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On January 29, 1845, the New York Evening Mirror published a poem that would go on to be one of the most celebrated narrative poems ever penned. It depicted a tragic romantic’s desperate descent into madness over the loss of his love; and it made its author, Edgar Allan Poe, one of the most feted poets of his time.
The poem was entitled “The Raven,” and its star was an ominous black bird that visits an unnamed narrator who is lamenting the loss of his true love…
So, with the vision firmly planted in your mind’s eye of a man completely out of touch with reality, seeking wisdom from a mysterious talking bird — knowing that there is only one response, no matter the question — Dear Reader, allow me to present to you a chart. It is one I have used before, but its importance is enormous, and it will form the foundation of this week’s discussion (alongside a few others that break it down into its constituent parts).
Ladies and gentlemen, I give you (drumroll please) total outstanding credit versus GDP in the United States from 1929 to 2012:
This one chart shows exactly WHY we are where we are, folks.
From the moment Richard Nixon toppled the US dollar from its golden foundation and ushered in the era of pure fiat money (oxymoron though that may be) on August 15, 1971, there has been a ubiquitous and dangerous synonym for “growth”: credit.
The world embarked upon a multi-decade credit-fueled binge and claimed the results as growth.
Floated ever higher on a cushion of credit that has expanded exponentially, as you can see. (The expansion of true growth would have been largely linear — though one can only speculate as to the trajectory of that GDP line had so much credit NOT been extended.) The world has congratulated itself on its “outperformance,” when the truth is that bills have been run up relentlessly, with only the occasional hiccup along the way (each of which has manifested itself as a violent reaction to the over-extension of cheap money).
Folks, rates WILL have to go up again. They cannot stay at zero forever. We all know that. When they DO, because of all the additional debt that has been ladled atop the existing pile, the whole thing will come tumbling down.
All of it.
There is simply no way out, I am afraid. But that is clearly a problem for another day. Right now, everything is fine, so we can all go on pretending it will continue that way.
So now, if you’ll indulge me in a little poetic license (not to mention there being not one but four mysterious strangers in my offering), I give you, “The Maven” (abridged version):
Once upon a midnight dreary, while I pondered, weak and weary,
Over many a quaint and curious volume of financial lore
While I nodded, nearly napping, suddenly there came a tapping,
As of some one gently rapping, rapping at my chamber door.
“‘Tis some visiter,” I muttered, “tapping at my chamber door
Only this and nothing more.”
Ah, distinctly I remember it was in the bleak December;
And each separate dying ember wrought its ghost upon the floor.
Eagerly I wished the morrow; — for the world had sought to borrow
From both friend and foe and neighbour — borrow, borrow, borrow more
For the cheap and easy money which the bankers forth did pour
Shall be paid back nevermore.
Deep into that darkness peering, long I stood there wondering, fearing,
Doubting, dreaming dreams no mortal ever dared to dream before;
But the silence was unbroken, and the stillness gave no token,
And the only word there spoken was the whispered words, “Some More?”
This I whispered, and an echo murmured back the words, “Some More”
Merely this and nothing more.
Open here I flung the shutter, when, with many a flirt and flutter,
In there stepped four stately Mavens from the Central Banks of yore;
Not the least obeisance made they; not a minute stopped or stayed they;
But, with air of lord or lady, stood inside my chamber door —
Standing by a mug from Dallas just inside my chamber door —
Stood, and stared, and nothing more.
Then these tired-looking men beguiling my sad fancy into smiling,
By the grave and stern decorum of the countenance they wore,
“Though thy faces look unshaven, thou,” I said, “art sure enslaven’d,
Ghastly grim and ancient Mavens wandering from the Nightly shore —
To free money ever after lest the markets pitch and yaw.”
Quoth the Mavens, “Evermore.”
While I marvelled this ungainly bearded man explained so plainly,
Though his answer little meaning — little relevancy bore;
For he cannot help a-printing, brand new currency a-minting
Ever yet was blessed with seeing nothing wrong in doing more
Mortgage bonds upon his balance sheet he’ll place, then markets jaw
With the promise “Evermore.”
“You there” said I, “standing muted — what is there to do aboot it?”
In a heavy accent quoth he — that by God he was quite sure
That more money being printed and, new measures being hinted
At would quell all fear of meltdown and the markets all would soar
Would this mean the printing presses would forever roar?
Quoth the Maven, “Evermore.”
Lastly to the fore there strode a small and bookish man, Kuroda,
Who with glint of eye did warn that he was happy to explore
Measures once thought so outrageous as to never mark the pages
In the history of finance — but those times were days of yore
Drastic printing was required, this was tantamount to war
Quoth the Maven, “Evermore.”
And the Mavens, never blinking, only sitting, only thinking
By the Cowboys mug from Dallas just inside my chamber door;
Really do believe their action has created decent traction,
And that freshly printed money can spew forth for evermore;
But the truth about the ending shall be seen when markets, bending
Shall be lifted — nevermore!
The full must-read Grant Williams letter is below:
Grant Williams “pulls no punches” in this all-encompassing presentation as the “Things That Make You Go Hmmm” author reflects on what is behind us and looks ahead at the ugly reality that we will face when “the impurities of QE are finally flushed from the system.” Central bankers of today have “changed everything” he chides, “in ways that will ultimately end in disaster.” Following extraordinarily easy monetary policies across all of the world’s central banks, Williams explains why “we are now near the popping point of the 3rd major bubble of the last 15 years,” each bigger than the last. The only way Janet Yellen avoids being at the helm when this ship goes down is to blow an even bigger bubble than Bernanke’s government bond experiment, “which is highly unlikely.” From how QE works, why many don’t “feel” wealthy anymore, to the fact that “the geniuses that gave this thing life, don’t have the guts to kill it,” Williams warns, ominously, “the bills have come due on the blissful latest 30 years.”
Starting at around 2:30… Williams introduces the ‘extraordinary’ differences with today’s crop of central bankers
5:30 The bubble blowing begins (and ends)
6:45 How QE Works and “why the geniuses that gave this thing life, don’t have the guts to kill it.”
7:45 Investing Now and Then
9:00 “The bills have come due on the blissful latst 30 years”
9:30 The implications for markets
11:00 BoJ specifics…
11:30 Why rotating from bonds to stocks is nuts – even though bonds are in a bubble
13:00 China is flashing red… “if you thikn that doesn’t mean anything, then you’re wrong”
14:00 Aussie macro and micro economics
18:30 Pension Funds disaster pending – return projections are entirely wrong
22:30 Central Deviousness
23:45 Where Does That Leave Us? – “The Taper is not going to happen in any meaningful way” – The US economy is simply not strong enough.
26:00 So What Do We Do
30:00 “Be Brave – Take your money out of the markets and go to cash.”
31:00 “Once the impurities of QE are flushed from the system, we can go back to investing in a world that is understandable”
31:30 We’ve been here before…
“Returning to a world with which we are familiar is going to require either some real magic on the parts of Draghi, Kuroda, Carney, and soon to be Yellen; or some kind of tornado that sweeps away everything in its path and allows the world to build again from more solid foundations.”
Things That Make You Go Hmmm… Like The Freaking Fed | Zero Hedge. (source/full article)
The Fed has painted itself into an almighty corner with QE, and it looks as though we are finally getting to the point in the process where that fact begins to (a) occur to people and (b) matter.
Bill Fleckenstein has often spoken about the Fed’s reaching the point where it “loses control of the bond market”, and it is quite possible that we are rapidly approaching that point (the signs have certainly been strong in Japan). We may be there already. We won’t know until we can look in the rearview mirror, I’m afraid; but the nonvirtuous circle the Fed has created is extremely clear:
The simple truth, as you can see from the diagram above, is that the economy and the markets are now 100% dependent on the largesse of the Federal Reserve to sustain them. What you CAN’T see from the diagram is the scary proposition that the Federal Reserve in turn is entirely dependent upon hope to get itself out of this unholy cycle.
The Fed is hoping (as are the ECB, BoE, and BoJ) that the economy recovers sufficiently through massive stimulus so that the recovery will be “self-sustaining”; but, as can clearly be seen by the action of the markets in recent weeks and months, that strategy (such as it is) appears doomed to failure.
Fortunately, Obama has finally been left with just nominated Janet Yellen as the new Fed chair, and she can be relied upon to continue Greenspan & Bernanke’s work in conjuring unlimited free money out of thin air
Which is great for the status quo, but if we take another look at that chart of the US 10-year Treasury yield again, we see something that ought to set alarm bells ringing…
The retracement of interest rates AFTER the Fed’s refusal to follow up their tough talk with a Taper has been far less marked than the rout that ensued after the subject was first tabled; and that spells trouble, because the housing market — the engine of the US “recovery” — cannot stand higher rates without being choked off…
Well, Janet Yellen might well confound everybody and launch the Taper as her first order of business. Or Buysenberg may even begin it as his last act in power; but either way, the market will now likely call the Fed’s bluff, because it knows that the gun hanging on the wall in the shape of the Taper is not guaranteed to be fired. It may even turn out to be completely superfluous to the narrative; and if that is the case, then chances are it will never be fired.
Just as Walter White’s honest intentions in trying to protect his family ended up trapping him in an ever-worsening spiral where countless millions of dollars only made his situation worse, Ben Bernanke is in a similar prison of his own making.
The Fed realizes the truth of that — hence the abandonment of both the Taper and their own credibility — but their chances of averting catastrophe are receding daily.
Full Grant Williams Letter below…
- Things That Make You Go Hmmm… Like Ben “Barrel’o’Monkeys” Bernanke (zerohedge.com)
- The Problem Isn’t Janet Yellen, It’s the Fed (thedailyblogreport.wordpress.com)