Bigger Isn't Better

It’s now been over a decade since the world’s major central banks reacted to the financial crisis with record-low interest rates and quantitative easing. Major central banks gave themselves a blank check with which to resurrect problematic banks; purchase government, mortgage, and corporate bonds; and in some cases -- as in Japan and Switzerland -- stocks, too. They have not had to explain to the public where those funds were going or why. Instead, their policies have inflated asset bubbles while coddling private banks and corporations under the guise of helping the real economy.

When money is cheap because interest rates are low or near zero, the beneficiaries are those with the most direct access to it. That means, of course, that the biggest banks, members of the Fed since its inception, get the largest chunks of fabricated money and pay the least amount of interest for it.  The biggest six U.S. banks have been rewarded with an endless supply of cheap money in bailouts and loans for their dangerous behavior. They have been given open access to these funds with no major consequences, and no rules on how they should utilize the Fed’s largess to them to help the real economy.

The zero interest rate and bond-buying central bank policies that prevailed in the U.S., Europe and Japan were part of a coordinated effort that has plastered over potential financial instability in the largest countries and in private banks. It has, in turn, created asset bubbles that could explode into an even greater crisis the next time around.  The risks posed by the largest of the private banks still exist, only now they’re even bigger than they were in 2007-2008 and operating in an arena of even more debt.

Today the big banks are bigger than ever and the amount of de‌bt in the system is larger than ever. There’s been no substantial reform since the financial crisis, just some cosmetic moves that have been passed off as major reform. The big banks are always ahead of the regulators.  It’s just one part of a system rigged in favor of Wall Street that has been deemed too big to fail. It’s a corrupt and incestuous system filled with perverse incentives and conflicts of interest.

-- Nomi Prins, The Daily Reckoning (Dec. 13 & 19, 2019) edited

liquidity to inflation

[T]he problems in the economy today are structural, not liquidity-related. Federal Reserve officials have of course misperceived the problem. The Fed is trying to solve structural problems with liquidity solutions. That will never work, but it might destroy confidence in the dollar in the process.

Fiat money can work but only if money issuance is rule-based and designed to maintain confidence. Today’s Fed has no rules and is on its way to destroying confidence. Based on present policy, a complete loss of confidence in the dollar and a global currency crisis is just a matter of time.

Consumer price inflation has remained persistently low, despite the Fed’s best efforts. This has led many people to ask where the inflation is, because the Fed has created trillions of dollars since the financial crisis.  But there has been inflation. It’s just been in assets like stocks, bonds, real estate, etc. The market’s back to record highs again, in case you haven’t heard.  The bottom line is, we’ve seen asset price inflation, and lots of it, too.

But the question everyone wants to know is when will we finally see consumer price inflation; when will all that money creation catch up at the grocery store and the gas pump?

-- Jim Rickards, The Daily Reckoning (Dec. 9, 2019)

bank regulation

The Board of Governors of the Federal Reserve System recently published their annual Supervision and Regulation Report which measures the financial condition of major U.S. banks, including loan growth and liquidity in the banking system.  Overall, 45% of U.S. banks with more than $100 billion in assets received a supervisory rating of “less than satisfactory.”  That’s not good. As we learned during the 2008 crisis, the stability of these large banks is essential to the health of our banking system.

Furthermore, this rating should not sit well with hardworking Americans who bailed out many banks during that last major crisis.  As bank lobbyists continuously push for more deregulation, it's prudent to remember what happened a decade ago with bank bailouts and a market crash.  We need more regulation, not less, if banks continue to receive less than a “C” grade on their report cards.

-- Nomi Prins, The Daily Reckoning (edited) (Dec. 7, 2019)

Speculation Encouragement

Needless to say, if you bail out speculators, they will simply speculate more. And if you do it over and over and predictably so, you will extinguish the fear of risk and loss, which is the only thing which keeps the speculative impulses in check.

-- David Stockman (as quoted in The Daily Reckoning) Sept. 24, 2019 (slightly edited)

market manipulation

The problem with any kind of market manipulation (what central bankers call “policy”) is that there’s no way to end it without unintended and usually negative consequences. Once you start down the path of manipulation, it requires more and more manipulation to keep the game going.  Finally it no longer becomes possible to turn back without crashing the system.

Of course, manipulation by government agencies and central banks always starts out with good intentions. They are trying to “save” the banks or “save” the market from extreme outcomes or crashes.  But this desire to save something ignores the fact that bank failures and market crashes are sometimes necessary and healthy to clear out prior excesses and dysfunctions. A crash can clean out the rot, put losses where they belong and allow the system to start over with a clean balance sheet and a strong lesson in prudence.

Instead, the central bankers ride to the rescue of corrupt or mismanaged banks. This saves the wrong people (incompetent and corrupt bank managers and investors) and hurts the everyday investor or worker who watches his portfolio implode while the incompetent bank managers get to keep their jobs and big bonuses.  All it does is set the stage for a bigger crisis down the road.

-- Jim Rickards (The Daily Reckoning) July 31, 2019

AI's insurmountable limit

Machines do not essentially think. They don't know anything. There are systems of gates, of dumb components. They lack creativity and aren’t capable of what only human minds and imaginations can generate. Most neuroscientists believe that consciousness is just a byproduct of chemistry. Too many scientists imagine that if logical processing is accelerated to a high enough rate that somehow consciousness will emerge. I believe that this is a fundamental misunderstanding of the mind. And that (misunderstanding) undermines much of the prevailing neuroscience and almost all of computer science that purports to be imitating minds (i.e., artificial intelligence). The smartest people in the world believe in this materialistic superstition. They believe that the universe is explainable entirely in terms of chemistry and physics. That assumption, I believe, is manifestly false. But it is a religious conviction underlying almost all neuroscience and computer science.

-- George Gilder (The Daily Reckoning) June 22, 2019

Central Bank Experimentation

The grand central bank experiment of the last 10 years has ended in utter and complete failure. The games of cheap money and constant intervention that have brought record global debt to the tune of $250 trillion and record wealth inequality are about to embark on a new round.  All under the banner to “extend the business cycle” at all costs. Never asking whether they should nor considering the consequences.  This is not capitalism, nor does this ongoing farce constitute free market price discovery. It’s politburo based central planning, desperately trying to keep the balls in the air.  

The pretense is gone, it’s all about keeping the illusion alive that the Fed knows what it’s doing, that it’s always there to save markets from any trouble.  But since they are not elected by the people and face zero consequences for failure, they don’t have to consider the collateral damage they inflict.  Everything every central banker has uttered last year was completely wrong. Every projection they made over the last 10 years has been wrong.  Why place confidence in people who are staring at the ruins of the policies they unleashed on the world and are about to unleash again?  We’re all staring at a colossal policy failure with no accountability.  Brace yourselves as no one, absolutely no one, can know how this will turn out.

-- Sven Henrich (Northman Trader) June 7, 2019 (edited)

Move Over

Things look bad from over here
Too much confusion and no solution
Everyone here knows your fear
You're out of touch and you try too much

The country needs a father
Not an uncle or big brother
Someone to keep the peace at home

If we can't get together
Look out for stormy weather
Don't make me pay for your mistakes
I have to pay my own

If we can not wake you
Then we'll have to shake you
Though some say you'll only understand a gun
Got to prove them wrong or you will lose the battle
Don't you know we'll start a war which will be won by none

Yesterday's glory won't help us today
You want to retire?  Get out of the way

-- John Kay / Gabriel Mekler (Steppenwolf) 1969

Too Big to Fail (Again)

In the wake of the 2008 financial crisis, the bank bailouts did not save the economy as their architects advertised. Rather, they bolstered the biggest U.S. banks from an insolvency crisis of their own creation. Those banks were, and remain, too big to fail. Their CEOs are too connected to jail.

The leaders of the major banks oversaw multi-trillion dollar enterprises that committed fraud, lost other people’s money, harassed public service members, and fired thousands of low-level employees. Worst of all, they have put the entire financial system and markets at the edge of ruin again.

Big banks know they have political and Federal Reserve support. Low or negative rates provide banks access to cheap capital if they need it, which encourages greater recklessness than if they had to “pay” more for it. They have taken this as a license to gamble large. By rescuing and supporting the big banks’ dangerous behavior, such recklessness has been not only condoned but encouraged.

The argument big banks make about their mega derivatives positions is that they are “hedged.” In other words, though the total (or “notional”) figure is large, most of the long and short positions net out against each other. The problem with that assessment is that the big banks take long and short positions against each other. They have set themselves up again in domino fashion.

We are heading for another financial crisis at some point. No one can say when for certain, but probably sooner than later. There’s a lot more money supporting the system artificially that the central banks have conjured than we had going into the last crisis. If that subsidy was to go away or be reduced, the money would come draining out of the same financial system that it’s been inflating.

-- Nomi Prins (Daily Reckoning) May 23, 2019 (edited)

The Garden

The arrow flies when you dream

The hours tick away, the cells tick away
The Watchmaker keeps to his schemes
The hours tick away....

 

The measure of a life is a measure of love and respect
So hard to earn, so easily burned
In the fullness of time, a garden to nurture and protect

 

In the rise and the set of the sun
'Til the stars go spinning 'round the night
It is what it is

And forever, each moment a memory in flight

 

-- Neil Peart (Rush) 2012

Time

Ticking away the moments that make up a dull day, 

Fritter and waste the hours in an offhand way.
Kicking around on a piece of ground in your home town,
Waiting for someone or something to show you the way.

Tired of lying in the sunshine,
Staying home to watch the rain.
You are young and life is long,
And there is time to kill today.

And then one day you find
Ten years have got behind you.
No one told you when to run,
You missed the starting gun.

And you run and you run to catch up with the sun, but it's sinking
Racing around to come up behind you again.
The sun is the same in a relative way but you're older,
Shorter of breath and one day closer to death

Every year is getting shorter never seem to find the time.
Plans that either come to naught or half a page of scribbled lines.
Hanging on in quiet desperation is the English way.
The time is gone, the song is over,
Thought I'd something more to say.

-- Pink Floyd (1973)

Time

Time speaks with golden words
When there's nothing to be heard
Hides behind the stars
Silver in the night
Lies in the coming light

Time living with today
In a lonely way
She whispers never a surprise
She won't tell you why

Time speaks her golden tongue
And when everything is done
She lies to no one

-- Screaming Trees (1990)