Three Strikes And You're Out!
As we keep insisting, monetary central planning systematically falsifies asset prices and corrupts the flow of financial information. That's why bubbles seemingly inflate endlessly and egregiously, and also why financial crashes and economic corrections appear to come out of the blue without warning.
Back in the winter of 1999-2000, for example, we were allegedly in the midst of a "new age economy". The revolution in technology then underway, it was claimed, meant all historic valuation benchmarks--like PE multiples, cash flow, and book values----- were irrelevant to stock prices.
Likewise, in the fall of 2007, there was nary a cloud in the economic skies. That's because the Great Moderation superintended by the geniuses at the Fed had purportedly engendered a "goldilocks" economy destined to expand indefinitely.
Within months of the dotcom epiphanies, however, the highflying NASDAQ 100 crashed---eventually hitting bottom 83% below its new age apogee, and 15 months after the S&P 500 reached its goldilocks peak of 1570 in October 2007 it staggered around in smoldering ruins at 670---down 57% from its housing bubble high.
Needless to say, we are again on the precipice of a crash and correction that no one sees coming, but this one has an added fillip. Namely, three strikes and you are out!
What we mean, of course, is that the Fed and other central banks are out of dry powder. They are now stranded near the zero bound with bloated balance sheets that have actually reached hideous girth relative to current GDP and all historical experience----meaning they will have almost no capacity to reflate the next busted bubble, as they quickly did in 2001 and 2009.
The BOJ is the most extreme case, of course, but it does dramatically illustrate the central banker insanity at loose. That is, if what you see below represented some kind of loony tunes outlier, Mr. Kuroda would have been scorned, belittled and drummed out of the global financial establishment long ago.
Instead, he appears year after year as an honored guest and thought leader at the IMF and G-20 confabs, among countless other global gumming forums. Yet since 2008 he has expanded the BOJ's balance sheet by nearly 5X, and, more crucially, from 21% of Japan's GDP in 2008 to 90%today.
For point of reference, consider this. Back during the heyday of booming industrial growth under the pre-1914 gold standard, the Bank of England's balance sheet rarely exceeded 3% of GDP.
Similarly, when the US economy was at the top of its game in 1960, the Fed's balance sheet under the hard money leadership of William McChesney Martin was only $25 billion or just 4.5% of the nation's $550 billion of GDP.
Indeed, it was still at just $190 billion or the same 4.5% of GDP level when Ronald Reagan made the unforgivable historical error of appointing Alan Greenspan as Chairman of the Fed (actually he was more or less tricked by his advisors, who didn't tell the gold standard supporting Gipper that Greenspan had long since jettisoned his earlier embrace of the same).
By the time the Maestro shuffled out of town in February 2006 the Fed's balance sheet had soared to $760 billion, but, more importantly, the baleful doctrine of "wealth effects" monetary policy and the Greenspan Put had been firmly implanted in Fed policy. So when the great housing/credit/stock market bubble collapsed in 2008, the Fed was off to the races. By the time QE3 ended in October 2014, the balance sheet was $4.5 trillion, representing 26% of US nominal GDP.
In the case of the ECB, the story is the same. Draghi is still not done tapering after a $2.5 trillion bond-buying spree, but already the ECB's balance sheet is on the cusp of $5 trillion, where it represents 40% of Euro area GDP.
We recite this data to underscore a crucial point. The condition of central bank balance sheets today, and the monumental inflation of financial asset prices they have fueled, is not owing to a one-time event in the dark hours of September 2008; it wasn't owing to the Lehman collapse, nor was it the result of some kind of mysterious "financial contagion" brought on a comet from outer space.
What has happened is not a random event, but a systematic monetary regime change that has been in the making for 30 years. In a word, central banks were taken over by Keynesian monetary central planners, and their easy money and cheap credit bias soon became the toast of the town in Wall Street, London, Tokyo and every other venue where money is moved, stored and speculated upon.
This monetary coup first occurred at the Fed under Greenspan during the October 1987 meltdown, and was then followed in the next decade by the BOJ, the People's Printing Press of China, the ECB and eventually virtually every central bank in the world. The only apparent exception, in fact, is the central bank domiciled in Moscow----that is, the one run on hard money principles by the evil Russkies!
Here's the thing. The Keynesian economic model is fundamentally and hopelessly flawed because it assumes that prosperity can be engendered and optimized by an agency of the state rather than the enterprise and output of workers, businessmen, investors, inventors and speculators in their tens of millions.
Embedded in that basic flaw, however, are two particular disabilities that contribute mightily to the corruption of financial information in today's casinos: Namely, a "Recency Bias" and the utterly arrogant insistence by the 12 members of the FOMC that they can keep an infinitely complex and speculation-ridden financial system stable and advancing to ever higher prices.
Call the latter a "Stability Presumption" and you have the pathetic day trading MO of today's financial markets. The boys and girls and robo-machines trade in the moment---without any regard for historical context and fundamental economic and financial principles, and do so with an utterly misplaced confidence in the myth that the Fed is your friend.
The truth of the matter, however, is that during the last 30 years the Fed and other central banks were indeed the generous friend and benefactor of speculators and asset gatherers. But they have now shot their wad.
At length, the Recency Bias and the Stability Presumption will be shattered as the central banks stumble and flounder with their new era task of monetary normalization and demonetization of their humongously bloated balance sheets. Then, all that is taken for granted and peddled with alacrity on bubblevision as the gospel truth will be repudiated and belittled.
On the matter of the corruption of financial information, the Wall Street Journal published a superb example of the Recency Bias this morning in a sunny-side-up story entitled "U. S. Manufacturing Rides Rising Tide, Buoyed by Global Growth, Optimism".
Indeed, this lazy cheerleading excuse for journalism captured the sum and substance of why the punters keep buying the dips despite troubles gathering all around. That is, as the tax bill falters, the crusade to remove the Donald from office gathers strength, the Fed moves into balance sheet normalization and instability breaks out all over the world from the Persian Gulf to the Korean peninsula.
You would think the title says it all, but the WSJ was not nearly done. It cited a 156,000 pick-up in manufacturing employment since last November, rising energy and commodity prices as evidence of a booming global economy, double-digit growth in business investment earlier this year, a strong order book at Rockwell and increased sales and employment at Caterpillar.
American manufacturing has picked up pace over the last 12 months thanks to steady global economic growth, a rise in energy and other commodity prices, and increased business confidence.
Although progress isn’t being felt by all industries, makers of items ranging from bulldozers to semiconductors to food products are on the upswing as various measures of spending, sentiment and employment have climbed, while stock markets have hit record highs.
Yet every one of the trends cited in the WSJ article are less than a year-old; are coterminous with the Great Coronation Boom in the Red Ponzi (i.e. the run-up to Xi Jinping's ascension to total power at the 19th Party Congress); represent only a minor up-tick from the 2014-2015 global deflation; and in the context of the current feeble recovery from the 2008 crisis represent nothing at all to write home about.
Indeed, we are quite confident that as the Red Ponzi goes into a stabilization and credit containment mode, as is already evident from the October economic data (fudged as it is), that the slight lift to global activity engendered by the latest China credit impulse will quickly fade, and with it the entire trading meme reflected in today's WSJ puff piece.
But short of that yet to unfold but predictable global mini-cycle, here is the actual data on US manufacturing output trends through September. It takes a magnifying glass and then some to see any rising tide in this graph.
In fact, overall US manufacturing production is still down 4.3% from its pre-crisis high back in December 2007, and was no higher last month than it was three years ago in November 2014. As we have frequently noted with respect the earnings trend of the S&P 500, what you have in this chart is the pig of energy and materials deflation passing through the python.
Of course, global commodity prices did perk up during the last 18 months. Not only did they rebound off the bottom in normal cyclical fashion, but the visible hands of the Red Suzerains of Beijing were more than a little evident. When they unleashed the latest credit tsunami in early 2016, the hordes of Chinese speculators dutifully bought up all the iron ore, copper, steel, diesel fuel etc that was to be had and which could be readily financed in cash and futures markets alike.
Presently, they will be selling, too, as the post-coronation signals coming out of Beijing become unmistakably clear.
Nor is the above even the half of it. US manufacturing output was lifted to some substantial degree during the 2016-2017 Coronation Boom because of the lift it gave to oilfield supplies and materials production. But if you look at output of US consumer goods, which is much less attached to the global commodity/industrial cycle, the rising tide of manufacturing output is nowhere to be seen.
In fact, consumer goods production has flat-lined for the last two years, and is still below where it was at the pre-crisis peak.
The same is true of manufacturing employment. Here is the long-run picture, and nothing is changing. Even if you dial in closer to the most recent cycle, its evident there is no "rising tide". Thus, between October 2007 and the April 2010 bottom, the US lost 2.3 million manufacturing jobs---representing a loss of 76,000 high paying jobs per month.
By contrast, during the three years since October 2014, the US have recovered about one-tenth of that loss---with manufacturing jobs expanding at a rate of just 6,000 per month. That is to say, the WSJ was essentially trumpeting statistical noise.
Finally, anyone paying half attention wouldn't have cited Caterpillar's sales trends. During Q3 2017 they were still down 36% from their 2012 high water mark! This slight upward blip in the last two quarters is essentially the Coronation Boom causing a temporary upward blip in orders and shipments of Big Yellow mining and construction machines in China and its supply chain.
In short, financial information has been totally corrupted by the Recency Bias and the Stability Presumption that are part and parcel of monetary central planning. Accordingly, when the third and greatest financial bubble of the 21st century collapses---and it is coming soon---it will also arrive as a great surprise.
But hopefully this time even the boys and girls of Wall Street will see through the kind of Bernanke Whopper which sufficed last time around. The Fed chairman said the 2008 Wall Street meltdown was due to a mysterious "contagion" that presumably came from outer space.
In fact, the contagion did not have a mysterious origin at all. The Bernank, his predecessors and the posse of money printers then domiciled in the Eccles Building had been spreading the infection around Wall Street for upwards of 25 years.
Disclosure: None.