Tags: tyranny | phds | stock market | financial

Emerging-Stock Market Slump Is the Beginning of the End

Emerging-Stock Market Slump Is the Beginning of the End
(Dollar Photo Club)

By    |   Wednesday, 15 June 2016 07:20 AM

Sad to say, you haven’t seen nothin’ yet. The world is drifting into financial entropy, and it is going to get steadily worse. That’s because the emerging-stock market slump isn’t just another cyclical correction; it’s the opening phase of the end-game.

That is, the end game of the PhD Tyranny.

During the last two decades the major central banks of the world have been colonized lock, stock and barrel by Keynesian crackpots. These academic scribblers and power-hungry apparatchiks have now pushed interest rate repression, massive monetization (QE) and relentless rigging of the financial markets to the limits of sanity and beyond. Honest, market-driven price discovery is dead as a doornail.

The very thing that financial history proves, above all else, is that governments can’t be trusted to honor their debts. And that cardinal fact is supposed to be embodied in the yield.

In fact, modern welfare state democracies have a veritable fiscal death wish.

What else can you call Japan’s announcement to defer yet again an increase in the consumption tax? Its public debt is already at 240% of GDP, even as its tax-paying population is rapidly streaming toward its national old age home.

At a 135% debt-to-GDP ratio, Italy is not far behind. Its economy is still smaller than it was in 2007, its banking system has more than $200 billion of bad debt, its public sector squanders more than 50% of GDP and its politically fractured and corruption-ridden government is paralyzed.

Yet these are only advanced cases of the universal fiscal condition of the world’s sovereigns. With $80 trillion of public debt and unfunded entitlement liabilities, the US government is hardly more solvent than the socialist basket cases of Europe.

Once upon a time, the tendency of politicians to bankrupt the state was at least partially held in check by the fear of bond vigilantes, and the prospect of soaring interest costs on the public debt. I happened to be there during one such episode, when the 10-year Treasury note required a 15% coupon.

It was enough to cause even Democrats to denounce deficits!

That is, at least until the GOP took a powder on social security and other entitlement reforms. At length, a tax-cut bidding war and DOD war spending spree supplanted most of the old-time fiscal religion. And then Greenspan finished the job when he threw in the towel on monetary discipline in 1994.

Once upon a time, too, the interest rate on debt reflected compensation for credit risk and inflation — and a real return to boot.

At the moment, however, “investors” aren’t getting paid for any of these costs. Instead, thanks to the mad-men running our central banks they are actually being forced to pay governments to borrow.

Moreover, that’s not an aberrant condition in the far recesses of the global bond market. There is now $10 trillion of sovereign debt securities with negative yields — and that figure is growing by the week as it cascades across government bond markets and out the maturity spectrum.

There could be nothing more perverse than for the central banking branch of the state to destroy the very government bond market on which modern state finances ultimately depend. But that’s exactly what they are doing, and the end-game could not have been expressed more colorfully than in the recent musings of the once and former bond king,
Bill Gross:

    Bill Gross, the manager of the $1.4 billion Janus Global Unconstrained Bond Fund, warned central bank policies that pushed trillions of dollars into bonds with negative interest rates will eventually backfire violently.

    “Global yields lowest in 500 years of recorded history,” Gross, 72, wrote Thursday on the Janus Capital Group Inc. Twitter site. “$10 trillion of neg. rate bonds. This is a supernova that will explode one day.”

To be sure, a supernova at least has a basis in physics. It’s an end-of-life star that suddenly increases in brilliance owing to a catastrophic explosion that ejects most of its mass.

Not NIRP. There is nothing natural or scientific about it. And it’s the opposite of brilliant.

It’s an economic mutant confected by arrogant Keynesian economists who inhabit a puzzle palace of fantasy. Not only do they have the nerve to believe that a tiny posse of monetary central planners has the capacity to price money, debt, capital and risk more correctly than the millions of agents that once populated free financial markets, but they do so in the name of invisible measuring sticks and prompts.

Thus, a recent piece in the Wall Street Journal highlighted a debate inside the Eccles Building which borders on sorcery.

    Fed officials disagree about their likely end point, in part because they are struggling to understand why another underlying interest rate—the mysterious natural rate—has fallen in recent years. And for that many are turning to the musings of Knut Wicksell, a Swedish expert on the subject who died 90 years ago.

    According to the textbooks, this so-called natural rate is the inflation-adjusted rate that’s consistent with the economy operating at its full potential, expanding without overheating. Also known as the equilibrium or neutral rate, it balances savings and investment.

    The natural rate can’t be observed directly; the Fed knows it has been reached only by how the economy responds. “It’s like discovering Pluto: you can only see the effect of the gravitational pull,” said Eddy Elfenbein, an investor and blogger at the site Crossing Wall Street, comparing it to the dwarf planet whose existence was inferred from the orbits of Uranus and Neptune.

Well, no. There is no such thing as the “natural rate of interest.”

There are pegged rates confected by central bankers who flood the market with printing press cash, thereby artificially tilting the supply/demand balance of savings and borrowings; and there are market rates discovered by the continuous interaction of savers and borrowers.

In an honest free market, savers need a rate high enough to induce them to forgo current consumption from their earnings and profits, while borrowers are constrained by their capacity to service their debts from current income and/or the return on funded assets.

The resulting market rate of interest reflects a continuous adjustment of these supply and demand balances. Its level over time can be influenced by a multitude of factors including demographics, technological change, entrepreneurial dynamics, wars, droughts, floods, taxes and the regulatory intrusions of the state, to name a few.

One thing is certain, however. When the animal spirits get too rambunctious and the herd of speculators cause the demand for credit to soar, bubbles get shutdown. When no more savings can be coaxed out of current income by rising interest rates, the market clears; the business cycle self-corrects.

Modern central banking, by contrast, mutes, overwhelms and eventually cancels out all of the price signals that are processed into shaping the market rate of interest. Instead, monetary central planners attempt to peg the rate based on purely theoretical constructs and standards — benchmarks which are ultimately arbitrary and virtually certain to be wrong.

In that context, in fact, the “natural rate of interest” is just a derivative of the mythical notion that there is such a thing as full employment GDP. Indeed, it appears that one of the more intellectually addled members of the Fed board has spent his professional life studying exactly that:

    We’re seeing no pickup, none whatsoever, in the natural rate even as the economy has gotten back to full strength,” John Williams, the San Francisco Fed president who has spent years studying it, said in a recent interview with The Wall Street Journal.

That’s right. By the lights of John Williams the natural rate of interest has dropped from 2-3% as recently as the first decade of this century to a negative level at present. And that implies, according to this PhD soothsayer, that nominal interest rates must be pegged to the floorboard, or even lower, for the indefinite future because the US bathtub of potential GDP has not yet been filled to the brim.

David Stockman was the Director of the Office of Management and Budget under President Ronald Reagan. To read more of his insights, CLICK HERE NOW.

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The emerging stock market slump isn’t just another cyclical correction; it’s the opening phase of the end-game.
tyranny, phds, stock market, financial
Wednesday, 15 June 2016 07:20 AM
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