Submitted by David Stockman via Contra Corner blog,
The Fed and the other major central banks have been planting time bombs all over the global financial system for years, but especially since their post-crisis money printing spree incepted in the fall of 2008. Now comes a new leader to the Eccles Building who is not only bubble-blind like her two predecessors, but is also apparently bubble-mute. Janet Yellen is pleased to speak of financial bubbles as a “misalignment of asset prices,” and professes not to espy any on the horizon.
Let’s see. The Russell 2000 is trading at 85X actual earnings and that’s apparently “within normal valuation parameters.” Likewise, the social media stocks are replicating the eyeballs and clicks based valuation madness of Greenspan’s dot-com bubble. But there is nothing to see there, either–not even Twitter at 35X its current run-rate of sales or the $19 billion WhatsApp deal. Given the latter’s lack of revenues, patents and entry barriers to the red hot business of free texting, its key valuation metric reduces to market cap per employee–which computes out to a cool $350 million for each of its 55 payrollers. Never before has QuickBooks for startups listed, apparently, so many geniuses on a single page of spreadsheet.
But nowadays, by contrast, the central bank’s free money guarantee nullifies all that and induces massive inflows to speculative positions in any and all financial assets that can generate either a yield or an appreciation rate slightly north of zero. To adapt Professor Keynes’ famous aphorism, the Fed’s quasi-permanent regime of ZERO-COGS “engages all of the hidden forces of economic law on the side of [speculation], and does it in a manner that not one in [nineteen members of the Fed] is able to diagnose”.
Indeed, no less an authority on the great game of central bank front-running than Pimco’s Bill Gross trenchantly observed last week: “Our entire finance-based system….is based on carry and the ability to earn it.”
Stated differently, the preponderant effect of the Fed’s horribly misguided ZIRP has been to unleash a global horde of financial engineers, buccaneers and plain old punters who ceaselessly troll for carry. The spreads they pursue may be derived from momentum-driven stock appreciation and credit risk premiums or, as Bill Gross further observed, they may be “duration, curve, volatility or even currency related…..but it must out-carry its bogey until the system itself breaks down.”
Not surprisingly, therefore, our monetary central planners are always, well, surprised, when financial fire storms break-out. Even now, after more than a half-dozen collapses since the Greenspan era of Bubble Finance incepted in 1987, they don’t recognize that it is they who are carrying what amounts to monetary gas cans. Having no doctrine at all about ZERO-COGS, they pour on the fuel completely oblivious to its contagious, destabilizing and perilous properties. Nor is recognition likely at any time soon. After all, ZERO-COGS is an artificial step-child of central bankers’ writ; its what they do, not a natural condition on the free market.
That’s the Keynesian cheap debt trick in a nutshell: it does not describe a timeless science that can be applied over and over again, but merely a one-time party that is over. As shown above, the ratio has now retraced to the 180s, but that’s still high by historic standards, and more importantly, is the reason that Professor Larry Summers can be seen on most days sucking his thumb, looking for “escape velocity” that can’t happen.
The up-ratchet in private and public leverage ratios is over, and that means that the Keynesian monetary policy is done, too. It worked for a few decades thru the credit transmission mechanism to the household sector, but one thing is now certain: the only part of household debt that is growing is NINJA loans to students and what amounts to de facto rent-a-car deals in autos, which in due course will lead to a new pile-up of defaulted paper and acres of repossessed used cars.
Meanwhile, Yellen and her mad money printers keep “accommodating” as they try to fill to the brim an imaginary bathtub of potential GDP. The exercise would be laughable, even stupid, if it were not for its true impact, which is ZERO-COGS. The latter, unfortunately, is fueling the mother of all bubbles here and abroad; crushing savers and fixed income retirees; showering the fast money traders and 1% with unspeakable windfalls of ill-gotten “trickle-down”; and placing control of the very warp and woof of our $17 trillion national economy in the hands of unelected, academic zealots.
The worst thing is that Yellenomics is just getting started because the whole crony capitalist dystopia that has become America can not function for more than a few days without another dose of its deadly monetary heroin.