As most of
our viewers know, we have not been happy with the world’s central bankers over
the past twenty years and have expressed those feelings. The U.S. Fed is the most important central
bank among the major central banks of the world, as the U.S. economy is the
most important of all major economies. But,
unlike corporations that are usually managed by people that have spent their
lives working in business and industry, the Fed is managed by people that are
in many cases from the academic world. The
U.S. economy is now in the hands of those running models based on theories and
formulas that they can only “hope” are correct.
We have
stated in the past that the Fed, through the largest expansion of its balance
sheet ever, several QEs and an operation twist, is conducting a grand monetary
experiment. Now it is possible that they
will accomplish their objectives and the economy will de-lever and grow, and
all will be fine…but we don’t think so.
In fact, we give a good outcome a close to zero chance. We are also of the opinion that we are in
“uncharted waters” and are certain nothing like this has ever happened
previously. We speak, of course, of the
unprecedented intrusion into price discovery (interest rates) on the part of
the Fed and other major central banks. Through this intrusion, stocks, bonds, major
currencies, real estate, collectibles, and just about anything you can think of,
that has to do with the cost of money, is terribly overpriced. There are, however, two things we think are
underpriced, risk and precious metals.
The aforementioned intrusion into the pricing mechanism of financial
markets have pushed investors of all kinds much farther out on the risk curve
than is generally perceived. In
addition, the across the board printing of money to expand their balance sheets
will, in our opinion, debase the major
currencies versus precious metals over time.
We started
discussing our criticisms of the Fed in the late 1990s. Since then, we have criticized these
officials many times with our latest documented criticism being:
We wrote in
May of 2013, “The Fed is in a Lose-Lose Situation”.
In January
of 2016, “Difference between Past Fed Tightening and Now”.
In February
of 2016, “More Fed Criticism—We Are in Good Company”.
In July of
2016, "The Central Bank Bubble Is Worse Than the Dot Com & Housing Bubbles.”
There were
many more-- and you can find them by clicking on the latest comments and scroll
down the older comments. When you get to
the bottom, just click “next” to find the others.
The central
banks of Europe and Japan have gone even farther than our Fed. On their balance sheets they carry corporate
bonds (ECB) and equities (BOJ). Through
ETFs the BOJ is now a top 10% shareholder in 90% of the market capitalization
of the Nikkei 225. To add to the
insanity, in Europe, Japan and other non EU countries, interest rates on
government bonds are negative, out in some cases past 10 years, and are nominal
out to 30 years. There are $12 tn of bonds now trading at negative rates and
central banks own $25 tn in stocks and bonds.
Clearly, investments cannot be efficiently made by corporations when the
cost of capital is being determined by fiat, rather than the marketplace. It will take time, but lots of bad
investments are being made, and lots of productivity and capital will be lost.
Just when we
thought this was about as insane as it could get, we find that Ben Bernanke
visited Japan recently and it was reported that the topic of “Helicopter Money”
was discussed. “Helicopter Money” is
turbo charged QE. In QE, central banks
create money from thin air to buy financial assets in the marketplace from
investors. Now imagine central banks creating
money to fund infrastructure projects, tax cuts, bombs that blow up or
“helicopter drops”. That’s “Helicopter
Money”!!
Even more
insane is the fact that the central bankers don’t realize that the most likely
outcomes will be those that are “unintended consequences”. So let’s summarize by stating what we
believe the Fed and other central banks have intended. Simply stated, the central banks have tried
to stimulate their respective economies by inflating financial asset prices and
lowering interest rates to near zero (ZIRP), and in some cases below zero
(NIRP). That was supposed to cause
people that owned financial assets to feel wealthier and spend money, and also
to cause businesses to borrow to invest in plant and equipment to help grow the
economy.
That was the
intention. Here is list of just a few
unintended consequences we can think of:
ZIRP and NIRP have punished savers and caused
those who choose not to earn zero or less, or to spend, to invest in
inflated/riskier financial assets.
Stocks are trading near the most expensive levels in history while bonds
in the U.S., Europe, and Japan have traded at the most expensive levels ever.
Those who choose not to invest are
not spending enough to stimulate the economy.
Instead, they are saving.
Corporations should be investing in
plant and equipment for future growth.
They are doing less of that, and instead, are repurchasing stock (at
shareholders expense) hand over fist, along with other mispriced money based
financial engineering. The investments
they are making are being made using the same mispriced rates.
The economy continues to grow at the
slowest post recession rate ever since coming out of the “Great Recession”.
Inflation (why a central banker would
want inflation is in itself insane!) remains below target.
By creating money in record amounts
from thin air, the U.S., E.U, Japan, and China are risking a loss in confidence
in paper/fiat money. That could manifest
itself in hyper-inflation.
The debt accumulated during the
housing bubble and great recession could unwind and we could be at risk of a
major deflation.
In closing
we would like our viewers to understand that what central banks are doing has
not been done before. To that extent investors,
markets, corporations and populations are all in “uncharted water”. No one knows for sure how this will all play
out. But, we believe that what has been
done by central bankers for 7.5 years has not worked. With or without “Helicopter Money”, we
believe a major bear market is coming. If and when that happens this era will
be forever known as “The Central Bank Bubble”.
