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Today – going to cover the Central banking playbook in the next crisis – If there is ever going to be one!

Today – was doing some reading so will have a look at some comments from key central banking figures over the past few years – and look at the market implications – as either markets will crash at some point and central banks will conduct bail-ins and also buy up shares – or they will actively try to avoid a crash by a BOJ strategy – constantly buying shares and offering incentives (continued low-interest rates) for investors to continue investing

To start with

– Back in June 2017 – several key officials provided some bizarre honesty in their statements – all of this occurred from individuals under Janet Yellen’s Federal reserve – Now the Fed Chair is Jerome Powell – appointed by Trump – but the playbook likely hasn’t changed – Let’s have a look though at the statements from back in 2017 – rare to get anything from Fed officials for the market implications of their comments –

  1. First – San Fran Fed president John Williams – now become the Fed’s #2 as he took over as head of the NY Fed in 2019 (major Fed Branch) – he said “there seems to be a priced-to-perfection attitude out there” and that the stock market rally “still seems to be running very much on fumes.”
    1. He also added that “we are seeing some reach for yield, and some, maybe, excess risk-taking in the financial system with very low rates. As we move interest rates back to more normal, I think that that will, people will pull back on that.”
    2. But what happened when they announced an increase of rates back in Mid-2018 – markets dropped by more than 10% over a few months until they cancelled the plans of increases
  2. Next – has the then-Fed Vice Chairman Stan Fischer – echoed John Williams’ statements – that “the increase in prices of risky assets in most asset markets over the past six months points to a notable uptick in risk appetites” all thanks to the lower interest rate environments creating people chasing yields –
    1. All of this occurring when the measures of earnings strength – like the return on assets, continued to approach pre-GFC crisis levels at most banks
    2. But given the interest rates were a lot lower – the return on assets should have been expected to have declined relative to their pre-crisis levels–and that fact is also a cause for concern.”
    3. Fischer then also said that the corporate sector is “notably leveraged”, that it would be foolish to think that all risks have been eliminated, and called for “close monitoring” of rising risk appetites.
    4. Essentially – what was covered in the corporate debt episode – as listed companies have taken on massive levels of debts and if rates were to normalise – their earnings would be destroyed by the interest repayments
  3. Lastly – you have the lady herself – the then-Fed Chair Janet Yellen – she said that some asset prices had become “somewhat rich” although, like Fischer, she wanted to assure the public that share and bond prices are fine – but what she left out was that they are fine as long as you assume that we will be in a record low-interest rate environment in perpetuity – as her next statement points out – “Asset valuations are somewhat rich if you use some traditional metrics like price-earnings ratios, but I wouldn’t try to comment on appropriate valuations, and those ratios ought to depend on long-term interest rates.”
    1. So as long as interest rates don’t go up – the PE ratios of some of the largest companies in the US at 100 times is fine – given a lot of their growth of price is backed off debt and buy backs
  4. Quick reminder – back in 2017 at the time of these statements – the S&P500 was trading at “only” 2,400 – back when the Fed was only starting to consider a hike in interest rates and QE4 was more than two years away – thanks to not raising rates and the implementation of QE4 – S&P500 now at 3,386 – all time highs –
  5. Digging a little deeper – one of the more interesting things that Yellen said was in response to a question on financial system stability – Yellen said that the implementation of the post-crisis regulations had made financial institutions much “safer and sounder”, and as a result she went on to predict that there would never again be a financial crisis “in our lifetimes” – her actual statement was – “Will I say there will never, ever be another financial crisis? No, probably that would be going too far. But I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will.”
    1. First – she was 71 at the time – so maybe she was expecting an early grave – While some were quick to compare this statement by Yellen (who then was 70–years old) to Neville Chamberlain infamous – and very, very wrong – 1938 prediction of “peace in our time”, perhaps she was hiding a trump card all along… A trump card which she revealed only now, almost three years later.
    2. But what I find more interesting is that someone in her position may just be saying this to help provide confidence to the market – however – the fact she refers to legislation changes – such as the SIB and SIFI regulations and controls over the market which could ban trading and shut down markets during times of crashes – seems like she knows more to the story
    3. Which makes me think that she meant something else – such as when looking at the transcripts when she was speaking via a video conference with bankers in Kansas City – Yellen said that the Fed would take a page out of the SNB’s (Swiss national bank) and BOJ’s (Bank of Japan) playbook – and “might be able to help the U.S. economy in a future downturn if it could buy stocks and corporate bonds.”
      1. Of course – she didn’t mean the whole “US economy” – for instance, every worker and person who pays tax – but those who own the most amount of these assets – the Fed and other financial institutions/investment managers and their political cronies.
  6. This being said – on the public surface – Yellen was quick to walk back this “hypothetical” scenario, saying that “the issue was not a pressing one right now” and pointed out the U.S. central bank is currently barred by law from buying corporate assets – but the laws can change
  7. The idea was already “incepted” in the heads of America’s political rulers (whose fate is just as tied to the performance of the stock market) and the law can be changed literally overnight.
      1. Similar to SSC – politicians have a lot of money in markets – and rely on the markets as a sign of economic health – even though it is not – look at Bloomberg – 9th richest man on earth running for President – has a lot of wealth in markets
      2. And after all, it is only a matter of time before a crisis does hit, and now Yellen has explained has to happen to avoid an all out social catastrophe in a country where financial assets account for nearly 6x of GDP – all time high compared to average pre-90s of 3 times GDP
  8. To validate her point, Yellen said that the Fed’s current toolkit might be insufficient in a downturn if it were to “reach the limits in terms of purchasing safe assets like longer-term government bonds.”
      1. “It could be useful to be able to intervene directly in assets where the prices have a more direct link to spending decisions,” – referring to the wealth effect – where economists and central bankers still rely on this as a basis to help boost GDP growth by getting people to spend more –
        1. Regardless – Yellen said that the Fed buying equities and corporate bonds could have costs and benefits… But mostly benefits, if only for the Fed, and those in the know – who would get very rich.
      2. Keep in mind that what Yellen said was merely a paraphrase of Ben Bernanke’s famous April 2010 Washing Post oped in which he defended his use of easy monetary policy in facilitating higher stock prices – again, the idea is to boost asset prices to – quoting from Bernanke here – “to boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”
      3. None of these policies are really true or “trickle-down” economics – which isn’t a thing – it is a design – central planning similar to communist countries – in China – all the building of ghost cities using tax payers funds goes to the Communist party members who own the construction companies – and in the US and Western societies – this wealth goes to those who own the assets that own the shares and bonds – in US society – top 10% of people who own 93% of all equities – again a choice to participate – but those who did own shares have gotten great returns – I am technically one
  9. But these haven’t been real returns – and doesn’t provide a free market – supply side economic gain for all – Bottom of Form – as the bottom 90% of the population who own virtually no stocks and owe most of the debt, got very, very angry as they watched how the Fed plundered their future and hopes to become wealthy, and resulted first in the election of Trump, and the upcoming election of a socialist candidate as America goes full-on populist in response to the Fed’s catastrophic policies.
  10. However, thanks to Yellen we now know that the Fed won’t go down without a fight… or at least without monetising everything – whilst Yellen is no longer the chair of the Fed – just last month she told a conference the Fed would fight a future recession by buying government debt and jawboning interest rates lower
      1. But she did add that other tools will be necessary – including expanding the range of assets it would purchase – i.e. shares
      2. Painting a picture that before the current fiat regime of central banks finally ends and before stocks go limits up as the revolution starts, the Fed will order a Permanent open market operations (or POMO) of, well, everything in one final, last-ditch effort to keep social stability by creating the impression that stocks are stable and rising even as society implodes
      3. Genius strategy – expand the fiat system massively to buy real assets – like shares and bonds – then switch monetary bases once the value of fiat goes to almost nothing
  11. Begs the question – Will it be successful? Normally – long term I would say that it won’t be = but when we consider that that’s precisely what has been happening for the past decade – have to think really hard just how much further the Fed can keep kicking the can before it all comes crashing down – it will likely continue to keep markets high until they decide to cease the expanded operations in the markets

 

But the Next Level

– this is what is an additional concern 

  1. What happens when the central banks own most of the shares in companies?
    1. Say they do buy up a majority of corporates and have an influence on these companies
    2. Central banks are pushing for climate change reforms – getting involved where they don’t belong –
    3. Every central bank is now on the same page – repeating the same UN talking points
  2. But as a shareholder – you get voting rights – so Fed could gain access to control of the “private” (use the term loosely) markets – beyond the control over Governments and their debt they currently have
    1. Central banks like the SNB and BOJ already own a large chunk of their share markets – question is – do they get voting rights and how would they use them? Control the board and decisions of a company
  3. So under this system – Zombie companies will reign supreme – Those that the Central banks own can technically be propped up regardless of the money they continue to lose – Banks would become more involved to help their balance sheet grow –
  4. Therefore, there would be no free market of companies rising and falling based around their performance –
  5. The injections of printed money will save them from their declines in prices – so, whilst their performances suffer and they lose money – their prices will continue to rise –

 

Summary 

  1. With Central banking intervention into markets – they can keep coming up with schemes –
    1. SSC and Blunt – keep coming up with something for prices to go up – but inevitably – the complex system of markets beats out = the markets can correct and have done so.
  2. All comes down to Central banking hubris – that they think they are supreme and solve every economic problem –
  3. A long way from their early charters of being the bank of last resort – just to provide liquidity to commercial banks in the event of bank runs – now they can control markets and the very cost of money.

Thank you for listening to today’s episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/

 

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