Monday, February 10, 2014

Politicians and central bankers are lying in their teeth

Grant Williams has an outstanding newsletter this week (link is to an Adobe Acrobat document in .PDF format) dealing with the current crisis in emerging markets, the effects of the Fed's 'tapering', and the implications of current policies (both political and fiscal) for the world (and the US) economy.  His conclusions are very like those I posited recently.  Here's an excerpt.

Everywhere you look, concern is rising amongst those charged with applying the copious amounts of sticking plaster that are vital to ensuring the world financial system doesn't fall apart...

. . .

... a big problem is that, over the course of the ongoing financial crisis (yes, it is), the power wielded by central bankers has reached unprecedented levels as one extraordinary measure after another has been implemented simply in order to maintain the status quo.

. . .

... central bankers lie. The job demands it. That means that they join politicians in the category marked "cannot be trusted," and yet investors the world over are not only relying on the promises made by these individuals but also trusting them to be both transparent and honest when the job demands they be neither.

Given that they lie to us, and given that they are making two key representations to us, should we not perhaps take a moment to think about the two inputs to this particular equation?

Politicians across the globe are assuring us that (amongst other lies things):

1) The "recovery" is either here or right around the corner.
In fact, it is neither.

2) Remaining in the EU is the best option for Greece, Spain, Italy (and France).
It is not.

3) Soaking the rich is the answer to a multitude of problems.
It isn't.

4) Raising taxes will generate the necessary revenue without having a negative effect on the economy.
It won't.

5) Future promises of entitlement payments are solid.
They aren't. Defaults are inevitable.

Meanwhile, the central bankers of the world are promising us that:

1) Interest rates will remain low for a very long time.
In the end, it's not central bankers' choice to make.

2) Quantitative easing has no ill effects and can be withdrawn at will without causing any problems.
It can't be.

3) Printing money will not translate into higher inflation.
It will. It just hasn't yet.

4) They will do "whatever it takes," and that will be enough.
There is a limit to what they can do, and it will ultimately not be enough.

5) They are all in this together.
They're not. It is every man for himself now, and the Fed will screw them all.

So here we are.

Having established that, like politicians, central bankers are required to lie to us in order to be able to do their jobs, we are left facing a couple of crucial questions. First, IS tapering tightening, or not? Secondly, what does all this chaos in emerging markets in the wake of The Tighten Taper mean, and where does it take us from here?

. . .

Not only is tapering most definitely tightening (don't listen to what they say, watch the results), but we have likely seen just the beginning of the fallout from the Fed's new course.

Will they stick to it? No. They won't be able to. They MAY taper another $10 bn in March when Janet Yellen's first rate decision is announced, but I suspect that by then markets will be in such a state of disrepair that excuses will be made as to why the taper has been suspended. You can bet your bottom dollar that there will be some frantic calls put in to Ms. Yellen's office by her peers around the world between now and March 20, all of which will be begging calling for an end to The Taper.

Ultimately, QE will continue to be expanded until it implodes in a fireball the like of which has never been seen before. There's no choice, I am afraid, because the alternative would involve the telling of some very harsh truths by politicians and central bankers and the bestowing of some serious pain on an electorate that already holds them in contempt.

Think those truths are going to be volunteered?

Me neither.

The splintering of central bank policy is just the beginning.

There's much more at the link.

Folks, I said a couple of weeks ago:  "I begin to think that the economic chickens may finally be coming home to roost".  Mr. Williams' analysis dovetails very neatly with what I see in the markets today.  He who has ears to hear, let him hear . . . and let him batten down the hatches, economically speaking, while he's about it.

As Paul Singer said in his January newsletter:

As we and others have said, the Fed is overly reliant upon models that do not account for real-world elements of instruments, markets and traders in the derivatives age. Models cannot possibly take into account unpredictable interactions among huge positions and traders in new and very complicated instruments. Thus, the Fed should be careful, humble and conservative. Instead, it is just blithely plowing ahead as if it knows exactly what is going on. Intelligent captains sail uncharted waters with extra caution and high alert; only fools think that each mile they sail without sinking the vessel further demonstrates that they are wise and the naysayers were fools. This is a formula for destruction. The crash of 2008 should have been smoking-gun evidence of the folly of this approach, but every mistake leading up to the crash, especially excessive and “invisible” leverage and interest rates that were too low, has been doubled down upon in the years since.

We're about to reap the bitter fruit of that doubling down.



lemmiwinks said...

Biggest trouble (you probably said it already, I don't generally read economic posts too closely) can be traced back to when things were declared "too big to fail" or "SIFI's" - systemically important financial institutions. The TBTF should have been dropped on their arses, the pricks responsible thrown in gaol as a lesson to their colleagues and things would have played out as nature intended.

Instead, the inevitable has been delayed, and in doing so its effect magnified. It can only be bad, and the longer they cook the books, the worse the outcome is going to be.

JollyGreen said...

Predicting the future is hard, I get it. But my question is, are we expecting a 2008 crash? A 2001 crash? 1929? Something unprecedented? Or completely unknown?

Secondly, how would one prepare for such a financial collapse? Have you previously done a blog post on this?

Anonymous said...

Yeah, I hear ya about the multinational quagmire that we are in...BUT my economic influence extends to the tips of my fingers! So what do I have to do to "gird my loins" for the crash?


Peter said...

@JollyGreen and Anonymous: I wrote about what I'm doing to prepare in this post from early 2013:

There have been other questions along the same lines as yours via e-mail. I'll try to address them in a blog post (or series of posts) later this week.

Jim22 said...

Have you seen the comparison of the Dow-Jones line graph of the present to the one of 1928-29? Here take a look:

Peter said...

@Jim22: Yes, I've seen that in a couple of places today. I'll post something about it tonight.

Capt.Craig said...

The correct expression is,"Lying through their teeth."

Peter said...

@Capt. Craig: Not necessarily. "Through" is an Americanism. "In" is an Englishism. I was raised speaking English-English rather than American-English. Either option is technically correct.