– Rick Ackerman, former San Francisco PSE market maker
When the Federal Reserve will tighten: I worked some numbers over the weekend in order to refine my forecast for Fed policy. One prediction that has stood the test of time is that any real tightening by the central bank is as likely as a Martian invasion. Turns out that when you crunch the latest data available, a Martian invasion winds up being 1.835 times as likely as any Federal Reserve tightening now or in the future. The formula I used to handicap this bet is proprietary and somewhat esoteric, so I won’t go into it here. But the bottom line is this: Anyone who believes that deliberate tightening is even remotely possible, let alone likely, is delusional.
Of course, many of the deluded are bound to argue that the Federal Reserve has already begun tightening via the “taper,” a gradual reduction in its sham purchases of Treasury paper and mortgage-backed securities that commenced with dubious earnest last winter. However, the tapeworm represents the sort of “tightening” that Fed-watchers, pundits, eggheads and the news media can wrap their delusional brains around, since it dovetails conveniently with the absurd myth that the Fed knows what it’s doing. In fact, most of those who interpret economic news — crypto Marxist-cum-Nobelist Paul Krugman chief among them — couldn’t hold down a CETA job assembling doorstops. These are the same economic bozos, after all, who bought into Greenspan’s crackpot notion that inflated home prices constitute “wealth,” and that capital investment supposedly was expanding at a time when household savings growth in the U.S. was negative.
Managing Our Expectations
To put the tapeworm in proper perspective, it has amounted to the withdrawal so far of perhaps forty billion dollars’ worth of Treasury funny money per month from the financial Rube Goldberg machine’s fuel tank. If this is what Federal Reserve tightening is all about, it is like putting a thousand-pound man on a diet by substituting aspartame for sugar in his coffee. Meanwhile, as the Federal Reserve goes about its Goebbelsian business of managing our expectations, the banking system continues, via a quadrillion-dollar derivatives shell-game, to churn out uncollateralized digital money at a rate probably 50 times that of credit withdrawn from the system via the tapeworm.
The result is that for all the talk about the Fed gradually ending “quantitative easing,” the world is awash in a sea of egregiously underpriced loans. This holds true for the entire spectrum of borrowers — from the lowly, revolving-credit consumer to the home-equity lender to the multinational banking giant. Mortgage rates are hovering near historic lows, and car loans remain so cheap and plentiful that even someone in prison can buy an Escalade with no money down. Zero-percent teaser rates continue to glut the mailboxes of anyone with a credit card. And for top-rated corporate issuers of debt, the Guvmint has made credit infinitely abundant and so cheap that even companies with mountainous cash surpluses continue to borrow because it costs them practically nothing to do so.
Global Markets Ebullient
With corporate-debt sales running at a record clip, Apple just raised $12 billion, Oracle $10 billion, and Cisco $8 billion, contributing to a reported $612 billion of corporate borrowing in the first half of 2014. The news media have reported this mania matter-of-factly while failing to recognize it as a symptom of malinvestment at a millennial peak. The fact that the tusnami of money creation cannot possibly recede without sweeping the global economy out to sea has been overlooked for one reason: U.S. stocks are trading in record territory. Although this has provided psychological support for an unprecedented wave of investor madness around the world, and for the spinmeisters’ story that the U.S. economic “recovery,” such as it is, is sustainable, it is entirely predictable that today’s giddy ebullience will turn into cold, hysterical fear overnight when the epic bear market that is by now long overdue takes its initial plunge.
Meanwhile, it is remarkable that the Federal Reserve has succeeded for so long at “managing expectations” on-the-cheap, holding a quadrillion-dollar deflationary juggernaut temporarily at bay with, most recently, a mere $50 billion worth of monthly, monetary sleight-of-hand and cryptic policy speeches. Clearly, the dolts, eggheads and editorial hacks who interpret Federal Reserve policy, and who hang on Janet Yellen’s every word, still believe the Fed to be all-knowing and all-powerful. Heaven help us when the central bank’s transparently idiotic ruse lies fully exposed to market forces, as occurred briefly during the Great Financial Crash of 2007-08. As to any deliberate Federal Reserve tightening in the meantime, it is absolutely unthinkable, since subjecting the quadrillion dollar derivatives bubble to even 50 basis points of market-induced tightening would precipitate an unwind of wrong-way bets that in mere days will leave the global financial system in smoldering ruin. By that time, the feather merchants who created it will have no place to hide, and the Paul Krugmans of the world no choice but to acknowledge the epic hoax that sustained it.