Aberrant Central Banks

In a report to be presented on Wednesday June 17 in London, the Official Monetary and Financial Institutions Forum (OMFIF) will reveal that central banks are increasingly investing in the stock market and that they will most likely continue to do it in the future. “A cluster of central banking investors has become major players on world equity markets” can be read in the report, according to an article published in the Financial Times. What should be considered an aberration, that is, that central banks, whose “raison d’être” is maintaining the purchasing power of the currency, engage in such market distorting and destroying activities, is presented as a, at most, minor mistake, a quirk, a curiosity, something not to be ashamed of or worried about. Here you can reach the OMFIF press release, here the FInancial Times article and here the Zerohedge comments about this conspiracy theory turned fact.

“… the ongoing assurances of central bank liquidity seem to ensure an eventual crisis beyond the liquidity capacity of central banks”

Doug Noland, one of the few financial analysts that foresaw the 2008 crisis before it happened, this week, in his weekly Credit Bubble Bulletin, “celebrates” the 25th anniversary of the October 1987 crash. The complete article here, some excerpts here:

“Portfolio insurance played an important role in the precipitate sell orders that overwhelmed and helped crash the market.”

“The “twin deficits” were a major concern.”… “Our Current Account deficit jumped to $39bn in 1983, $94bn in 1984, $118bn in 1985, and $147bn in 1986.  By 1987, the U.S. was running quarterly Current Account shortfalls the size of its annual deficit from only four years earlier.”

“I’ve often contemplated where I might “officially” pinpoint the beginning of the prolonged U.S. and global Credit Bubble.  … I’ll instead propose October 20, 2012 as the 25 Year Anniversary of the Great Credit Bubble.   It was, after all, 25 years ago, on the Tuesday following “Black Monday,” that a statement changed history:  “The Federal Reserve, consistent with its responsibilities as the Nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.””

“Federal Reserve largess ensured that fledgling areas of excess throughout the system actually gathered critical momentum.  These included the Drexel Burnham junk bond scheme, the Wall Street “Gordon Gekko” M&A boom, and real estate lending excesses, especially on both coasts. ”

“When that Bubble phase eventually burst in the early nineties, eighties period excesses were referred to as “the decade of greed.”  In the name of fighting the scourge of deflation and depression, the Greenspan Fed responded even more aggressively.  The Fed went from guaranteeing marketplace liquidity to ensuring a steep yield curve (short-term rates pegged significantly below market bond yields).”

“Furthermore, the Fed’s activist policies spurred rampant growth in non-bank Credit, including MBS, ABS, GSE balance sheets, “repos” and Wall Street finance more generally.”

“The Greenspan Fed’s 1987 promise of market liquidity was the precursor for today’s zero rates, the Fed’s almost $3 TN balance sheet, and recent promises of “open-ended” quantitative easing (QE).”

“Especially after the ’87 Crash, the Federal Reserve and other regulators should have moved decisively to nip the derivatives boom in the bud, especially in the area of the dynamic hedging of myriad market risks…  Instead of the Crash destroying this market fallacy, the Fed’s day-after statement validated the view that derivative contracts could be written and risk-strategies pursued on the belief that policymakers would be there to counterbalance market illiquidity and neutralize “tail risks” and system shocks.  This fundamentally changed finance, the pricing and trading of risk instruments, and risk-taking more generally.  The unprecedented proliferation of market risk insurance took the world by storm and played a pivotal role in runaway Credit excesses and associated global imbalances and economic distortions.”

“The Fed’s statement on October 20, 1987 commenced 25 years of serial (and escalating) booms and busts around the world.  We’re nowadays in the midst of “melt-up” Credit debasement, a “blow-off” top in global speculative excess, and complete policy capitulation in hope of holding the downside of the global Credit cycle at bay.  For a few years now, I’ve referred to the “global government finance Bubble” as the granddaddy of them all.  What started as excesses at the fringes of U.S. bank and junk bond finance back in the late-eighties eventually made its way to terminally infect Treasury and related debt at the core of our entire monetary system.  Global excesses, having fueled precarious Bubbles in Japan, SE Asia, Europe and the emerging economies over the years, afflicted China with its estimated population of 1.3 billion.   Today’s historic Bubble phase risks the loss of market trust in sovereign debt.  The current global “inflationist” policy regime risks being completely discredited.  And the historic Chinese Bubble risks a precarious post-Bubble day of reckoning. ”

“Unlike the 80’s and 90’s, there’s no longer any attempt at a coordinated strategy to deal with global excesses and imbalances.  Policymakers have thrown in the towel – and these days have no strategy beyond reflation and Bubble perpetuation.  U.S. policymakers pay little more than lip service to incredible federal deficits.  This, however, is actually more than is paid to the massive Current Account Deficits that have been the root cause of now deep structural global imbalances and economic impairment.  More than 25 years later, our nation’s policy prescription for unmatched global imbalances is even looser monetary policy and added stimulus for all nations, everywhere, all-the-time.”

“And the way I see it, the Fed, ECB and global central bankers today fight a losing battle.  The mountain of global debt, securities, and derivatives, along with this destabilizing global pool of speculative finance, just inflate larger by the year – and after each policy response.  And the more outrageous the policy measures implemented to try to resolve each crisis, the more these desperate measures further inflate the global Bubble.  Ironically, the ongoing assurances of central bank liquidity seem to ensure an eventual crisis beyond the liquidity capacity of central banks.  Happy 25th Anniversary..”

TYR 18 September 2012 reads

Scientific Paper: “The Fukushima Radioactive Plume Contaminated the Entire Northern Hemisphere During a Relatively Short Period of Time” @ Washington’s Blog The peer-reviewed scientific journal Science of the Total Environment reports: the Fukushima radioactive plume contaminated the entire Northern Hemisphere during a relatively short period of time.

U.S. Household Incomes: A 44-Year Perspective @ DShort Mean Household Income (MHI), adjusted for inflation,  for the bottom 50% of the population has barely increased since 1967

If You Want to Help the Poor and the Middle Class, Encourage Deflation @ Oftwhominds We have been brainwashed into believing that inflation is good and deflation is bad. The truth is that inflation is good for banks and bad for households, while deflation is bad for banks and good for households.

Why A Centrally-Planned Heroin Addiction Never Has A Hollywood Ending @ Zerohedge Morgan Stanley: When will fundamentals matter again?….Manhattan is crowded. In our judgment, sentiment is decidedly bullish. Decidedly – both on the earnings outlook and the equity market. We know everyone likes to romanticize that they are a contrarian bull on an island by themselves, but trust us, that island is not vacant. It’s crowded….We have received several emails in the last week from investors with messages of the ilk that “we all know this will end in tears”, but for now, people are not at the rehab center.

Chart Of The Day: Monetary Supply – It’s Not A Marathon, It’s A Steroid-Fueled Frenzy @ Zerohedge Gold’s supply expanded 8% while monetary bases expanded….83% (BoJ)…146% (ECB)…212% (SNB)…223% (FED)…362% (BoE)

Obama wins right to indefinitely detain Americans under NDAA @ Russia Today Pulitzer Prize-winning journalist Chris Hedges, that sued the Obama administration because of NDAA says: “this demented “war on terror” is as undefined and vague as such a conflict is in any totalitarian state. Dissent is increasingly equated in this country with treason. Enemies supposedly lurk in every organization that does not chant the patriotic mantras provided to it by the state. And this bill feeds a mounting state paranoia. It expands our permanent war to every spot on the globe. It erases fundamental constitutional liberties. It means we can no longer use the word “democracy” to describe our political system…Fear is the psychological weapon of choice for totalitarian systems of power. Make the people afraid. Get them to surrender their rights in the name of national security. And then finish off the few who aren’t afraid enough. If this law is not revoked we will be no different from any sordid military dictatorship. Its implementation will be a huge leap forward for the corporate oligarchs who plan to continue to plunder the nation and use state and military security to cow the population into submission”.

TYR 9 September 2012 reads

Five Years Since The Great Financial Crisis: “No Growth, No Deleveraging” @ Zerohedge It illustrates the lack of debt deleveraging in developed economies from 2007 until now

Diverging like it is 1929 @ Safehaven  Interesting comparison of the divergence of market action and fundamentals today and in 1929

The Repricing of Oil @ Peak Prosperity It shows the fragility of the supply/demand balance in the oil market and how the present worldwide recessionary conditions mask the latent scarcity of oil, limiting the scope of price decreases and showing the potential for big price increases in a not too distant future