9/23/2013 Portland, Oregon – Pop in your mints…
Most persons in the financial industry, and likely beyond may recall that a mere five years ago, the Lehman Brother’s bankruptcy filing rocked the financial markets and served as the official notice that the blind 25 basis point hikes in the FED target rate that had passed as “monetary policy” during the go-go years of the early 2000’s were not exactly what the economy ordered.
In a matter of months, an entire industry that had been operating in a nearly infallible uptrend since the early 1970’s began to retool itself to cope with significant downside risk.
The Lehman event took place on September 15th and, while it did not exactly catch the US Treasury and the FED off guard, it did catch them without the resources or authority to do anything about it. As Phillip Swagel details in this piece “Why Lehman Wasn’t Rescued,”:
“Lehman failed before TARP was passed or even proposed to the Congress. This meant that the Treasury Department had no legal authority to put government money into the firm or provide a guarantee for its obligations. This changed with the passage of the Emergency Economic Stabilization Bill on Oct. 3, 2008, which provided $700 billion in TARP financing to be used to purchase troubled assets (used in the end mostly to purchase preferred shares in banks).”
Swagel goes on to state that the cases of both Bear Stearns and AIG, whose subsequent bailouts caused Lehman stakeholders, amongst others, to cry foul, differed on one very significant count:
“To all eyes, the problem at Lehman was one of solvency while the issue in the other two cases was liquidity. The Fed’s actions on Bear and A.I.G. were thus appropriate in its role as a lender of last resort and the same with its caution at Lehman.”
And so began the cascade of minifailures which have become collectively known as the Financial Crisis of 2008, as liquidity was provided to the solvent while the insolvent went quickly into history’s dustbin.
At The Mint, we refer to this odd period of time as “August and Everything After,” with apologies to the Counting Crows. It was a time when the industry threw in the towel, and the prevailing current became one of loss avoidance.
Today, just over 5 years later, we believe that we are at a similar inflection point with regards to tendencies in the financial markets, hence our tagline “August and Everything After All Over Again,” only this time, the tremendous risks in the financial system are not on the downside, where everyone is looking for them, they are on the upside, where few dare to tread.
The few who have tread confidently on the upside risks, despite the commonly held beliefs to the contrary, would have nearly tripled their money by doing something as mindless as going long the Dow circa March 2009, when it appeared the Dow companies themselves were to be swallowed up.
At this point in time, the upside risks are hidden from most. While the stock market continues to churn out an impressive performance, a more significant trend has been playing out in plain sight: Private investment activity is going through the roof.
While publicly traded equities get nearly all of the airtime, it is becoming clear that the advantages of being a publicly traded company are being outweighed by the regulatory burden and incredible scrutiny that public companies are under. To sum up the plight of public companies circa 2013, they are easy targets.
The answer for many has been to “go private,” and go private they have, from Ford to Blackberry, companies that once basked in the public limelight have found that going private may be just what the doctor ordered.
To accentuate this trend, today is the day that a key provision of the JOBS act takes effect, allowing private companies and startups to solicit accredited investors publicly rather than needlessly lurking about in the shadows as they had done since the days of the Great Depression.
The Role of the Federal Reserve
FED observers watched in near disbelief last week as the US Central Bank declined to “Taper,” which means to scale back the amount of money that they simply print and hand to holders of US Treasuries and Mortgage Backed Securities, citing downside risks.
In observing the FED, we can confirm that the economy currently faces unimaginable upside risks, as they are paradoxically always the last to react to market realities which they have unwittiningly created.
The FED and their observers labor under a belief that is both accurate and woefully misguided all at once. It is true that the Federal Reserve, in regulating short term interest rates and the base money supply, has nearly unchecked influence on the level of economic activity anywhere that dollars are used in exchange. This is a simple reality of the insane “debt is money” monetary system that the world suffers under. The primary issuer of the debt determines how much money there is.
They are wrong in thinking that the FED is clairvoyant in any sense of the word and can somehow time their interventions to achieve desired effects on the underlying economy. In this sense, the FED is always the last to react as it has no idea what the true timing of the cause and effect of their policy decisions are. While they have produced reams of academic work to prove their theories, in practice, it is nothing more than guesswork with the benefit of hindsight.
This is also why the FED will only “taper” when nobody cares whether or not they taper, i.e. when there is so much money flooding the system that the dangers are clearly on the side of hyperinflation. Inflation, in their mind, is much easier to fight than the deflationary spiral the the Lehman event triggered five short years ago.
They are right in the sense that in a hyperinflationary environment, the monetary system simply needs less juice, where a deflationary environment threatens their stranglehold on the world’s monetary system.
To understand the depth of the incompetence of the FED and Central Bankers at large, one need only look to their latest hero, Michael Woodford. Mr. Woodford wrote a book titled “Interest and Prices: Foundations of a Theory of Monetary Policy” in which he deals with problems of zero bound rates and quantitative easing, ideas that were being toyed with back in 2003 when the book was published as mere theory. Now, they are part of a Central Banker’s everyday life, and Woodford’s book is considered their bible.
The base of Woodford’s theory, which we have come to know as “foreword guidance,” is that when monetary policy is accommodating maximum liquidity and the system still lacks it, policy makers must resort to telling market participants what they will do, essentially tying their hands in the future, in order for liquidity to exceed its theoretical limits. This is the only reason why Ben Bernanke now holds a press conference after FED policy meetings, so that this theory can be implemented.
Woodford’s theory of Foreword Guidance, like Quantitative easing, is further evidence that the current monetary system has failed. It has failed in the sense that even unlimited amounts of debt masquerading as money cannot satiate the need for liquidity in global markets, which are so disconnected from actual physical conditions that it is impossible to tell which projects are a net benefit to humankind and which take humankind further down the path to fantasyland, where all play and no work promises a lot of pain and scarcity down the line.
The risk in the “After August” period is to the upside, and central bank notes will become irrelevant as the global economy goes into overdrive and a new monetary system will be tacitly agreed upon by all participants.
When the Central Bankers of the world look up from Woodford’s textbook, they may catch a glimpse as the Tsunami of liquidity washes their currencies away.
The FED has nearly doubled the base money since 2008, are re you ready for it to multiply?
Stay tuned and Trust Jesus!
Key Indicators for September 23, 2013
Copper Price per Lb: $3.27
Oil Price per Barrel: $103.40
Corn Price per Bushel: $4.53
10 Yr US Treasury Bond: 2.71%
Mt Gox Bitcoin price in US: $133.43
FED Target Rate: 0.09% ON AUTOPILOT, THE FED IS DEAD!
Gold Price Per Ounce: $1,322
MINT Perceived Target Rate*: 0.25%
Unemployment Rate: 7.3%
Inflation Rate (CPI): 0.1%
Dow Jones Industrial Average: 15,401
M1 Monetary Base: $2,469,100,000,000
M2 Monetary Base: $10,783,000,000,000