The lesson of the past three years is the ultimate in simplicity; Don’t fight the Fed.
It used to be that interest rate policy was the blunt tool used to shape economic and market activity. Making money cheaper or more dear was the “throttle” to make things go faster or slower. Simple.
Now is a whole different story. No longer is the cost of money used to shape an outcome. Money is free to Central Banks and they have taken matters to their most extreme: creating money out of thin air to buy the bad investments that nobody wants to buy. And the capital markets think that is a reason for optimism or earnings multiple expansion. If you think about how bad the investment landscape must be in order to justify this type of action, and think about the market’s reaction, it is the very definition of insanity.
The money used to buy these investments will never see the light of day. They will be marked as a total loss. But it doesn’t matter to markets. The SPX has rallied 100 points, again, for the eighth time in a few months and just in time for the Holday Season. Yet we remain in our trading range and below major resistance.
You are being trained that there will never be a reason to sell any investment because no matter what the situation, prices will not be allowed to fall more than 10% or so without a new printing or stimulus scheme. Over and over again, prices that should fall and investments that should fail are not being allowed to. Soon nobody will ever sell anything ever again. A new “permanently high plateau” will be reached and higher prices will be justified as “normal”.
Can this scheme ever end? I am beginning to exhibit “Stockholm Syndrome” as even I am being brainwashed into believing that regardless of the events of reality, the fantasy of price will be victorious no matter what. Unless Ron Paul becomes President, and he’ll probably be assassinated before that could ever happen…
29 Responses to Central Banks are Training You…
agree with you Scottt. and evryone keeps touting “They’re out of bullets”, on e day we may hit a wall, but the time is now now. SO much more they can do. Whta bout legislating that all pension funs MUST hold a fixed percentage in UST?
There won’t ever be a lack of demand for ust’s … they just drain excess reserves that will always exist when congress deficit spends
Right on. This time it is a little different. Its an election year and the banks want their two faced Obama to remain in office as their perfect tool. Every dip is being bought by god knows who and every gap up is not fading. This a casino
absolutely that the fed will take a loss.heaven forbid a business like a bank has a write off, like other real business’ do.so the fed will print more money so that the debt they bought will be faded onto the taxpayer= our children and the next generation, or they pull a lehman on bac,stuff it with all the toxic paper,then blow it up, lol, there, i fixed it for you benny.
Not only is the Fed buying while the market is low (so to speak) but inflation rates are lower right now than during the Bush administration.
I think we are looking at the tip of an iceberg and seeing what the Fed wants us to see.
I think I disagree. The Fed has profited from these investments. They are buying extremely out of favor instruments that pay off for the most part. And the money created does see the light of day. Cash comes onto some suffering financial institution’s balance sheet in the place of the crippled instrument bot by the Fed.
The problem is, as I see it, people are scared as shit and hanging onto their cash rather than investing. We have no confidence in our government and our leaders seem disinterested in creating confidence. They would rather piss fight in an attempt to maim their opposition in the next election.
If you net Fed “investments”; they are deep under water.
Our no confidence in our government is fully justified.
It is not sustainable, but could go on for years or hrs – until that seed falls from a bird’s beak and starts the confidence avalanch
How can they be underwater when they materialize the cash out of nothingness? Most of those investments are bonds that if held to maturity will pay off. The mortgage backed securities were marked to market by the banks, which drove down their values. FDIC squeezed them on financial ratios, the banks needed cash to stay afloat.
Anyway, we are through that rough patch. Now Europe is dealing with their problems which were also largely self-inflicted. They went on massive construction spree after creating Euro-Zone. I was in Dublin in 2009 and construction cranes were everywhere.
Whats the basis for stating the fed is underwater? Not arguing, just curious how all y’all “know” this
The FED buys shit that nobody wants and pays full boat and banks get the cash. Insane bank bailout.
The citizen. AKA Taxpayer gets screwed on both ends of the transaction.
1.) Fed pays full price with fictional money. (that will cost taxpayer in higher taxes.)
2.) Banks can buy treasuries and sit on them. Collecting interest that the taxpayer pays. Yes. it is low. But where else are you going to park a bajillion dollars for a relatively short or possible long time period.
3.) There is an ARB strategy here for the banks that screws the taxpayer.
4.)Any profit made from holding treasuries or an ARB strategy ultimetly makes it’s way to be lent back to the taxpayer with tougher terms and highre rates on that loan.
So to recap.
1.) Fed(aka taxpayer) bails out banks.
2.) Banks sit on capital in the form of treasuries. Collecting money from the taxpayer.
3.) Banks use the profit to lend money back to the taxpayer with a higher interest rate.
The taxpayer is screwed on both ends.
I call this “The Circle of Clusterfuck”
Or heads the Banks win. Tails the taxpayer looses.
that how people talking about p/e of 22 saying its normal to that sector lol. u spot on. but that won’t help any bear i guess
Scott, I have some Tulips for you to buy. This is one massive bubble,and like all bubbles must pop. The pin is that everytime the Central banks act, commodities rally and there comes a point when the price of the commodities become so high that the speculators can’t sell their Tulips to anyone else and it all falls apart. IMHO, this bubble topped out in Feb of 2011 when copper on the LME hit 10,000 and has been falling apart, but like all bubbles, the biggest drops are towards the end so I have to sit here and watch these silly rally attempts on the hopes that Govts will throw out more money, just the lessons of riding a market on the downside…
Stocks not overpriced though. Businesses in much better shape than 2-3 years ago. This is undeniable.
Global PMI’s suck.
You are spot on with all of this Scott.
The question is when is the end game?
That is the zillion dollar question. And one that everyone is after. Wish I knew. Have an opinion. But that is worth shit.
How long will the Can be kicked?
Ultimately it all ends in war.
Soros and Kyle Bass have quants working overtime.
The end game already happened. The creation of the Bank of International Settlements is in the past. World government already exists, and it’s run by unelected central bankers.
That you and everyone else doesn’t know it yet is a testament to the power they possess.
I am well aware. Believe me.
I am always looking for opportunity to profit though.
Brilliant! Whether they contrived to do this, or are just pulling every lever they can possibly pull to avoid it all falling apart on their watch – the result is the same.
Look, enough with the “ron paul is my personal martyr for everything wrong with the world” stuff. You had a great post until then.
You got me thinking about biryini’s (spelling?) comments a few days ago on cnbc. His belief is this is the consolidation phase of a bull market which does not end until after the final phase. Guess what that final phase is: the “there’s never going to be another down day” phase. Seems as if the central bankers could be ushering in that “era” precisely as you’re describing it. Something like that obviously couldn’t last too long but maybe only that would bring about your bear fantasies and finally undo the qe magic dust.
The Ron Paul stuff was sarcasm. I don’t even like him. It was placed there to make a point.
And to be clear, I don’t have “Bear Fantasies”. What “I want” is a market that reflects reality more than this one. It will also create bone-fide buying opportunity…
Electing another CFR or Trilateral Commission member as president is about as lunatic as a grown man can get. Ron Paul is the only candidate who is not on the central bannker payroll. To suggest it’s crazy not to vote for him is to demonstrate one’s own lack of awareness of what is reality.
Repair that last sentence. To suggest it’s crazy to vote for him is to demonstrate one’s own lack of awareness.
I use this as a test to determine the intellectualy capacity of the people I decide to converse with on politics. Anyone suggesting Ron Paul is nuts is generally out of touch with reality and is a full-fledged subscriber to the central banker false paradigm, which IMO is so supremely easy to research and identify at this point that there are really no excuses for grown men anymore.
My take from Scott’s mention of Ron Paul – based on its context – was that he was making the simple observation that there are people who wouldn’t like what would have to be done to restore sound money and that there are people who benefit from the fuckery in which the FED engages.
I don’t know how you got from this that to: “ron paul is (Scott’s) personal martyr for everything wrong with the world”.
Me, I’d love to see Ron Paul become a moderating influence on the forces for fuckery and was disappointed that Scott went fetal in response to your dickish post.
Well judging by Scott’s response, and based on what you just wrote, I hereby redirect my comment at you rather than at Scott.
If central banks are writing off the bad debt with fiat that will never be seen, then aren’t they essentially writing the bad debt off the books? Aren’t they really just using bad debt as a means to a political end?
As in, the creation of the USSA, owned and operated by unelected central bankers? Just like the rest of the Planet of the Apes?
Hope you enjoy your remaining days in your local soviet commune, policed by some idiotic Fabian socialists with no tolerance for their own shadow.
I don’t know if I’d go that far. I think the unelected central bankers — if I were to fully buy into that scenario — would prefer a more sotto voce approach.
So you are essentially correct on the Fabianism thing, but I just don’t see them going full commune… I think we’re talking something more like the cloying, insulin-doped nanny state of the Netherlands, without the longer term capital in place.
Something more akin to the Matrix than 1984.