Dear Reader, the FT did not run Martin Wolf's regular Tuesday article last night. Therefore I have written the following stand-alone piece. It is not light reading or a barrel of laughs…so make yourself a nice beverage and find a comfy chair :-)…Best wishes…MarkGB
Republicans are embarrassed by Donald Trump, Democrats are ashamed of Hillary Clinton, and Independents say they will move to Canada whoever wins – most of the latter are probably kidding, but the point is well made nevertheless. Both candidates for the Presidency of the United States have higher ‘unfavourables’ than ‘favourables’ - according to the latest Gallop poll 57% of Americans dislike Clinton, 59% dislike Trump. This is a contest for the title 'lesser of two evils'.
This election is symptomatic of a political and financial system that is bankrupt morally, intellectually and financially. One candidate exemplifies and embodies a corrupt establishment, the other is benefitting from a backlash against it; personally I wouldn’t let either of them walk my dog. The FT position is clearly, and fawningly, for Hillary Clinton. To me, this is akin to advocating the virtues of a snake over those of a baboon – neither of them is fit to run a raffle, let alone lead the most powerful nation on earth.
Integrity, and the credibility it brings, is the crucial currency in any field of endeavour. In the world of politics in general and monetary policy in particular, the debasement of this currency is almost complete. Whoever moves into the White House next January will inherit the reins of a system that is rotten to the core. Massive reform is needed across the spectrum of politics and banking, but it will not come until after the next crisis. The elites will not reform until there is no other choice. I believe the crisis will come in the sovereign debt market, unless one of the many sociopaths running the world manages to create a war first.
When the monetary establishment starts warning about the quality of their own ‘product’, we are not far from the end of the Ponzi scheme. Last week in an interview on CNBC we got another such signal, this time from Kevin Warsh, ex special advisor to POTUS, former steering group member of the Bilderberg group, ex member of the Federal Reserve Board, and liaison to Wall Street during the crisis of 2008. Speaking of the Fed, he said this:
"They look to me 'asset price dependent' more than they look 'data dependent'. When the stock market falls like it did in the beginning of this year, they say, ‘Oh, we better not do anything.’ Stock markets are now at career highs. I suspect when they meet over the course of the next 10 days they will suggest, ‘Oh, now they look like they can be somewhat more responsible.’ I don’t like changing policy meeting to meeting based on data, or even with what the S&P 500 is doing. I like making it based on what’s happening on the real side of the economy, and that has not been very convenient over the last six to nine months.”
To anyone paying close attention (provided they are not drinking the Kool-Aid), he is very slow to acknowledge something that has been apparent since the commencement of ‘taper talk’ in 2014. Neither does his criticism go far enough of course - but that is to be expected. It is not just that it takes ‘insiders’ a long time to catch on to the effects of their own handiwork, it’s that most of them dare not speak the truth of what they really think -because if they did, it would shatter the illusion of control that they are so desperate to portray. So, better to keep schtum and hope for a miracle. There will be no miracle - there will be consequences. The major consequence will be the total collapse of the only currency that really matters in an entirely fiat world: credibility of policy makers, confidence in the product they sell - perpetual credit expansion. In short, they are debt pedlars.
The last two decades of monetary policy have been one long ‘con’, an ongoing confidence trick – an attempt to abolish failure and to rig the system in order to keep the Ponzi scheme going; two decades of kicking the can down the road so that politicians, and their paymasters on Wall Street, do not have to face the music. It has failed.
The marketing strategy for this policymaking has included disingenuous garbage like ‘the wealth effect’ and ‘trickle down’ I.E. the pretence that this was somehow done in the best interests of ‘ordinary’ people. It never was and it never will be. When the credibility of the policy-makers running this charade finally goes to its intrinsic value of zero, the system will collapse under the weight of its own hubris, and we are nearing that point.
Some economists know this and say so (albeit in much politer terms than this), a few are trying desperately hard to nudge the Fed away from the cliff, some are theoretically smart enough to know better but are still too much in love with themselves to consider they might have got it wrong, and one or two appear to be utterly clueless. I would put Bill White in the first category, Mohamed El-Erian in the second, Paul Krugman in the third, and Janet Yellen in the fourth.
The only thing keeping monetary policy afloat is a smidgeon of residual confidence in the system and the credibility of its so-called guardians. But I believe we have now crossed a threshold: The day that interest rates went negative is the day that this credibility went past its sell-by-date. What is left in its place is not confidence - it would be better called ‘inertia’. Some specifics:
We are experiencing the lowest government bond yields since 1946. They have been in steady decline since 1982. What does this tell us? It tells us that there is a huge bubble in debt, that it is only a matter of time before long-term interest rates begin to rise, and that there is virtually no one trading the bond markets today who has a clue what will happen when rates rise, or how to trade in a rising yield market. Some figures will help understand what is coming: From Keith Dicker of IceCap Asset Management:
‘A mere 1% rise in long-term interest rates, will create losses of approximately $2 trillion for bond investors…the fun really starts when long-term yields increase by 3%, and then 6% and then 10%. This is the point when certain government bonds simply stop trading altogether, and losses pile up at 50%-75%...Most investors today have no idea what is happening in the bond market, and have exposed themselves to incredible amounts of risk…And more importantly, because a global crisis in the government bond market has never occurred in our lifetime – advisors, financial planners and big banks continue the tradition of telling their clients that bonds are safer than stocks….As a result, the most conservative investors in the word remain heavily invested in the bond market and are therefore smack dab in the middle of the riskiest investment they’ll ever see”
The system is in a state of inertia, or complacency, which will transform very suddenly into panic when a critical point is reached. The monetary environment is like a massive build-up of snow (debt), on the side of a mountain (the real economy). Whilst we do not know which new snowflake (event) will trigger an avalanche, we can observe that the snow is coming thicker and faster. So whilst the timing is unpredictable, the eventual consequences are easier to predict:
A series of events will cause a crisis of confidence in sovereign bond markets. This will accelerate the loss of credibility in policy-makers, who will be rightly identified as having deliberately stoked up the debt in the mistaken notion that negative rates are stimulative. They are not – after the zero bound is breached rate cuts are deflationary. I.E. NIRP encourages ‘greater fool’ behaviour in traders, yet more buybacks in listed companies, and fear, uncertainty & hoarding in individuals.
This, as yet unknown series of events, will trigger capital flight on a scale not seen since the banking crisis of the early nineteen thirties, which Herbert Hoover described in his memoirs as being akin to a loose cannon rolling around on the deck of a ship in a storm.
The storm will hit in the bond market…the loss of confidence will manifest in government assets, and capital will flee from government assets and financial stocks, into non-financial stocks, gold, and the dollar. This will be unlike anything anyone alive has ever seen, because the degree of irresponsibility that has caused it is unlike anything we have ever seen. Nothing said or done at the FOMC meeting later today will do anything to change what’s coming. Helicopter money will come, probably after the election, and it may delay things further. It may even look as if it is working for a while, but it will not immunize the US from contagion from overseas markets. Europe is on the brink of a banking crisis, and Japan is a basket case.
Neither Hillary Clinton nor Donald Trump have the foggiest idea of what they are vying to let themselves in for. And even if they did, they would not tell the truth about it. And that dear reader…is the problem….lies and corruption got us into this mess, more lies will not get us out of it. It is time for some very uncomfortable truth telling. Don't wait up.