More hell for central bankers the globe over, the lack of common sense, or if some is good more must be a lot better. More, contrary to these folks, is often less. A 15 trillion plus balance sheet for the Lords of Eccles since the Great Recession.
Once upon a time there was a Senator who became famous for saying a billion here, a billion there, pretty soon you're talking serious money. That was then, this is now. And it's a trillion here, a trillion there and still hardly anyone thinks it's serious money.
We've talked at length before about the COLA crowd, underfunded retirement plans, insurance companies and the fixed-income set. We said before they were tossed to the wolves by central bankers and politicians who supported those central bankers knowing full well the damage they would do in rescuing their Wall Street friends.. It was a conscious choice,premeditated, and now you have Senator Pocahontas of Massachusetts screaming about struggling Social Security recipients, debt-laden students and the jobless millions.
Gross state the current system is beginning to be challenged, but that is too kind by a trillion here and a trillion there. Opportunity and leverage don't show up often. Keep that in mind
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My country club locker room is a fascinating 19th hole observatory
where human nature and intelligence often come into conflict. Almost all
of my golfing buddies are risk takers by nature and many of them are
gamblers — not just in the card room but also in the casinos in Las
Vegas.
Having spent some time in Sin City myself in my early 20s
as one of the first blackjack counters, I was, and still am, most
familiar with odds and the impossibility of beating the "House" in any
game other than blackjack over a long period of time. Still,
this commonsensical conclusion is not so obvious to many of my friends,
who first of all, claim that they usually "break even" on any particular
weekend jaunt, and secondly, suggest that they can win by using various
betting "systems" that somehow allow them to claw back losses or
stabilize winnings. An absurd example of this would be to triple your
bet if you've lost 3 times in a row, and if you lose that, to quadruple
your bet and so on. All of these illusions are derivatives of the
so-called Martingale System, which claims that it is mathematically
impossible to lose, given enough money and the willingness of the casino
to take the increasing bet. The latter conditions, however, are where
reality meets the road. A string of 4, 5 or perhaps 30 straight losses
cannot work in the long run because the size of the bets eventually
reach billions of dollars.
This same mathematical logic seems to have eluded central bankers around the globe.
They
are quite simply, employing a Martingale System in the conduct of
monetary policy with policy rates now in negative territory for both the
ECB and the BOJ — which in turn have led to over $15 trillion of
negative yielding developed economy sovereign bonds. How else
would one characterize the "whatever it takes" statement by Mario Draghi
in 2014? How else would one interpret BOJ's Kuroda when just last week
he upped the ante in Japan by capping 10 year JGB's at 0% until
inflation exceeds 2% per year? How else would a rational observer
describe Carney and Yellen other than
"Martingale gamblers with a
wallet or a purse?" Our financial markets have become a
Vegas/Macau/Monte Carlo casino, wagering that an unlimited supply of
credit generated by central banks can successfully reflate global
economies and reinvigorate nominal GDP growth to lower but acceptable
norms in today's highly levered world.
An interesting counter to my Martingale characterization of central
bankers is in fact that they do have an unlimited bankroll and that they
can bet on the 31st, 32nd, or "whatever it takes" roll of the dice.
After
all, their cumulative balance sheets have increased by $15 trillion+
since the Great Recession. Why not $16 trillion more and then 20 or 30?
They print for free, do they not, and actually they make money for
themselves and their constituent banks in the process. Why not? Why is there a limit for them as opposed to an individual gambler?
If
future inflation is the problem, then markets must know that that is
their goal and what the increasing bets are geared to do. They are some
distance from their 2% or 2+% targets so stay in the casino and keep
printin'!
Well, a commonsensical observation made by yours truly and
increasing numbers of economists, Fed members, and corporate CEOs (Jamie
Dimon amongst them) would be that low/negative yields erode and in some
cases destroy historical business models which foster
savings/investment and ultimately economic growth. Our argument
is that NIMs (net interest margins) for banks, and the solvency of
insurance companies and pension funds with long dated and underfunded
liabilities, have been negatively affected and that ultimately, the
continuation of current monetary policies will lead to capital
destruction as opposed to capital creation.
Central bankers counter with the cavalier attitude of "let them (savers) eat cake" (buy stocks).
"Our job", they claim "is to promote economic growth in the short term
and restore stability via ever ascending asset markets that eventually
trickle down to the masses." They claim that normalization will have to
wait, and even then, the "new, new Normal" in terms of yields will be
much lower than historical averages. I think that the latter contention
is true, but central bankers cannot continue to double down bets without
risking a "black" or perhaps "grey" swan moment in global financial
markets. At some point investors — leery and indeed weary of receiving
negative or near zero returns on their money, may at the margin desert
the standard financial complex, for higher returning or better yet, less
risky alternatives.
Bitcoin and privately agreed upon block
chain technologies amongst a small set of global banks, are just a few
examples of attempts to stabilize the value of their current assets in
future purchasing power terms. Gold would be another example — historic
relic that it is. In any case, the current system is beginning to be
challenged.
zerohedge.com/news/2016-10-04/cannot-end-well-bill-gross-warns