Never before in the long, comic history of mankind and its money have central bankers taken such a keen interest in asset prices. Now they create money – out of nowhere – for the express purpose of pushing them up.
By Bill Bonner, Chairman, Bonner & Partners:
Stocks have barely begun to correct (the S&P 500 is down about 7% from its September high) and the St. Louis Fed president James Bullard is already preparing for QE4. But where is the proof – from logic or experience – that QE pays off?
It is a shame that quack philosophers, politicians and central bankers are not subject to penalty. After all, bridge builders and hedge fund managers suffer shame and ruin when their projects fall to pieces.
Couldn’t some suitable stick be laid on world improvers, too? Preferably before their wacky programs are put into service.
For example, when they make a claim that cannot be supported by rigorous proof, they should lose a year’s worth of income… or have their genitalia cut off. Maybe that would slow them down.
A More Complex Universe
Yes, dear reader. Things are setting up pretty much as expected. That is to say in a way that seems logically coherent, but is nevertheless incomprehensible. Liquidity is drying up. Volatility is returning. The leaves are falling. Investors are getting nervous. And Fed officials are promising more cash and credit, neither of which they actually possess.
You’ll recall that stocks fell when QE1 and QE2 ended. Why shouldn’t they fall now that QE3 is ending too? No doubt, they will. And that will set little feet running in predictable, but preposterous, directions.
Bertrand Russell published his famous book in 1912. Called The Problems of Philosophy, it raised questions about how we know things and how we can prove that anything we think we know is true. Turns out the universe is far more complex than our best philosophers (let alone Bertrand Russell) can comprehend… or our evolved language can describe… or our simpleminded logic can illustrate.
For example, you tell us all politicians always lie. We ask, How do you know?
I have it on good authority, you reply. A senator told me.
Hmmm. Now, what do I know?
Not much. The senator may be a good authority on the scoundrels of the US Senate, but he is disqualified as a source of honest opinion or observation.
“Although the sun has risen every day previously,” wrote Russell, “we have no reason to expect the sun to rise tomorrow.”
There, poor Bertie was mistaken. We have every reason to think it will rise. We just don’t know for sure. This was the “black swan” problem Nassim Taleb popularized a century later. Perhaps, every once in a very long while, the sun does not rise… black swans appear… and it’s a new era.
But we only bring this up to remind readers that it is usually the same old era. For now, the sun still appears on schedule. A kiss is still a kiss. And stock markets still go down as well as up.
That much we take for granted. Always has been that way. Always will be.
Roll Out the Fire Hoses
Still, there is something very new on this water planet: central bankers who think they can succeed where philosophers fail. Without explanation, they think they know where the S&P 500 – and the FTSE 100 and the Nikkei 225 – should be.
Never before in the long, comic history of mankind and his money have bankers taken such a keen interest in asset prices. Now they create money – out of nowhere – for the express purpose of pushing them up.
Should those prices fall – as they naturally and episodically do – you can be sure that some lunkhead such as Bullard will be quick to roll out the fire hoses.
US stocks recovered from an early plunge as St. Louis Federal Reserve Bank President James Bullard said policymakers should consider delaying the end of bond purchases to halt the decline in inflation expectations.
Widely reported was that the Bullard comments gave the market “a shot of adrenaline.” Said St. Louis money manager Chad Morganlander: “The overall markets are hooked on QE and liquidity is being withdrawn.”
Adrenaline now. The hard drugs will come later. More highs. But more lows, too. By Bill Bonner, Chairman, Bonner & Partners:
Also by Bill Bonner: We’ve spent our entire life in a credit expansion. We began life when the cork came out of the credit jug. We’ve all been pulling hard on it ever since. Heck, we’ve lived on it. “Hey, we’ll pay you later,” we said. But what if “later” is now? Read… Dow at 8,000
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Of course they will roll out QE – the ECB, the BoJ – the Fed -the BoE – all of them will print until we run out of trees. In Oslo where I live the big companies are laying off left and right and there is a property bubble that is just out of all proportions (for a 500 sq feet two bedroom in Oslo expect to pay 350 – 400 k + USD depending on location). Statoil is laying off, DnB (the biggest bank) and Telenor (telco operator) are laying off thousands of people. So are other companies in the oil and gas sector. And they will run the printing presses which will do exactly zilch to the real economy but only lift asset prices and make life difficult for normal people. To top it of the current government (a consertvative one) is changing the taxes to benefit the rich and screw the havenots over. And this repeats itself to my knowledge in most countries. We are sleepwalking into an enormous catastrophe which will be as difficult to solve politically as economically. And the only thing the dimwitted bozos who govern us have is a printing press – this will get very interesting in the next few years.
Please explain further as these developments you describe should not be happening in Norway. As an American, we are told that we should be more like Nordic countries and less like crazy selfish cowboys.
No one on this website could have seen this coming.
It’s going to be QE to infinity.
Personally, I’m not so sure there will be more QE (at least at this point).
It was just Bullard jawboning the markets while they were in free-fall. There is considerable resistance within the Fed to restarting the whole circus again.
With yesterday’s turnaround and today’s bounce, the urgency has gone. I expect more jawboning when things get crashy. But I would need to see more consensus from FOMC participants before I become a believer.
At this point if they are going to print the only way for it to help is to give it to people on the bottom, people who will spend it. They should consider a tax holiday for earners under 100K. That money will definitely be spent and circulate thru the economy.
If they roll out another round of QE I predict an initial surge in stocks and then panic when people realize why they’re doing it. There can be no greater signal that things are not improving than another round of QE.
BTW, from a medical POV adrenaline is a great analogy. It can be used to support blood pressure during shock due to blood loss but BP, like stock prices, is only one parameter to measure. A lot of adrenaline without expanding blood volume eventually leads to poor perfusion of vital organs, leading to death.
That would be the oops-moment.
These central bankers like the comical character Ali G who did an interview with a toxicology professor on drugs.
“Apart from rich get richer, inflated price, lost of quality jobs, soaring household debts, what negative effects do we get?”