target unemployment rate favored by then-Fed chairman Ben Bernanke.“Fed’s Lacker abruptly resigns over disclosure of confidential information” AmericanBanker.com
And there you had it, laying bare any and all grandiose calls of expertise, acumen or investing prowess. The Fed had “their” back. And it was a ranking Fed member
saying implying so. The rest is now history. The only question now is: Can they (Fed) ever leave? Here’s a Hint:
Everything they said prior has been completely rebuked by their own deeds. Reduction of the balance sheet, control of the Fed’s fund rates, one-time purchase programs, Fed credibility, _______(fill in your own here) all completely nullified. Repeat: all.
The Fed’s balance sheet alone is already back over $4,000,000,000,000.00 (that’ Trillions with a T) and with just a few more weeks into January, will itself, eclipse its once stated “record” high with another one.
The repo-markets with their “one time” liquidity injection back in September to cover “tax” implied gyrations, has now turned into a full blown crisis with the need for well over $100 Billion nightly and now ever-the-more with some lasting from weeks to months. And no one, not even the Fed knows if this will be enough. Personally, I think this will all be made permanent in one form or another. This is like playing monetary Jenga® on steroids. Removal only leads to crashing.
Currently there’s only one question any sane (well, relatively sane at this point is close enough) person should be thinking, and it’s this: If this is what it takes with a market at record highs. What will it take if we have another genuine sell-off?
Think about that question very carefully as you think about what may be your best plans for 2020, because we are in a current environment that is made up of pure make-believe.
Some, but very few, are starting to see glimpses of this reality. People like myself have been calling it out and warning about itnow going on a decade back when then Chair Ben Bernanke made his now infamous 2010 Jackson Hole speech where the idea of QE4eva! was born.
This was when all the rest i.e., maistream business/financial media, next-in-rotation fund-managers, so-called “smart-crowd” of think-tanks, Ivy League and Ivory Tower pundits and more were saying we were the crazy ones. As that old saying goes, “The only sane person in the asylum – is the one appearing to be the craziest.”
I wear that “crazy” badge, to this day, with honor.
Below is that article from 2014. (Note: a few typos and/or grammatical errors were corrected.)
“Keynsian Shangri-La From Myth To Reality”
In less than the time it takes for a chrysalis to release one of life’s remarkable transformations, many once called “capitalists” woke to find the world they once knew changed into something only dreamed or told in folklore.
Where business models resembling unicorns abounded along with rainbows in a resembling equivalent of over-arching ETF’s, all available in a multitude of hues and proportions so plentiful: It was hard for one not to well up when contemplating. For in this new fairy-tale land there must certainly be a pot of gold at the end of every “rainbow.”
However, one would be mistaken. For one must remember this is a “Keynesian Shangr-la” and gold here is useless. (insert choir music here)
Today, at the end of these self propagated rainbows, lies a Central Bank ready and willing to print as much money as one needs to see those vivid colors so plainly; only the term Technicolor® seems appropriate as a descriptor. (no special glasses or headset required)
Although the above is a bit tongue in cheek. What it isn’t, sadly too say: is fiction.
We now have entered a time where what you once knew or thought about capitalism is out the window. At least when it comes to the global financial markets.
What was once the bastion of “free market capitalism” has now metamorphosed into what the devotee’s of Keynesian economics have been chomping at the bit to unleash and install. And that day is – now here.
The only bug in their soup they forgot to remember while they’ve been drooling in anticipation, waiting for its possible arrival is this: Be careful what you wish for. For you just might get it.
The Keynesian argument has been made for decades. I wonder if the man (John Maynard Keynes) would be impressed with just how much his ideology is so vehemently held in the halls of academia and political circles. Many religious devotees pale in comparison.
Once upon time people believed in free market capitalism. The relationship with the money supply. The economy, markets, interest rates and their effects on keeping governments spending in line. All that and more is now out the window, along with the old draperies. No need for those silly viewpoints, nor those curtains, because there’s no longer a need or even the inclination as to try to hide.
You don’t need anymore proof to show this over enveloping viewpoint than the front-page story highlighting none other than Keynes himself with the headline on Bloomberg Businessweek™: Stimulate This!
But maybe it’s the subtitle that really gets to the heart of the matter: “John Maynard Keynes has the last laugh on what works for the global economy”
Oh that tagline just might be the very thing that produces more tears than laughter in the end. As I stated earlier “Be careful what you wish for. For you just might get it.”
A few years ago I made this point when trying to get others to understand just how far the interventionist monetary policies had permeated the capital markets. I remember people taking great issue with me as if I “was going too far.” It seems now in retrospect just maybe – I hadn’t gone far enough. Here’s a few quotes from that article: Welcome To Keynesian Shangri-La
“Valuations – schmaluations. Please spare me. It might make for good time fill in the financial media’s “power rotation” of talking heads however, to anyone with just a fair understanding of business. The economy can’t be spitting out numbers just over stall speed of a recession with all time highs in the stock markets as something that’s even close to resembling healthy.”
“To the Keynesian or, the government has all the solutions devotee, everything looks just as it should. Turn on the television, radio, or pick up a paper and the headline reads, “Record High!”
So here we are just a few years later to find ourselves floating in a sea of printed or digitized dollars looking for a home. And that home is in an increasingly shoddily built, underpopulated, (as expressed via volume) maintenance plagued financial arena know as “The markets.”(remember how many times the markets broke this week alone?)
But it would seem we have traded one slumlord for another. Exit the Federal Reserve and please join me in a warm round of applause for the Bank of Japan. (insert hysterical cheering crowd of Keynesian economists and lackeys here)
What has now garnered the moniker of “Banzainomics” leaves no doubt that we have entered a time in financial history that belongs totally and squarely upon the shoulders of Keynes.
Problem is – where Atlas may shrug, there’s a real and true strength as to carry the weight. For Atlas it’s about risk, reward. For this new Keynesian metaphor? When and if a shrug is needed; it won’t be out of risk or reward.
It’ll be out of losing its grip and collapsing under the very weight they told – and sold – everyone on. The idea, that if they would only “give him the ball” (Keynesian’s) tranquility and fear from “capitalistic dogma” along with its pervasive repercussions would finally be eradicated.
Well – Now he/they got it.
Problem is without a never-ending supply of steroids and other substances (in the form of monetary policies whether legal or not) the myth of strength will transform into the reality of weakness.
Then as he/it falls apart he may decide that rather than taking another injection he’ll just shrug the weight off and reach for the remote or XBOX™. For remember, in a Keynesian world: Hard work is for Atlas, not him/them. Besides, can’t one get that injection and still be on the couch? In a Keynes world. Why not?
So why does this matter to today’s entrepreneur or other business people. Easy…
So now you’ve created this great widget, company, what ever that you’ve grown through hard work and more where you believe it’s now time to access the capital markets.
There’s a problem now. Those markets aren’t for “capitalists” any longer. They’re for “Keynesians” and if you aren’t the right investment, or in the right ETF – you’re toast.
You might have a great company, but if a Central Bank deems there’s “No money” to be had this month, you’ve got crap.
The flip side is also the same. Say you’ve built a better mouse trap than your competitor? Sorry, they’re in the right ETF and you’re not? Sorry – No “soup” for you.
“Oh that’s nonsense” you say. “You’re being over simplistic.” Fair enough, but there was also a time little more than 4 years ago where “monetizing the debt” was laughed at.
If you even made the claim you were shouted down as some “tin foil cap wearing, conspiracy theory, fear mongering, blabber mouth.” And now? Not only proven fact, but stated as an “effective policy tool” aka QE.
Which leads us all right back to today.
For decades Keynesians have deplored true “capitalism” as a form of cancer than must be eradicated, for it does nothing but bring on booms and busts leaving devastation in its tracks. Where the altruistic Keynesians profess if only they were under the world in place of Atlas; they would show one and all exactly what they are capable of doing. And today – here we are. It’s their world.
For over two hundred years the strength of Atlas (warts and all) has brought about the greatest economic super power in all forms of measurements from quality of life, to military strength to protect that life.
Yes there are booms, and yes there are busts. But they are necessary and needed just as the underbrush in a tranquil forest at times needs to burn off to make way for newer even better growth.
During these times it seems there is nothing but devastation and turmoil. So too does the inner workings in a capitalistic market place mirror this.
It’s in the folly of thinking it can be surgically dissected and removed from out of the cycle where the Keynesians get into real trouble. For the more they meddle, the worse the ramifications, like an over-eager plastic surgeon stating “We can fix that last nip tuck – with another nip tuck.”
Then they’ll blame others in a fury of finger-pointing for why “their meddling” doesn’t or didn’t work. i.e., “You didn’t allow us too spend enough, or, at all.” However that is no longer the case.
Not only do they have the checkbook, but the credit cards, safe deposit keys, and even a few neighbors assets they’ve yet to realize are gone. It truly is “all in their hands.” (and pockets)
Not only do they have the above, they have the whole ball. (Yes, the globe – as in the global financial markets)
Here we are at never before seen in the history of mankind market highs. Not only is there so much money floating around, it’s been decided by another Central Bank to increase that level. For they have taken that immortal line given by President Kennedy “A rising tide lifts all boats” to an even near unimaginable level.
Forget boats, for we are truly in the Keynsian Shangri-la of: Those that have – those that have not – and those that have yachts!
The inherent problem to the Keynesian model also lies within the very thing most coveted by the Keynes devotee: Who do you blame when it all falls apart? You can’t blame capitalism or Atlas. You’ve shrugged them off. It’s now all on your shoulders.
For well over two centuries the Atlas’ of the world proved more than willing, as well as capable, to bear the burden of holding up the economic world. As of today the marvel of Keynesian economics is now front and center with no question as to who is in control. Without a doubt: You’re in control. (Keynesians)
Since 2008 those policies and practices have been implemented with near little opposition. And now with the other Central Banks ipso facto picking up the baton, even before it hits the ground proves; we are now living in a “Keynesian Shangri-la.”
You’re now just 5 years into complete and total economic control via Keynesian policies, while simultaneously gaining even more followers and devotees. This truly is a historic time we are witnessing.
I leave you with this one thought for its something I penned a long time ago when all this meddling first began…
“Markets right themselves with pain… That’s Capitalism.
Back room manipulation to avoid pain only increases the severity of the pain to be felt down the road.”
You’re (Keynesians) in control now and best of luck. The rest of us will go on about our lives in business dealing the best way we can as to navigate this new world you’ve created, but one small warning, if I may…
Since you now have the weight of the financial world on your shoulders, you’re not going to do the one thing you most want…
The ability to pat yourselves on the back.
© 2019 Mark St.Cyr