Fed Putting Debt Fueled Economy at Risk




The Federal Reserve is preparing to perform an incredible magic trick that dazzles the mind. They are planning to mystify the masses with extreme precision and trick of hand. The stage is set and the world is watching to see if they can perform a feat never seen before. Oh sure this little band of academics have a long history misjudging the economy, as it sends it veering off a cliff with poor monetary policy, but let's not count out The Incredible Janet.

It will be nothing short of amazing if they can do the impossible. They are suggesting they can sustain the massive debt fueled bubble which they created, while preforming quantitative tightening. This includes flooding the bond market with sizable portions of the $4.5 trillion debt securities they currently hold, while at the same time reducing market liquidity, which was used to juice stock and bond prices to incredible highs. Added to this the Federal Reserve has moved overnight rates up to the lofty range of between 1.0 to 1.25%. This being equal to the low rates that lead to the financial crisis in 2008.

Yes we have seen some amazing job numbers (mostly part time jobs) added to the economy, but we can not ignore that all this occurred while interest rates were held down artificially low through the Fed's manipulation of the debt market. Today the Fed is suggesting that their manipulation days are coming to an end. The economy must levitate on its own without the Fed's record low rates .. and the bond market must be able to sustain its values without the sizable ($4.5 trillion) manipulation by the Fed to press the forces of the market away from true price discovery. Yes the Fed believes the laws of economics can be defied simply by waving a wand without consequence.

The Amazing Janet now suggests that the debt fueled economy will not collapse once the support (see: market manipulation) is removed. All this while there are multiple bubbles lying within the economy. I have not been this excited since a Super Dave Osborne stunt. Sure we may have had uncertain feelings before Super Dave went into action, we still held out hope he could defy the odds and come out of it alive and well. Could Janet be the modern day Super Dave?

While some are feeling a positive outcome is possible even after the Fed's quantitative tightening, we must not ignore the fact that the record levels of debt flowing through the economy is starting to buckle. The sub prime auto loans are at the at record levels, while used car lots overflow with inventory and auto production falls. Needless to say this is a huge problem. Some are calling it CARmageddon in waiting.

Source: Bloomberg







Household Debt


The levels of margin debt is at record levels. Corporate debt is pushing an all time highs. Government debt has climbed beyond the stratosphere. Household debt is also at record highs. Excluding mortgages household debt has surpassed $3.3 trillion dollars. It is plain to see that the economy is deeply dependent on this massive debt bubble. The record low rates of the Fed and the multiple levels of QE pumped the economy full of new money, designed to drive debt into the economy. Mission accomplished. There is more debt in the economy now than at any point in history, while saving rates are at all time lows. We also have many huge pension plans across the land teetering on the brink of failure. Commercial real estate is on the verge of collapse as retail outlets close doors at rates never seen before.
An article from Forbes laid out the expected retail closures in 2017:

Source: Forbes

Lets not forget pension funds are among the largest holders of this highly leveraged real estate asset class, but have yet to mark down these assets. As many malls and shopping centers across the nation feel the pinch and management begin to shutdown money losing operations, bonds will feel the pain. The quality of capital allocation will come further into question, which will drive up risk premiums. Expect a new cycle of mark downs after the fact. On top of all this the GDP growth rate is limping ahead at a very slow pace, even though the economy has ridden interest rates that have been held at extremely low levels for the past 8 years. We know that increasing the cost of carrying the massive levels of debt sloshing around the economy, by increasing interest rates, will only put downward pressure on GDP growth in the future.

With all these indicators of the "recovering economy" in place, it is no wonder that the Fed believes that now is the time to raise rates while removing their centrally planned market manipulation, which is holding up the bubble economy and propping up bond market. All the elements of excitement are in place. Since the Fed has telegraphed its intentions to dump bonds and further raise rates, many investors will be looking to unload their bond assets as a means of minimizing risk.  After one has made appropriate portfolio adjustments all we have to do is sit and wait to see if the Fed can successfully suspend its centrally planned economic activities without popping the debt bubble they created.

So The Amazing Janet is set to perform one of the greatest financial magic tricks of our time and if you don't believe me, give it a go. Blow a giant bubble and then try to let some of the air you used to create it out without popping that bubble. Yes it is extremely difficult, but thankfully we have the intelligentsia at the Fed performing the act. Relax, this is the same Fed who has the uncanny ability to identify a recession only mer months after the fact, in charge of the show.




Popular posts from this blog

Aftermath (Part 1): Consequences of a Massive Debt Bubble

Image
The dark financial clouds are forming and the likelihood of a storm hitting is pretty certain. The question is what will be waiting for us once it hits. The Fed has manufactured the largest debt bubble ever seen and there are signs that this bubble is starting to lose air. Subprime auto loan defaults are on the way up. Major retail chains are shutting down as business inventory continues to climb. Many very large pension funds are deep underwater with no hope of recovering.  Commercial real estate is showing weakness. Consumer debt is climbing through the roof and is on a unsustainable path, while home ownership rates are at extreme lows. Student loan debt has become a major issue. Government debt is at extreme levels, approaching 20 BILLION DOLLARS, surpassing 104% of GDP, with absolutely no plan to resolve it moving forward. Unfunded government liabilities are ignored by government and mainstream media, but is without a doubt a massive ticking time bomb. I guess its no...
Read more

50 Years Later : Federal Reserve Is Debasing As Fast As It Can

Image
  It was August 15. 1971 US President Nixon announced that the United States would no longer convert dollars into gold, and thus ended the era of gold backed money. August 15, 1971 Nixon takes the US dollar off the gold standard. As a result of this action the US defaulted on its debt obligations as it would no longer repay it debts in terms of gold backed notes, but instead offered a rapidly debased fiat currency as repayment.. It was the start of an era of huge spikes in inflation while lowering of the standard of living of the American people.  In the years to follow the US dollar dropped in value and by 1980 the dollar was only worth a fraction of what it was in 1971. The Federal Reserve failed and/or ignored its mandate to sustain the value of the dollar.  While the US population was made to struggle though this period, the US government went on a massive expansion of spending to pay for its military infrastructure and even larger expansion of its bureaucracy. ...
Read more

Mass Currency Debasement Is Not A Solution

Image
Mass Currency Debasement Is Not A Solution  As the Federal Reserve's gigantic debt bubble implodes all around us, we are witnessing massive wave after massive wave of currency debasement. Literally printing billions and billions of dollars on a daily basis in an effort to keep their debt bubble alive. The Federal Reserve has gone so far as to suggest there will be limitless currency debasement as a means of "providing stimulus", or put another way endless money printing to keep certain mismanaged corporations from going under. The Federal Reserve has also suggested that these massive money printing actions will only temporary in nature. They want the public to believe these monetary debasements can and will be stopped and things can and will be normalized once this financial crisis comes to an end. Not sure which turnip truck the Fed assumes we fell off of, but it doesn't take much to realize that it is not possible to unwind a quantitative easing scheme (see: P...
Read more