“That’s a Super Dangerous Place to Be”: CEO of JPMorgan Asset Management

When central banks distort the markets, risk disappears from view.

“You could have a bunch of walking-zombie companies and you don’t even know it,” explained Mary Callahan Erdoes, CEO of JPMorgan Asset Management, on Wednesday at the Delivering Alpha Conference in New York. “That’s a super dangerous place to be,” she said.

She was talking about the effects of the ECB’s bond buying program as part of a broader warning that investors are no longer seeing risks.

The ECB has been buying corporate bonds, among other things, in an explicit effort to distort the bond market and drive corporate bond yields to near zero. At the peak of the frenzy last fall, the average euro junk-bond yield fell to 2.08% — though it has risen since. These are bonds with an appreciable risk of default. But the yield was barely enough to cover inflation (currently 2.0%). Credit risk wasn’t priced in at all.

The bond-buying binge has created a universe of bonds with negative yields, and desperate investors who’ll take any risk without compensation just to cover inflation. This desperation supplies fresh money to burn to even the riskiest zombie companies.

Companies have relentlessly taken advantage of this investor desperation. The amount of corporate euro bonds outstanding has surged by about 45% over the past three years, to €1.5 trillion ($1.75 trillion), including record euro-bonds issued by American junk-rated companies.

When credit risk is not being priced at all – when it’s free – this most important gauge of the credit market is worthless.

“You’re equally rewarding the A-plus student and the student who’s doing no homework and is just showing up,” Erdoes said at the conference, as reported by Bloomberg. “That’s a super dangerous place to be, because when that gets pulled back, and the markets have to sort of figure out the good from the bad, and you have real-money buyers in there, as opposed to the governments, then you start to do your homework and you figure out, ‘This is not all the same.’”

Artificial demand from the ECB’s bond desk caused all kinds of distortions. While the ECB doesn’t buy junk-rated bonds – it only buys investment grade and “unrated” bonds – the distortions from those purchases filtered down to the biggest credit risks, and companies that shouldn’t be able to sell bonds, are not only able to sell bonds, but do so at a low cost, and are thus able to stay afloat.

But the ECB’s bond-buying binge will likely end by the end of this year. And then what? That’s when investors will begin to discover, as Erdoes put it so elegantly, that they have “a bunch of walking-zombie companies.”

In the broader context, she was talking about investor complacency – the idea that risks no longer exist because they’re not being priced in anymore, and that there is nothing to worry about. And this has left investors unprepared for a downturn. This condition has its origins in the Financial Crisis – and what the Fed and other central banks tried to accomplish since then, and how the financial advisory industry has followed the instructions.

“Every moment since the financial crisis of 2008, our job as financial advisors is to help clients re-risk when it was uncomfortable to do so,” Erdoes said, as reported by CNBC. “Well they’ve done it, and now they’re very comfortable doing it, and they see no risks on the horizon.”

And this idea that risks aren’t there, or if they’re there, that they don’t matter because central banks will always bail out the markets at the smallest squiggle, and that therefore risks no longer need to be priced in – that’s a pandemic attitude today.

Ironically, it is precisely what the Fed is now trying to undo with its efforts to tighten “financial conditions.” It wants risks to have a price, and it wants risk premiums to widen. But clearly, given how assiduously the markets are brushing off the Fed, this effort is going to be a slog.

Markets have a way of blowing this type of consensus out of the water. Read…  “Yield-Curve Inversion” Consensus Rouses Contrarian in Me  
 

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  61 comments for ““That’s a Super Dangerous Place to Be”: CEO of JPMorgan Asset Management

  1. Dave Mac
    Jul 19, 2018 at 5:09 am

    Don’t worry about this matter.

    “Super Mario” has it all covered.

    What could possibly go wrong?

    • Tom Kauser
      Jul 20, 2018 at 10:53 am

      Main street knows all about inflation and demand is not keeping up with price increases? Tick tock! Super Mario is asset gathering with American funny money? Now back to le tour!

  2. Gershon
    Jul 19, 2018 at 5:15 am

    he markets have to sort of figure out the good from the bad, and you have real-money buyers in there, as opposed to the governments,

    True price discovery, when it eventually asserts itself, is going to be cataclysmic for these rigged, broken, Ponzi markets.

    • Ambrose Bierce
      Jul 19, 2018 at 12:02 pm

      Yeah that phrase hits hard, because you should expect LESS government spending going forward, not the pie in the sky fiscal package that was promised. USG will shorten its role as a seller of debt leaving fewer alternatives for real buyers. Cutbacks in spending always occur after a war, or an event like impeachment, and we may have both. This is 1970 all over again.

      • Mike
        Jul 19, 2018 at 5:09 pm

        Forbes article estimates total US liabilities at $124 trillion. As they age, Baby boomers and poorly educated later generations will need more government spending.

        Thus, U S debt issuance will not decrease. Similar trends apply in UK, Japan, and EU. I think some collapse in zombie companies and even many “good” companies that are in too much debt now is just a matter of time. At some interest rate and when credit is tighter their debts are not going to be rolled over or refinanced.

        The Fed banksters and other privately owned central banks caused this with ultra low interest rates to save themselves and maximize their profits: a financial debt-opioid-like corporate debt addiction and resultant crisis. As fiduciaries in public companies and pensions, controlling officers had to maximize net income by using such below market rate debt or be replaced.

    • Brent
      Jul 20, 2018 at 8:31 pm

      Where should your average mid 40s sub-$1M investor put his/her money to minimize the fall out? or, are all asset classes and markets going to drop equally?

    • Jamie
      Jul 22, 2018 at 1:59 pm

      A question for any of you….If the various Central Banks have colluded and decided that with their unlimited money creation powers, they would keep markets worldwide at elevated levels and overcome any selling pressure either through ETFs or actual stock purchases, and would use any thin-air created money for these purposes only ( to keep inflation from being a problem ), what could cause the anticipated sell-off, that unfortunately, I’ve been expecting for two years+

  3. rhodium
    Jul 19, 2018 at 6:31 am

    Don’t worry, the business cycle and credit cycle, all these cycles no longer exist because our understanding of economics has reached the pinnacle of wisdom. The Fed can now fine-tune the system like a good process control system, nothing bad can happen.

    • Lance Manly
      Jul 19, 2018 at 6:49 am

      Like Wolf said the Fed is trying to dial back the insanity, the markets are blowing them off though. The ECB needs to join the parade before it is too late.

      • Saving Joe
        Jul 19, 2018 at 7:19 am

        The Fed created this mess. They are now trying to tiptoe their way out of it. And the markets are calling their bluff.

        • Jul 19, 2018 at 7:55 am

          The markets might delude themselves into thinking the Fed is bluffing. But the Fed isn’t bluffing. And the markets are going to find out.

        • GS
          Jul 19, 2018 at 10:20 am

          Actually the market is thinking along the following lines. The fed will only hike till a stock market crash of 25% or so occurs. As soon as that occurs fed will reverse course. No one knows with 100% guarantee what the fed will do at that time but my guess is that unless there is a threat of total currency collapse or a complete social collapse fed will go back to it’s easing ways helping the asset owners and rich guys at the expense of little guys.

        • MD
          Jul 19, 2018 at 10:49 am

          Nope. Reckless speculation and unbridled greed of private finance caused this mess, which has required sticking plasters for the last 10 years.

          It was enabled by politicians who were gulled into believing the lies of ‘trickle down’; the lie that unleashing naked greed and ‘animal spirits’ in the world of finance would benefit us all.

          It didn’t. It delivered us massive wealth concentration (in to the hands of those who lobbied for deregulation of their sector) and debt.

        • Rates
          Jul 19, 2018 at 11:15 am

          I always like how Wolf will say something like “the Fed isn’t bluffing” but then would reject a 50bp rise.

          It’s obvious the Fed (and most “investors”) wants to have it both ways. Want to show seriousness? Don’t do 25, don’t do 50, do 100bp. I guarantee the party will be over. Afterwards don’t cut for 3 years.

        • JZ
          Jul 20, 2018 at 4:26 pm

          Rates, that’s NOT how FED thinks. Yes,
          everybody will get the message if they do 100bps. But the FED will ALWAYS do things MOST will NOT pay attention to.
          If they dial up inflation to 5%, everybody will get it. But they do 2%.
          If they want to raise rates to 3%, so that they can have room to cut, they don’t do 100bps, they do 25 bps per step. Before MOST know it, it is already 3%.
          They want to achieve their goals without MOST noticing. That’s how the pros and their friends get it BEFORE the MOST gets it.
          The only time they do 1 big shot is when MOST panicked, like the “what ever it takes” moment. Basically make sure the pros and their friends screw the MOST and if the MOST finally gets it, they tries to “restore confidence”
          and let their friends keep screwing the MOST.

  4. blindfaith
    Jul 19, 2018 at 6:47 am

    Mom and dad are always alarmed, outraged, and defensive, that their kid did anything destructive. “We always did the best we could.”.

    Putting Pandora back in the box is job for “Titians”, I don’t see any.

    • RD Blakeslee
      Jul 19, 2018 at 8:48 am

      Furthermore, mom and dad are on the horns of a dilemma: fools for not “buying in” to the boom, and resented when they are unscathed after the bust.

  5. cdr
    Jul 19, 2018 at 6:54 am

    “But the ECB’s bond-buying binge will likely end by the end of this year. And then what?”

    Somewhere a few weeks ago, Draghi stated that even if bond buying ends, maturities might, and will likely be, reinvested in an Operation Twist like fashion in order to keep rates low.

    As I said before, Draghi will insist that QE has ended. Please ignore the reinvestment and the interest rate management, plus any QE-like purchases that might arise from time to time but are definitely not QE so please don’t call them QE.

    Applying simple 100 IQ level common sense, if the EU has depended on QE and managed rates for over 5 years using the hunt for inflation as a tired excuse, how will the EU continue to exist if rates normalized due to a normalized credit market? EU Kick the Can is legendary, yet invisible like the Emperor’s cloths.

    Germany is still negative out to 7 years.

    https://www.investing.com/rates-bonds/germany-government-bonds?maturity_from=40&maturity_to=290

    • cdr
      Jul 19, 2018 at 7:00 am

      Re my comment above:

      Please consider what it says juxtaposed to the blog pieces here about how investors like to ignore obvious risk.

    • Jul 19, 2018 at 7:33 am

      cdr,

      Obviously, maturing securities will be replaced. The Fed has been doing that too since it stopped QE. It’s not until they start unwinding QE that some of the maturing securities will not be replaced.

      And what Draghi said was kind of a silly effort at media manipulation. Did you think that they would replace a maturing 10-year note with a 3-month bill? Of course not. They’d just have to replace it in three months again. They’re going to replace the maturing securities with a mix of maturities.

      BTW, Draghi will ride off into the sunset in 2019. Once he is gone, no one at the ECB or elsewhere will give a hoot about what he said. So don’t stake your expectations of what will happen on a few silly snippets he said.

      • cdr
        Jul 19, 2018 at 7:39 am

        …. Leaving some chump holding the bag.

        Kick the Can!

        • cdr
          Jul 19, 2018 at 7:53 am

          Advertisement: Job Opening – ECB Huckster In Chief

          Your job, should you choose to accept it, is to unwind Draghi’s ECB mess but at no cost to the EU membership while keeping rates low to negative and buying all forms of debt from time to time so the EU can cover everyday living expenses using printed money.

          Your challenge will be to stick someone else with the bill, payable ‘later’ after everyone has retired and/or moved on to their celestial reward. You will have a central bank at your disposal and a press corp who will believe and support in writing anything you say no matter how ridiculous. The Economics profession will not object to anything you do, no matter how goofy your proposals.

          Low pay, must love to mess with people and make stuff up.

      • Petunia
        Jul 19, 2018 at 8:12 am

        They are pushing up short term rates because that’s where the banks are making money. The reason the yield curve is flattening is because there is more demand on the short end. All the risks like student loans and mortgages have been loaded onto govt entities. There are no real financial markets anymore, it’s all a simulation, and that is a dangerous place to be.

        • Jul 19, 2018 at 8:34 am

          Petunia,

          “The reason the yield curve is flattening is because there is more demand on the short end.” It’s true, there is plenty of demand on the short end (because yields are starting to be appreciable). But what brings down yields on the long end — and thus flattens the curve — is very strong demand on the long end. This demand comes from all over the world.

          Totally agree with your last sentence!

    • Jul 19, 2018 at 7:50 am

      cdr,

      BTW-2, the article was talking about corporate bonds, not German government bonds. And the euro junk bonds I mentioned, their yield has soared by 60%, from 2.08% last fall to 3.34% today. Why? because of the ECB’s current taper and because of the prospects that ECB bond buying will stop altogether. There’s already some bloodletting going on.

      • cdr
        Jul 19, 2018 at 7:57 am

        Yes, but all Euro debt is interconnected due to ECB money management. It’s impossible to discuss one without the others. If the ECB were not in the middle of all Euro Debt, Corp debt in Europe would be a separate entity.

        It’s like discussing sunburn while ignoring the sun or daytime.

  6. backwardsevolution
    Jul 19, 2018 at 7:21 am

    “You’re equally rewarding the A-plus student and the student who’s doing no homework and is just showing up.”

    Says it all.

    • Paulo
      Jul 19, 2018 at 8:33 am

      adding to that: buying unrated bonds? That would be a student of the first day of class.

      • MC01
        Jul 19, 2018 at 1:04 pm

        “Unrated high quality covered bonds” have been part of the ECB’s covered bond purchase program since 2014.
        Covered bonds are Europe’s answer to asset backed securities (ABS) and are, generally, AAA rated due to the high level of creditor protection they carry.

        The ECB has never been particularly clear about the exact standard it uses to purchase these unrated covered bonds.
        However the revenue-generating assets backing covered bonds are overwhelmingly of two kinds: mortgages and public sector loans.

        Differently from corporate and sovereign bonds, the ECB does not release a detailed breakdown of the covered bonds they hold (rated or otherwise) so we are left to guess at the exact nature of these unrated high quality covered bonds, but my shiny ½ ChF coin is on bonds backed by public sector loans for pretty obvious reasons. ;-)

  7. Jul 19, 2018 at 7:41 am

    The UST 10 Yr has not been able to sustain a 3% plus handle because corporate pension funds and insurance companies have been using their equity portfolio gains to buy treasuries and IG corps in an effort to match their liabilities now before the whole thing blows up…again.

  8. Gandalf
    Jul 19, 2018 at 8:40 am

    The Taylor Rule(s) say that the Fed Rate should have been at 3% by now. I posted a link to the Fed website in another thread.

    The target Fed rate is currently at 1.75-2% right now. So the Fed is way behind. Even if the Fed goes through with its 1/4 % increase per quarter, which would be very aggressive, it will take a whole year to catch up to what the Taylor Rule says it should be at now. So, no wonder the markets are ignoring the Fed increases – the current Fed rate is way too low and is still adding to the asset bubble

    By the time the Fed gets to 3%, inflation might have increased, possibly as a result of Trump’s Global War on Trade (GWOT, Part Deux), which will mean the Taylor Rule number will go up higher. An economic slowdown may also be happening at the same time, and so this could be the beginning of stagflation. Will the Fed continue to raise rates to try to catch up to the Taylor Rule number? Or will it feed inflation by keeping rates low to try to get out of the stagflation?

    • Wisdom Seeker
      Jul 19, 2018 at 6:06 pm

      The Taylor rule triggers recessions.

      It’s possible that with a go-slow approach to rate normalization, and the relatively strong economy (if it holds up a bit longer), a lot of people and corporations (at least, those with their eyes open) will be able to get out of their current debt traps before they blow up. I suspect for the FedRes that scenario is preferable to having Great Recession 2.0, even if it means a bit of inflation in the meantime.

      And as folks have pointed out, the FedGov is the biggest debtor around, and will have a very interesting time coping with higher rates. For the relevant political insiders there may well be a timing aspect to this – go slow now so the interest-payment crisis doesn’t hit during midterm election year. (Ditto for not wanting to trigger a recession until after the 2020 election.)

      • Gandalf
        Jul 19, 2018 at 9:41 pm

        Wisdom Seeker,
        The Taylor Rule, if followed closely, will not trigger a recession. It’s designed to provide an accurate feedback loop to regulate how the Fed interest rates stimulate or restrain an economy.

        But that isn’t what happens in the real world. What tends to happen is that when an economic bust happens, the Fed lowers rates to stimulate the economy, as it should according to the Taylor Rule, but then as the economy climbs out of recession, the Fed is reluctant to raise rates to rein the economy in. So the economy gets superheated, and asset bubbles develop.

        The longer the Fed holds off on raising rates to try to reach the Taylor Rule number, the bigger the asset bubbles get. If still nothing is done, inflation eventually raises its ugly head and then at some point somebody decides to bite the bullet and raises rates to Taylor Rule levels to try to control inflation.

        Dunno if you ever studied engineering, but in engineering control systems, whether electrical or mechanical, this system will be Unstable and highly likely to oscillate in the other direction (downwards), because the correct feedback control signal – an increase in interest rates to Taylor Rule levels to control inflation – is now being applied with a phase delay, i.e., too late.

        In engineering control systems, there are two main things that cause unstable, oscillating systems – phase delays in the feedback loop, and positive feedback. It’s very useful if you have engineering training to think of the economy as a control system with positive and phase delayed feedback loops, because this explains quite well why economic cycles tend to oscillate up and down instead of a smooth steady growth.

        Low interest rates, kept for too long below Taylor Rule levels, are fundamentally positive feedback signals to the system – cheap money in an economy that is chugging along at full speed is like gasoline on a fire – it accelerates bloated, unwise investments and massive lending that is not supported by any economic fundamentals.

        So there you have it, the two major elements that cause wild gyrations in an economy – prolonged low interest rates acting like a destabilizing positive feedback signal, followed by a time delayed, phase shifted negative feedback signal – the subsequent rise in interest rates long after a giant bubble has formed.

        Trump has already loudly voiced displeasure at the Fed’s plan to raise rates. He obviously wants the cheap money and crazy loans to keep flowing and fuel this economic boom, at least through the midterm elections.

        The corrective feedback signal – higher interest rates – is already phase delayed. Wolf keeps documenting all the stupid junk bond lending and the other unsavory debts piling up because of the flow of cheap money. If or when the full feedback signal is applied, there will be a downward correction, and the longer the phase delay, the bigger the explosion will be when all the asset bubbles finally burst.

        • Guido
          Jul 20, 2018 at 4:01 pm

          It seems to me that you assume a closed/fixed system with no new components being added to the circuits. In your description, only the behavior of the system can evolve not the elements of the system itself.

          But consider this. What if new sources of power and sinks are being added all the time to either pump up the system or take out the excess heat? Such a band aid job is precisely what the Fed did with its QE and the 2008 bail outs. 2008 bail outs were to stabilize the wild gyrations and the QE was to supply energy to a system dying. Now it is removing the excess energy source.

          Why do you assume they aren’t already thinking about the next strategy that will stabilize the system? In this respect, the Fed is like a software company. It’s making a previous software redundant and will likely introduce another one to replace it. I will hazard that we have no idea about the upcoming nouns and the verbs and the adverbs that are in the future. We are thinking in terms of outdated structures, I think. Just imagine how one would have reacted if one were told of QE in 2006? People would have had a good laugh. Same goes for negative interest rates. May be our belief systems haven’t evolved in last 15 years?

          That’s the difference between a programmed (AI or whatever) system vs humans. We are constantly looking across a multitude of domains to solve problems.

        • Gandalf
          Jul 20, 2018 at 4:35 pm

          Guido,
          Of course this is not a closed system and I have left out other feedback or external/internal forces of disruption. I did it to point out the key elements of an unstable system that is inherently ALWAYS going to oscillate – positive feedback and phase delayed feedback. And these two factors are always there, which is why our economy always cycles through boom and bust cycles.

          The whole field of economics and its various branches, from Keynesian to monetarism to supply side, to whatever, for the last century has been devoted to understanding why economies do what they do and how to manipulate economies to make them do what we want to do.

          I have so far not seen any economists use this analogy of positive feedback loops and phase delayed feedback causing oscillations. The same effects that I describe are not new, and are well known to economic theory, just not set in the language of engineering science.

          I’ve brought up the Oil Crises of the 1970s – which most economists now believe caused as much as 2/3 of the high inflation of that era (too low interest rates for too long probably caused the rest). Sudden increases in price of a key commodity necessary for the function of modern society would certainly be an external disruptor that would change the equilibirum of this system.

          The Taylor Rule seems to be about as good as it gets for helping the Fed set its rates. It’s already been tweaked a couple times, last in 1999. The fact that the Fed publishes charts of the Taylor Rule on their website tells me that it does provide some guidance for their rate setting.

          The oscillations of the economy have in fact gotten much better over the last century. Up to the time of the Great Depression, the United States stock market and economy had regular boom and bust cycles every 20 years or so. We still have boom and bust cycles, but they are no longer as severe as they used to be, and this is due to a better understanding of the sorts of government intervention that can be done to tweak the economy.

          But things remain imperfect, and it’s clear from those Taylor Rule charts that Greenspan set the interest rates too low for too long during the early to mid 2000 period as a response to the recession that started in 2001, and this led to the housing and stock asset bubble that finally blew up in 2008-2009.

          It’s starting to look like another such asset bubble is brewing.

        • JZ
          Jul 20, 2018 at 7:37 pm

          What is the order of the system? How many poles and how many zeros? How do you know adding delay in one of the monitoring parameters will NOT provide better compensation for the stability? The FED intuitively know this. I once heard a MIT economist talking about once a FED policy changes, you will NEVER know what the effect will be and what happen at what time, therefore, you do NOT change policy OFTEN, AKA adding extremely long time constant low pass to stabilize it in your model. So when they said ZIRP till 2015 in 2009, I believe them. When they say rate raise 0.25% until 3%, I bieleve them. They know if they flip-flops on actual policy(NOT words to manipulate public perception) , it is destabilizing.
          One explanation using linear control theory on system stability may NOT be used to describe stability on systems that are NOT governed by differential or difference equations. Complexity systems describing earth quake or avalanche or Autrians’ human action may be better models.
          I do NOt believe in any models on human behavior. Reason is simple, if I am being figured out by some models, I will change my behavior so that I can win at the poker table.

        • Gandalf
          Jul 21, 2018 at 8:19 am

          .JZ,
          It’s been more than a few decades since I last dealt with operational amplifiers and linear control circuits, but here’s a very simplistic explanation of how a delay in a negative feedback loop causes instability and an oscillation – you are probably familiar with it already:

          https://electronics.stackexchange.com/questions/203724/delay-and-stablity-in-negative-feedback-systems-confusion?rq=1

          I had come across the Taylor Rule(s), which was first put forth in 1993 as a guide to help set the Fed Fund Rates, and then was modified in 1999. It was clear that the Fed Fund Rates often did not follow the Taylor Rule(s) and this might be an explanation for why bad things then happened.

          Taylor had stated that the reason for the Housing bubble of the mid 2000s that led to the crash of 2008-2009 was that the Fed had kept interest rates too low for too long, allowing an asset bubble to build up in the housing market. It wasn’t clear how this sequence progressed or why.

          What happened was that the Fed had dropped rates to low levels in response to the recession of 2001, and then it did start to slowly raise rates beginning in 2004, but the rates did not reach Taylor Rule levels until 2007. By then a huge housing bubble had developed, margin and leveraging and debt had piled up, and the whole thing was ready to explode, which it finally did in 2008.

          The example of the op-amp with a delay built into a negative feedback loop is just a simplistic engineering construct to explain mathematically why that happens, and why instead of a soft landing, you end up with an over-correction. It’s not some sophisticated economic model that will tell you how to time the market and become a billionaire.

        • JZ
          Jul 22, 2018 at 12:43 am

          Gandolf, i understand what you meant. I know your thinking of financial market as an linear system is an analogy. I am NOT challenging this since we all know this is over simplification. What I am saying is that EVEN when it is correct that financial market is a linear time invariant system like an piano, you still have to know its order, zero pole locations in order to judge whether adding delays will cause the feedback loop to go unstable. Your implicit assumption is that once FEF changes the interest parameter, the financial market and economy will respond immediately. What if the response itself has lots of delays, in other words, the transfer function with interest rate as input and GDP as output is a high order system with lots of dynamics that involves all kinds of delay by itself? How would you compensate such a system? Delay hurts opamp in feedback loops since opamps are simple first or 2nd order systems. But economy is NOT even when your economy being linear system assumption is correct.

  9. Lou Mannheim
    Jul 19, 2018 at 9:26 am

    https://www.theonion.com/new-financial-report-finds-economy-invincible-forever-t-1826221432

    I love The Onion, just never thought investors would use as a resource.

    • Gershon
      Jul 19, 2018 at 10:23 am

      The Onion is a doomed enterprise, as its satiric business model has been rendered obsolete by our bizarro-world economy and surreal utterances from the likes of Old Yellen, who assured us there will be no new financial crisis “in our lifetimes.”

      https://www.reuters.com/article/us-usa-fed-yellen/feds-yellen-expects-no-new-financial-crisis-in-our-lifetimes-idUSKBN19I2I5

      • wkevinw
        Jul 20, 2018 at 9:56 am

        The internet is full of videos from Greenspan, Bernanke, Yellen and others admitting they cannot detect bubbles and other indicators of future economic turmoil; and/or they have tried to predict and were utterly 100% wrong.

        Also remember that they really cannot say when things are “extreme”. They have to be calm at all times (also read calm as “misleading”). That’s one skill that gets them these jobs.

        And these people are the most powerful in the world.

  10. KPL
    Jul 19, 2018 at 9:30 am

    Ironically, it is precisely what the Fed is now trying to undo with its efforts to tighten “financial conditions.” It wants risks to have a price, and it wants risk premiums to widen. But clearly, given how assiduously the markets are brushing off the Fed, this effort is going to be a slog.

    A version of crying wolf. This is what you get when you pander to the market. Every time the market sneezed, the Fed (and other CBs) got a severe cold and the blockheads will come running with each one flapping his/her big mouth (Bullard’s low, Dudley etc.).

    It will be fun to watch as it unfolds. Obviously they will come up with more of the same. I only hope that this time people understand the damage done by the central bankers and do something about it.

    • polecat
      Jul 19, 2018 at 2:02 pm

      With the exception of utilizing lampposts, do what ? .. stamp one’s feet, hurl expletives, vote ??
      The Banksters, their politician toadies ..along with the help of their credentialed sycophants and the ‘establishment’ medias (including many digital one’s), are bringing slow death to the greater public, as to not account for ANY negative externalities whatsoever, nor the continual destruction of whatever commons are left on this, so far, pale blue dot !

  11. Paul Morphy
    Jul 19, 2018 at 9:42 am

    Mario Draghi’s legacy as Governor of the Italian Central bank is an utterly broken Italian banking system.

    I know that the decision making processes at the European Central Bank are different to those at the Italian Central Bank, but my fear is that the ECB under Draghi we will end up with a (already?) broken European banking system.

    Trichet was a poor ECB chief, but Draghi is worse in my view.

    The ECB is presiding over a continental-wide economic mess.

    • MD
      Jul 19, 2018 at 11:03 am

      Germany’s second European conquest plan – this time to unite its financial system and run it under rules of the Bundesbank – again causes misery.

      Much better to stay at home and ‘mind your own’. Like the Swiss.

      • Mean Chicken
        Jul 19, 2018 at 12:38 pm

        The Swiss government has been running their own private crypto-currency racket, it’ll be interesting to watch how that comes out in the laundry.

  12. MD
    Jul 19, 2018 at 10:58 am

    A system geared to reward the massively over-indebted, reckless speculator/gambler, and to cast aside the prudent and sensible…what could possibly go wrong?

    It appears that all lessons not just of the past, but of what’s required to maintain stable, civil society – including the reining in of usurious behavior – have been cast aside in order to keep these masters of the universe happy, and to keep buying votes.

    Where’s rationality gone? Shoved out of the window by greed (sorry ‘aspiration’) it seems, as always seems to happen with homo sapiens sapiens.

    • HowNow
      Jul 20, 2018 at 6:18 am

      Well said. One correction: we aren’t talking about “-sapiens”; homo erectus is more like it.

  13. Ambrose Bierce
    Jul 19, 2018 at 12:22 pm

    Under the policy of Monetary Socialism the agent who assumes indebtedness contributes as much or more than the agent who keeps their books in order. Zombie companies have real employees, real products, just no real profit. So what? Japan has been doing this with banks for decades. If you were to close the business and provide the employees with a subsidized wage, and consumers with a government issued product, how does that help? In In the US Fiscal Socialism might provide some friction, but little of a threat. FYI I don’t own an Apple product and consider their real service is providing an outlet for compulsive non-productive behavior. The problem in the event of a cyclical and financial crisis is that zombie companies will close their doors. Real economic problems were made obsolete with the real economy.

    • Unamused
      Jul 20, 2018 at 3:31 pm

      “The problem in the event of a cyclical and financial crisis is that zombie companies will close their doors.”

      Which is actually a good thing, and not a problem, insofar as zombie companies represent institutionalized misallocation of resources. Such firms are subsidized for the benefit of their politically-connected owners, and not, as you say, to keep their employees off the dole out of some misplaced sense of social obligation.

      To be crude your comment is highly disingenuous.

  14. Mean Chicken
    Jul 19, 2018 at 12:33 pm

    “When central banks distort the markets, risk disappears from view.”

    The crisis was manufactured in order to arrange the largest transfer of wealth in the history of mankind. That’s their motivation, in behalf of JPM and other special interest criminal entities.

  15. Unamused
    Jul 19, 2018 at 1:00 pm

    “That’s a Super Dangerous Place to Be”

    Do tell. There are Super Dangerous Places to be, and then there are Ultra-Mega-Trendoid-Super-Duper Places to be, so it’s best if the markets simply ignore them all, because trying to price them in would seize the system so tight you couldn’t even have markets.

    https://www.marketwatch.com/story/stock-investors-confront-the-once-unthinkable-a-new-world-order-2018-07-19

    • Ambrose Bierce
      Jul 20, 2018 at 11:37 am

      and bull markets climb a super dangerous wall of worry..

      to be crude the comment is highly disingenuous

  16. cdr
    Jul 19, 2018 at 1:02 pm

    The EU has two options available, long term:

    1) Normalize rates over time because ‘inflation is now in hand’ and watch the Eurozone vomit from every orifice as it starts to pay market rates for all sovereign debt it issues and rising rates everywhere else. No more kick the can as a result of policy. Corporate debt rising to market will look cheap in this context for some member’s interest rates. The real insult to the EU would be the end of kick the can.

    2) Turn the Eurozone into a closed system where all costs are financed and contained within the system and the ECB is at the center of it all. Japan is sort of like this … if the BOJ wrote off all debt, few would really notice and the scandal would end in a week or less. The Eurozone would require a ring-fence for this. It would be kind of like turning the entire continent into a derivative of the old East Germany.

    Hmmm … which will they choose?

    Technically, stall forever is option 3.

    • cdr
      Jul 19, 2018 at 2:44 pm

      Option 4:

      Aliens from space land and offer the EU $100 trillion in gold to teach them bureaucracy. This would save them. Possibly.

    • MC01
      Jul 19, 2018 at 3:23 pm

      As proven by the “unexpected” Air Berlin bankruptcy last year, the very most financial repression can do is delaying the inevitable: high debt loads, minuscule margins and grandiose (and expensive) expansion schemes always result in more work for the good people at the bankruptcy court.

      Europe’s big problem is we are stuffed full with “financial walking dead” whose existence has been unnaturally extended by the aforementioned financial repression, but these walking dead are starting to stink. The stench is tolerated or even ignored in the name of “economic growth” or other hazy impressive-sounding targets but how long before it becomes unbearable and adjoining financial rot causes a fast-spreading epidemic?

      These walking dead will either topple or decompose in plain sight regardless of any financial gymnastics the ECB and the European Commission may perform.
      Just today I was reading one of Europe longest-serving walking dead, Italy’s flag carrier Alitalia, is facing yet another crisis after running through the cash injections and loan guarantees it obtained from the Italian government last year. There talks of nationalization or of selling the company to everybody from Lufthansa to Wizz Air (without mentioning who gets to hold the bag full of debts) but nobody mentions the most obvious course of action: bankruptcy.
      This means more kicking of the can, but for how long? The present Italian government is nowhere near as amenable as their predecessors and Italy’s “Oh-look-how-good-my-non-GAAP-financials-are” banks are not in any shape to attempt such a difficult rescue.

  17. Guido
    Jul 19, 2018 at 2:44 pm

    It’s a question of who’ll blink first. That, in turn, is a question of who’s got most to lose. I’d say ecb. The same reasons that led them to take the first whiff will bring them back for more. At this point, the ECB has trained the market to be bribed. They’ve provided the market with a button. There’s no going back. In any case, the sheeple are too busy either watching soccer or arguing about other sundry issues that are easy to grasp. After they are spent, they go home. Meanwhile, wealth transfer continues to prop up the market. The good news will be relayed and the sheeple will drink up. It is like this everywhere.

  18. cdr
    Jul 20, 2018 at 8:59 am

    impossible trinity eurozone

    https://www.google.com/search?biw=1254&bih=758&ei=KelRW-PGD432swW6hq-4Dg&q=impossible+trinity+eurozone&oq=impossible+trinity+eurozone

    Amazing. Somebody already noticed a long time ago what I sort of figured out on my own fairly recently. This is why people have said the Monetary Union was flawed from the start. The argument is also valid for why Globalism failed. I sort of feel vindicated.

  19. Tom Kauser
    Jul 20, 2018 at 11:07 am

    You can talk about short rates going over the moon daily for another dozen years and miss the fact that good long credit should do better than most asset classes over the same period? IMHO.

  20. Tom Kauser
    Jul 20, 2018 at 11:31 am

    The federal reserve entered into QE to replace the 750 billion dollars hank paulson stole from congress to re-liquify bank balance sheet , and not to drive short interest rates lower? You cant claim such and also jawbone the public about its responsibility to prepare for much higher rates every single day for 12 yrs?

  21. kiers
    Jul 22, 2018 at 3:50 pm

    “You could have a bunch of walking-zombie companies and you don’t even know it,” “that is scary…”

    This also applies to share buybacks by corporations.

    Last I looked, about a week ago, Fully 40 S&P500 companies have, over last 5 years, destroyed market cap, despite heavy buybacks of own shares.

    Starting w market cap, and share counts as of 5 years ago:

    Co Name, Share Count multiple, Mkt Cap growth multiple over 5 yrs:

    Viacom B , 0.70, 0.41
    Apache 0.79, 0.50
    Discovery(tv) 0.32, 0.55
    Ralph Lauren 0.61, 0.59
    HCP 1.04, 0.60
    IBM 0.82, 0.66
    Qualcom 0.87, 0.72
    Fluor 0.87, 0.76
    Harley davidson,Macys, Nordstrom, H&R Block, ANadarko, CF Inds, Flowserve, General Mills, etc.
    etc etc.

    another 270 S&P500 cos have market cap growth >1, but less than keeping up with market, over 5 years. At least 50% of these have done net buybacks that destroyed shareholder cash, net net, imho. Buybacks and the ZOMBIE APOCALYPSE

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