First, to all of those in the NOTES community who celebrate the Jewish New Year, I wish you a year of health, peace and prosperity. To those who celebrate other spiritual endeavors I offer you a wish for health, peace and prosperity. Now, to the markets. In the past month I have spent time putting issues we’ve been discussing for the last nine years into perspective. Lately, the airwaves are filled with the accolades laid upon the policy makers who SAVED CAPITALISM. Listening to Paulson, Geithner and Bernanke pontificate on how they acted to save the system is enough to send me into fits of rage as the culprits who failed to act to halt the housing bubble praise themselves for the “Courage To Act.”
Sorry, but this is nonsense.The bloviating Geithner systematically punished Main Street to save Wall Street. That is not opinion but fact. Somebody had to suffer and the choice was made to bail out Wall Street, bond holders and large financial entities while forcing overleveraged homeowners into bankruptcy and foreclosure. As Austin Goolsby once told me, “The Secretary of Treasury lobbies for Wall Street in the way that the Secretary of Agriculture lobbies for farmers.” The FED‘s zero interest rate policy, which was used to bail out the overleveraged financial institutions, further punished Main Street.
I agree that QE ONE was necessary to prevent the liquidation of massive amounts of assets. A massive selloff would’ve caused the entire financial system to seize up and result in unemployment data similar to that of Spain, Greece, Italy and other debt-ridden economies. The United States couldn’t politically tolerate 20% unemployment. Think about the present divide in our politics and that is with FULL EMPLOYMENT. The Bernanke/Geithner plan was for the financial repression of savers and foreclosing on homes of people with ridiculous adjustable rate mortgages. But as Holden said over and over, I digress.
***Larry Kudlow continues to note how well the U.S. economy is doing while citing the recent travails of the Chinese equity markets (thus a reflection on the weakness of the Chinese economy). It plays to Kudlow’s sophomoric view that the U.S. will most certainly be able to withstand a trade war better than the Xi Government. While Kudlow and his cronies cite the weak Chinese economy they criticize the weak Chinese yuan. In a global financial system of unencumbered capital flows, a weak economy saddled with high debt and excess productive capacity is certainly going to experience capital outflows, which will result in a weakened currency. On Wednesday, Kudlow allegedly said, “Trump is doing the Lord’s work on trade.”
Well Larry, I repeat what I wrote in this blog when Lloyd Blankfein made a similar comment: Noah’s flood was also the Lord’s work so be careful with your biblical references. The bottom line for investors is that markets are feeling distress as emerging markets are suffering under the plagues of too much debt denominated in another currency. The stronger the dollar the more expensive the debt servicing costs .If the Chinese Yuan continues to lose value, the global effect will be disinflation as China and others will dump excess capacity upon world markets. A new fear of deflation will cause central banks to panic as they rush to the barricades to stem the effect of falling prices on global record debt which will lead to a new rally in the precious metals. The Lord’s work indeed. Where’s the jubilation and forbearance?
***On Thursday we get interest rate announcements from the Bank of England and the European Central Bank. The BOE is expected to remain at 0.75% as the British Parliament works through the uncertainties of Brexit. Als ,Governor Carney was given an extension to his term so as not to change quarterbacks at a crucial time in British history. Forty-five minutes later we hear from the ECB’s President Draghi about interest rate policy. NO CHANGE to present policy is expected and the central bank should remain on course to start shrinking its QE purchases to 15 billion euros in October. The Draghi press conference, which begins at 7:30 CDT, will reveal some of the ECB’s thoughts about the recent weakening in the European economy.
Draghi will acknowledge that some economic indicators have softened but I would expect the ECB president to invoke the Bernanke/Yellen language of transitory headwinds from global trade conflicts. Draghi will also be asked about his successor and whether he has a preference. This will be a stupid question not worthy of a response. The successor question is far more important for German Chancellor Merkel. In my opinion, Merkel made a categorical error in 2011 by not promoting Bundesbank President Axel Weber to the ECB’s top job. Germans may have been far more receptive to aggressive QE programs with a German hard money advocate standing at the printing press.
There are rumors flying that Chancellor Merkel is willing to have a non-German as the ECB President if Germany were to receive the Presidency of the European Commission. In my opinion, the ECB will be a far more important place for the German’s to be in command of the money printing authority under the guise of Bundesbank President Jens Weidmann.
Tags: Angel Merkel, Bernanke, BOE, Chinese Yuan, ECB, Euro, Fed, Geithner, Germany, Larry Kudlow, Paulson, trade, U.S. Dollar, Yellen
September 12, 2018 at 6:36 pm |
Yra, Happy New Year, and thank you for nine years of offering this interchange.
September 12, 2018 at 6:50 pm |
Thanks Yra. The FT is disappointing. Thanks for remembering the history of neglect. Bernanke May 2007,””We believe the effect of the troubles in the subprime sector on the broader housing market will be limited and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system,”.
September 12, 2018 at 7:32 pm |
These guys are the very best money can buy!
September 13, 2018 at 2:42 am |
“Meet the new boss. Same as the old boss.”
The Who, Won’t get fooled again. 😆
September 13, 2018 at 4:26 am |
Most everyone agrees that QE 1 was necessary and most believe the subsequent QEs and “whatever it takes” has been a roaring success. I for one never have. I would have preserved Main Street and let Wall St. pay the price of failure for their gross indiscretions in the housing bubble. Citi and JPM and Bank of America shareholders and bond holders would have paid the piper. The government could have stepped in to guarantee depositors, nationalize the banks and restructure them and after they stabilized start all over. The taxpayers would not have been screwed, the savers and pensioners would not have been screwed and Main Street would not have been screwed. How many Wall St. executives went to jail for gross malfeasance? A few traders were the scapegoats.
Letting the markets clean out the rot would avoid the Moral Hazard that has now ensued and the ultimate cost to our financial system has yet to be realized. But creating over sixty trillion dollars in new debt will have a cost. And it will be much greater than the tumult of the temporary collapse of Wall St. We survived the Great Depression without bailouts and no thanks to the New Deal and FDR.
History will ultimately be the judge when the final chapter is written. The invisible hand IMO will have been the better cure than the very visible hands of Greenspan, Bernanke. Geithner and Draghi.
But what do I know.
September 13, 2018 at 5:16 am |
I agree 100% with you Asherz.
September 13, 2018 at 10:57 am |
I also agree. Goldman Sachs would have also certainly failed. Good.
Maybe instead we’d have had a very sharp but tolerably short depression like 1920-21. And have avoided the mountain of unproductive debt that’s much worse now after a decade of ZIRP, unsound money practices and crony capitalism.
September 16, 2018 at 8:05 pm |
Ray Dalio, in his new book “Understanding Big Debt Crisis” gives credit to QE1 for helping the crisis by preventing massive asset liquidation. On page 228, Dalio writes, “their first Quantitative Easing (QE) program [was] a classic and critical step in managing a deleveraging. Central bankers in the midst of crises are forced to choose … They inevitably choose to print, as they did in this case, which is when things changed dramatically.”
Who am I to argue with Ray. Seems Yra was right and I was wrong.
September 13, 2018 at 8:28 am |
BOE leaves rates at 0.75%
Turkey hikes(ed) to 24%
September 13, 2018 at 10:59 am |
Chicken, I think Argentina hiked to 60%, so they’re more serious.
September 16, 2018 at 10:46 am
Perhaps 160% should be the new benchmark rate. Similar to the strategy of offering forgiveness to men you’ve wronged.
September 13, 2018 at 8:30 am |
Happy New Year to those who are celebrating it.
As for the 2008 crisis and its aftermath, the way it played out shows how powerful Wall Street is. A GS CEO (Paulson) was infiltrated into the government to run Treasury. Two of Wall Street’s lawyers (Holder and Breuer) were infiltrated into government to run the Justice Dept. The icing on the cake is that the parent firms of most of mainstream media have someone from the financial markets on their board of directors.
Is it any wonder most of the public has no clue what transpired?
September 13, 2018 at 11:04 am |
Not all EM is like Turkey, Argentina, SA, Brazil. Lumping all EM together as bad is a false generalization. Some EM is solid with good growth and FX reserves of 2-3X their total net debt. Think Saudi Arabia or numerous countries in eastern Asia. This has created outstanding selective buying opportunities, as noted this week by Jefffrey Gundlach and Peter Boockvar. Per Gundlach, EM bonds in local currency are a buy, the dollar is going down and the US economy looks “suicidal” with higher interest rates combined with rising, massive debt it cannot possibly repay.
Also, don’t buy the media’s false “strong dollar” narrative; it’s really a weak dollar that will likely continue to weaken further over the next several weeks/months. The dollar’s short-lived relief rally apparently ended 4 weeks ago, has already surrendered 4 handles and is now barely hanging on by a thread, with a major H&S neckline around 94.5 A close below that promises a push toward 90-91 and then below that are new lows and much dead air (down).
September 16, 2018 at 8:13 pm |
The dollar index tested and held that key support on the close Thursday, followed by a small bounce on Friday. Dollar needs follow through and to reach above 95.5 quickly to invalidate its bearishness and at least become neutral. Dollar bears still need that close below 94.43-94.50 critical support. US stock bulls need the dollar to break that and weaken again more. IMO that’s likely to happen along with new US stock highs sometime in the coming weeks. But there is no certainty in these uncertain markets.
Also I can’t help but think that a political upheaval in the US (ie., Trump impeachment process) would eventually pummel USD and US assets – and that’s no political stmt. Just a look at the history of US markets after Watergate heated up.
September 14, 2018 at 5:07 am |
As usual, there appears to have been little unexpected in the Draghi presser? It seems the US PPI and CPI misses trumped all else. Is trump’s ill-advised, debt-backed fiscal binge starting to wear off? Had a big move in EUR/USD down to the major H&S neckline and key support in the 97.43-97.50 range.
There might be a USD bounce if US retail and sentiment data are rosy today, but regardless I think the dollar is ultimately going down (against almost everything). That will help US stock nominal values and markets everywhere by easing financial conditions globally which had risen recently with the dollar from very easy to merely easy.
The interesting part will be what’s next after the dollar loses a few handles. Will it fall off the cliff or reverse? (I suspect “reverse” up later in ‘c’ of an a-b-c, unhelpful for stocks then, say in 2019.)
September 14, 2018 at 5:12 am |
Trump, Kudlow and Company are giving the Chinese and other governments an easy scapegoat to blame for any economic woes that China & the region may experience.
We can see this starting to be used in the press throughout the region and apparently swinging public opinion across Asia. Very convenient when the Chinese economic leadership wants to reign in debt and tighten up as it knows it must. It’s also perfect timing for China in the early part of the 5-year Chinese political cycle. America’s allies in Asia are sympathetic to the Chinese perspective and gradually taking its side apparently.
September 14, 2018 at 5:17 am |
Nice try by Bernanke, Paulson & Geithner to revise history and take credit. As I recall, markets continued to collapse throughout 2008 and for months into March 2009 despite all their shenanigans. They failed. Rather, two other key events “saved the world” instead.
One. The turnaround of capital markets coincided with Congress shamefully holding a gun to the head of FASB and forcing it to change the century-old accounting rule “mark-to-market”, allowing financials to value their assets however they liked instead of market value. Thus huge, real accounting losses vanished overnight, per the books at least. Unbelievable! That smoke & mirrors has helped mask structural cracks for a decade and will apparently continue to fool most people until it doesn’t.
Two. The massive, debt-backed stimulus from China was the primary economic salvation for the world (and China, which is why they did it). Now China is tapped out and over-indebted like the West. Finished. So who saves the global economy in the next inevitable debt crisis? The socialists that Americans are preparing to elect to Congress within two weeks and/or to the executive in two years? LOL. We know they have no desire to “save capitalism”; on the contrary they wish to replace it with socialism. Not meant to be a political comment; rather a forewarning of turbulent times, extremely radical policy and market volatility ahead. As Ray Dalio has explained, it’s going to get ugly for society.
September 16, 2018 at 8:19 pm |
Per my post several above minutes ago, Ray Dalio in his new book credits QE1 (thus Bernanke) for managing an “ugly” deleveraging as something that was very helpful to matters. So that’s event number #3, maybe even #1. Yra was right in his post about QE1.
Dalio also wrote in his book that US markets embraced the FASB rule change above, which became fully expected in March 2009 at the market bottom and was formally passed a couple of weeks later.
September 16, 2018 at 10:56 am |
Great comments in this thread, kudos for the clear recollection and train of thought.
September 17, 2018 at 9:06 am |
To all who have posted—this is what makes this blog worth writing—the comments have been extremely thought provoking and if paid attention to able to develop successful investing–this is not an echo chamber but a great platform for discourse—-thanks to all–Yra