Game over. Occam’s Razor: The simplest explanation is often the best one. Central banks will never extract themselves. Whether they ultimately end QE is besides the point. They won’t reduce their balance sheets. They can’t.
Powell’s “performance” yesterday was not an accident. He’s been running on the same theme of offering absolutely zero specifics. Why?
1. There are none as there is no plan.
2. To maintain flexibility and not to be held accountable or anything
3. To not upset markets.
We saw this recently when he actually got challenged on MBS and QE. He couldn’t and wouldn’t offer a rationale as to what is actually economically accomplished by it:
Yesterday he clarified his “transitory” definition :
Powell: It’s hard to say when inflation will move back down.
*so he has no clue— Sven Henrich (@NorthmanTrader) July 28, 2021
He doesn’t know. And why would he? There is zero precedent for this much combined liquidity from the fiscal and monetary side along with a rapid economic reopening with consumers’ pockets stuffed with free money from the government.
To inflate the stocks market and the housing market was the goal. The Bernanke script:
Asset price inflation is Fed’s true policy.
A giant wealth gap is the result.
Ben Bernanke in 2012 in response to @pdacosta outlining clearly how the Fed deliberately targets home and stock prices to get consumers to spend more.https://t.co/wz230DpyZS pic.twitter.com/GeG0mispX5— Sven Henrich (@NorthmanTrader) July 26, 2021
Now the bubble has gotten so large they can’t risk anything popping it:
Why? Because popping the largest asset bubble ever would result in a catastrophic reset, not only a recession, but a depression.
The reality is debt levels have so exploded in the past 13 years any pre GFC type interest rates (which were historically low back then) would collapse the entire system. They know it. I know it, you know it. The entire system is predicated on debt expansion and cheap money to sustain it. That’s it.
This is the only choice:
“the Fed will most likely continue to disconnect asset prices even more from fundamentals. Wealth inequality will worsen more. The Fed’s monthly purchases of $40B of MBS will continue to price people out of the housing market.” @elerianm
*how is that the Fed’s mandate? https://t.co/WPML39Fdbi— Sven Henrich (@NorthmanTrader) July 28, 2021
The only way to avert disaster is to keep expanding wealth inequality, disconnect asset prices from the economy ever further and keep telling everyone they do it for the downtrodden while the bottom 50% are the ones actually taking the bath with permanent price increases while their wages are not keeping up:
Asset price inflation for the rich.
Consumer price inflation for the poor.— Sven Henrich (@NorthmanTrader) July 28, 2021
You will own nothing but be happy.
“Your weight gain will be transitory.
But you will remain fat afterwards”
– The Fed on inflation— Sven Henrich (@NorthmanTrader) July 28, 2021
Yes it’s all absurd, but that’s the trap they’re in. Hence all this waffling about tapering is just performance art. Powell was again completely dovish and we see the reality reflected in real yields:
It’s the grand distortion that forces everyone and everything into equities.
The Rydex bear/bull ratio has reached a new all time low, everybody and their mothers are long stocks:
And they keep buying the dips more aggressively than ever:
Hence asset prices are on a permanent expansion path:
But earnings. Yes earnings are great. Why wouldn’t they be? We just had $10 trillion shoved into system. And now more stimulus in form of an infrastructure deal. Yet we must keep running emergency measures at a rate never seen before. Come on.
Powell again made it clear that inflation will not be a deciding factor to taper or raise rates. Only full employment. An entirely disingenuous argument as the Fed cut rates 3 times in 2019 when unemployment was at 50 year lows of 3.5%. Powell cites uncertainty. There’s always uncertainty. On this basis, and now with climate change self anointed as the next big central bank portfolio task the stage is set for QE to never end. The BOJ is already onto buying “green” bonds.
It will never end in our lifetimes unless something breaks in the now held hostage organic economy and/or markets which are 100% under the thumbs of central bank distortion and manipulation.
The sad truth is: Without continued central bank intervention everything would collapse. One can only imagine the absolute carnage in global markets if central banks were to stop QE and raise rates by a measly 1/4 point tomorrow. You all know it. And the Fed knows it. Hence this pathetic song and dance show that will continue for months and months before they actually will taper.
And what does taper actually mean? Nothing. If they reduce bond buying by $10B or $20B or even $30B per month they’re still running a larger QE program than during the GFC. It’s insane, especially given the ever more glaring dichotomy:
Fed: Emergency measures are needed to support our struggling economy.
Corporations: Look at those record profits, things have never been better.— Sven Henrich (@NorthmanTrader) July 27, 2021
No, if Powell is smart he’ll gracefully exit next February and let someone else deal with the epic drama that is to unfold over the next few years. After all it would be a brilliant financial decision on his part, he could exit his all long stock portfolio and make a killing on the speaking circuit and laugh himself into the big fat book deal. Working title: The Savior. How I made myself and the top 1% really rich. No, that won’t be the title, but it may as well be, for that is the real effect of his policy.
The most financially conflicted Fed Chair in history, who financially benefits from every rally to new highs, has zero incentive to taper before his term is up. It’d hurt his personal financial net worth. And given Occam’s Razor, perhaps that’s the most obvious answer for the man who has no answers as to why he keeps printing despite an increasing chorus of people from even BlackRock on down urging him to stop:
All eyes now on Jackson Hole in August for the next hand wringing exercise in “evaluating substantial progress”.
My take: Even if they announce some sort of roadmap they won’t taper this year. One 10% correction, heck 7% correction, and it’s all off the table as more “uncertainty” suddenly makes the rounds. Jay Powell doesn’t want another Q4 2018. Not on his watch.
For the Fed remains market dependent and not data dependent. And so when Mohammed El-Erian asks: Is there an exit from QE:
From the @WSJ and showing how the #Fed‘s balance sheet…
Has ballooned since the 2008 global financial crisis;
Did not contract much even when both economic and financial conditions provided a window to do so; and
Highlights a key question being asked: is there an exit from QE? pic.twitter.com/SjcmiGeYQM— Mohamed A. El-Erian (@elerianm) July 28, 2021
The answer is a resounding no. Powell already hinted at maintaining the balance sheet for years when/if they taper. There is no plan or commitment to ever reduce it again. That experiment failed in 2018 and the ECB & BOJ didn’t even try. They’re all trapped & won’t admit it. That truth is self evident in the charts:
How do you unwind something like this without causing a giant equity and economic collapse? Occam’s Razor: You can’t. And hence no central bank is even pretending to speak about it. And no media organization is even bothering to ask them. Taper is a performance act to pretend to get back to some path of normal. News flash: There is no path to normal. The opportunity was there in 2017-2019 and they all failed to take advantage of it at the time and now the Fed has doubled its balance sheet again since last year. They couldn’t extract themselves from a $4.5 trillion balance sheet without blowing up markets. They sure as hell won’t be able to from an $8.2 trillion going on $9 trillion balance sheet. Game Over. Don’t play again.
What then does the future hold? Well, you heard it from Mohammed El-Erian: “the Fed will most likely continue to disconnect asset prices even more from fundamentals. Wealth inequality will worsen more. The Fed’s monthly purchases of $40B of MBS will continue to price people out of the housing market.”
How is this the Fed’s mandate? How will this accomplish anything other than fracture society even further to the core? How does propagating an ever larger asset bubble promote financial stability? Baffling. Investors won’t care about these questions at the moment as the gains keep coming. The questions will only get asked once the damage of the distortions will become self evident. By then it may be too late.
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