How to Commit Financial Suicide

“Hey… you want a wealth effect? I’ll give you a wealth effect!”

By Bill Bonner, Chairman, Bonner & Partners:

Stocks are trading at a new record. Works of art hit a new record too.

From Bloomberg:

An almost 6-foot-tall Jeff Koons white plaster sculpture of a woman holding three Hermes Birkin bags sold for $4 million last night at a charity auction in New York, 60% more than similar works fetched in the past.

The sale of “Gazing Ball (Charity)” followed last week’s tally of $673 million for Impressionist and modern art sold at Manhattan auctions, setting the stage for a potential record season if high prices continue this week.

“I’m long-term bullish on the art market,” Rajiv Chaudhri, president of Sunsara Capital LLC in New York and an art collector, said at the event at the Four Seasons restaurant in New York. “Prices will keep moving up. There is still so much private wealth being created. Art is the ultimate asset.”

Mr. Chaudhri is wrong about several things…

First, private wealth is not being created; it is being fabricated by central banks.

Second, art is not the ultimate asset but probably a poor and unreliable one.

And third, the art market is not going up the way he imagines. When the money drains away, the aficionados will be punished: They’ll be stuck with their purchases.

Oceans of Liquidity

Still, Mr. Chaudhri is right about one thing: There’s a lot of money around.

Yes, rich people have gotten a lot richer in the last few years. The top 1% now own 35% of America’s wealth. The bottom 80% owns only 11% of it.

Where did all this money come from?

We’ve seen estimates for the effect of QE on the balance sheets of the country’s asset holders. Over the last five years QE has added between $2.5 trillion… to as high as $9 trillion. Now, with so much loose change in their pockets, the rich can bid for Jeff Koons’ confections, Manhattan condos, or whatever they want.

But that still leaves the question: Where does the money come from?

You already know the answer: from the central banks. And you know where they got it: from nowhere.

Central banks have created oceans of liquidity. Like water, it had to go somewhere. In the event, it went into stocks, real estate, art… and many other things. And now that the QE program is officially on “pause” in the US, the Japanese and the Europeans are taking over.


“ECB council backs €1 trillion euro-zone rescue,” was the headline in the Financial Times as last week came to a close.

“Mario Draghi has secured unanimous support from the European Central Bank’s governing council to inject €1 trillion to rescue the Eurozone economy from stagnation,” continues the report.

And that comes on the heels of remarkable reports from Japan. The Bank of Japan has a new governor, Haruhiko Kuroda. Apparently, he is even more reckless and retarded than Prime Minister Shinzō Abe.

Kuroda has upped the central banks asset buying to ¥80 trillion ($700 billion) a year. And part of the deal includes direct purchases of Japanese REITs and ETFs. As the Real Time Economics blog reports:

In addition to bonds, the BoJ is investing heavily in private assets […] by buying stocks in the form of exchange-traded funds, or ETFs, and real estate through Japan real estate investment trusts, or J-REITs. Those assets had been in the mix before, but will be tripled. The figures are small compared to the JGB purchases – ¥3 trillion for ETFs, ¥90 billion for J-REITs – but can have a big influence on markets.

“Hey… you want a wealth effect? I’ll give you a wealth effect!”

The Japanese are the trendsetters – at least in the world of suicidal financial policies. So, it probably won’t be long before the Fed gets back into the money-printing business.

Most likely, it’ll wait for the stock market to crack. Then it, too, could begin buying stocks directly.

The US stock market will fall because there is less and less fabricated money holding it up. The $3.6 trillion in QE helped push up the S&P 500 by 200% since its crisis low on March 9, 2009.

But QE is, as we said, now on “pause.” And the money-printing operations in Japan and Europe will probably not leak fast enough into the US to keep the water level high. Instead, liquidity will drain away – gradually… and then suddenly.

The Other “QE”

Not only has QE stopped, but so has the big boost that the US used to get from its trade deficits. At its peak, America’s current account deficit reached $800 billion. That money – largely credit-financed – went out of the US to buy foreign-made goods.

To stop their currencies from appreciating versus the dollar, foreign central banks – particularly the People’s Bank of China – had to print local currency to buy these dollars. They then reinvest these dollars back in the US. This was like QE before there was QE, says our friend Richard Duncan.

The US got a flood of liquidity from overseas money-printers. This is what helped inflate the stock market bubble of 1999 and then the housing and financial bubble of 2008.

But that’s gone too.

The current account deficit is only about half of what it once was. And as America’s oil industry coaxes more and more crude from the ground, there will be fewer US dollars headed overseas to buy energy and a lower current account deficit as a result.

This will mean less buying of US assets by the foreigners… and “excess liquidity” to float asset prices. The energy boom will not buoy up asset prices; it will help sink them. By Bill Bonner, Chairman, Bonner & Partners.

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  6 comments for “How to Commit Financial Suicide

  1. Dead at 18, buried at 65 says:

    This report reminds me of a beautiful comment by Wolf Street’s subscriber Genevieve Hawkins, who said:

    “When you are starving and eating parts of your own body to survive, I suppose the question becomes how long can you survive on it? Or does there come a point where only the elites even bother to play the game anymore?”

    Otherwise, I hate to be critical but I have read this article and I am not sure what to say or how to say it? There are so many flaws in it I am exhausted by them. So much so, that I don’t even think I can be bothered to list or to mention them!

    Or should it be said that to address all the flaws here would be an article in itself?

    Wolf? Are you testing us? ;)

  2. Petunia says:

    Rich people aren’t stupid. They know the money isn’t worth anything. They are parking their wealth in overpriced assets of all kinds because they have no other choice. A $50M painting, a $100M apartment in London or NY, farm land in middle America, are all hard assets which will be worth something when the economy realigns with reality.

  3. Central banks cannot ‘print money’, they are collateral constrained. They can only lend against loans already made by others; by the private sector.

    Private sector loans without sufficient collateral (or re-hypothecated collateral) are unsecured; the systemic increase in unsecured loans by finance = ‘economic growth’.

    Wall Street/giant banks have created the lions’ share of the worlds excess liquidity (smaller banks have created the rest). Indeed, all of these funds are conjured out of ‘thin air’. All the central banks can do is re-lend (asset swap) and push yields lower (interest rate repression).

    When central banks make unsecured loans they become instantly insolvent. That is, there is no difference between the over-leveraged commercial banks w/ bad assets on their balance sheet(s) and the central bank that is pledged to bail them out. When the central bank is insolvent there is no lender of last resort, there is no guarantor for bank deposits (unsecured loans to the bank); bank runs and runs out of currency.

    As BoJ monetizes Japan securities/debt the quality of collateral will be revealed as worthless = BoJ making unsecured loans. The outcome is the onrunning flight out of yen, to be followed by depositor runs out of banks. That will get the (insane) Japgov’s attention in a big hurry.

    The claim that ‘central banks print money’ is inaccurate, it is also peak oil denial.

    … go ahead and deny and watch what happens next!

    • jrmcdowell says:

      Steve, the Fed (through QE) is not lending against loans made by others. They are purchasing assets (bonds) from primary-dealer banks and their customers with money “conjured out of thin air”. Obviously, this is a huge gift to the sellers of these mortgage-backed securities and treasuries as they get a higher price than they would have obtained by selling on the open market.

      This also pumps liquidity (money) directly into the system when customers of the primary dealers sell their bonds to the Fed. The newly created liquidity is then used to drive up asset prices as the article suggests. Money printing seems like an appropriate label for this wealth-transfer racket.

    • Vespa P200E says:

      Good points about flourishing of unsecured loan monster which is leveraged to hilt by derivatives quagmires. Banks are so flush with cash pumped by the CBs that they get reckless and greedy, and why not when they can borrow from the Feds at near zero % interest and peddles it to highly indebted slaves for exorbitant rate on unsecured loans or depreciating asset like car loans?

      Now wait till the dominoes fall when like 2008 (when anyone with a pulse got mortgages) armies of highly indebted slaves begin to default and good luck unraveling the derivatives but no worries as Fed will rescue the banksters by buying next AIG with taxpayers on the hook again.

      We learn history so as to repeat it.

  4. Julian the Apostate says:

    With all this Monopoly money sloshing around the banks are not keeping cash on hand. Just finished Craig and LaPonte’s “Don’t Bank On It”. I tripped over the phenomenon a month before and sent several of our friends out to try it, figuring my difficulty to withdraw 40k was a one off. But everyone who tried it hit the same wall. They in turn sent others- same result.
    Finally I heard LaPonte talking about it on FSN, and called them up and they sent it out. If its this hard to withdraw now what will it be like when a general panic sets in? FYI good people.

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