Why This Time Is Very Different

All bets are off regarding conventional forecasts of the economic and financial future because central bankers have gone bonkers ever since the 2008 financial crisis. Their insane balance sheet eruptions have thoroughly obliterated all of the traditional relationships between Economy and Finance. The two are now virtually disconnected, suspended in their own separate silos.

Stated differently, busted financial market signaling mechanisms mean that all historically-rooted projections and inferences about the relationship between main street and Wall Street have become "inoperative" in the Nixonian sense. At month #103 of the business expansion, therefore, the S&P 500 at 2755 is flying blind.

Thus, if a recession were incepting in February, for example, there is nothing in today's yield curve, credit spreads or bond pricing levels that would reliably warn you. That's because all of these metrics arise from a gambling house vertical which is controlled, shaped and smothered by the central banks, not from the free market evolution of the real economy as was historically the case.

The overhang of $2.2 trillion of Fed-generated excess reserves in the banking system, for example, did indeed cause the asphyxiation of the once and former "money market".

Yet how could it be otherwise under the current universal regime of monetary central planning? These folks are not in the business of "nudging" interest rates in the soft touch manner of the Fed back in the halcyon days of William McChesney Martin.

Instead, they are in the heavy-handed business of interest rate pegging (as in nailed to the wall), yield curve shaping (to purportedly stimulate housing and CapEx) and risk asset price-keeping (to promote wealth effects enthusiasm). That's why we call the FOMC the "monetary politburo".

Like their Kremlin predecessors, these 12 preternaturally wise and gifted men and women do mean to rule, not merely nudge (whether successfully or not is another matter and about as likely as Soviet Communism).

Accordingly, the current thin (54 basis points) twos-to-tens spread has precious little to do with the outlook for economic growth or profits on main street. Instead, it's being manufactured inside the Eccles Building by a policy of jacking-up front-end rates sooner and faster than the slower and delayed ramp-up of QT (quantitative tightening) at the middle and back of the curve.

1 2 3 4
View single page >> |
How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.


Leave a comment to automatically be entered into our contest to win a free Echo Show.