You have to love the “distancing” games that are played when the “reaction” isn’t quite what The Fed wants. (See: St. Louis Federal Reserve President James Bullard Explains What Ben Bernanke Got Wrong)
As everyone who doesn’t live in a pineapple under the sea knows, the last two days have been brutal in the markets after Bernanke basically admitted that QE was going to end. This was, of course, contrary to the many opinions that QE would never end.
Unfortunately this isn’t really about what The Fed, or Bernanke, wants. It is about arithmetic. Arithmetic that Bullard understands as well as anyone, but dares not express in public, just as Bernanke hasn’t.
The sequester and debt ceiling gridlock in Washington, you see, has produced a dearth of Treasuries for Bernanke to “buy” (that is, monetize.) This leads to a problem as liquidity dries up in a market that is the benchmark for virtually everything in the economy.
Bernanke isn’t “pulling back” because he wants to — or because the economy is getting stronger. He is pulling back because the combination of liquidity squeezes, which are now starting to become critical events in China and threatens to spread, along with the relentless squeeze on consumers, has led corporations to find only one way to drive “value” higher — borrow and blow money on either buybacks or dividends. This is nothing more than adding leverage to the system; it is not economic progress even though stock prices have gone up to a monstrous degree.
This morning Tepper was out again saying “buy stocks because it’ll be the only place to be”, more or less. Where are those pointing out that there was in fact no actual progress in employment — the backbone of the economy because ultimately without economic consumption there is no economy in the first place!
There is also a big problem in the bond market. The cross-posting of collateral and the leverage games played there along with the FX markets is a monstrous systemic risk that could have been addressed in 2008-09 — but wasn’t. The “why” is simple, given that the banks can’t have 10s of thousands of employees and “make money” (after expenses) if they have to only loan or work with capital they actually have, and cannot “create money out of thin air.”
The usual retort is that we “need” to allow these sorts of schemes for the economy to “function.” But this is a lie; real economic progress comes not from expanding leverage but from innovation — that is, allowing people to do more by expending less. This is inherently deflationary but that’s good, not bad, as it’s all about how much work you have to do in order to eat, shower and shit — and what you have left over.
Bubbles are part of any economy; by definition if there is no disagreement on the value of something then there is no transaction, because for me to buy something from you I must believe it’s worth more than the asking price and you must believe it is worth less. If that’s not the case then no transaction takes place, and yet reality is that we must both, in the aggregate, be wrong!
But when people — like Bernanke — intentionally come into markets and drive the price:value equation so far out of whack that it represents a pure fantasyand the economy and markets organize themselves around that fantasy you’re not going to get a little “hiss” or “pop” when the bubble deflates — it’s going to be a mighty boom instead.
Ps: There is a very dangerous pattern setting up here this morning for stocks, coming into OpEx as we have today. While the odds of a worst-case outcome are not particularly high that the pattern is on the board bears watching…