“Rates Were Pushed Off The Cliff By The Central Banks”

The title quote is from Tad Rivelle, Chief Investment Officer of TCW (Los Angeles based fixed income management company), who manages one of the largest actively managed bond funds. He goes on to comment about the implications of the negative rate policy that has been implemented by Japan and the EU: “Credit markets look late cycle, manufacturing looks pretty late cycle and corporate profitability, as well. So the proliferation of negative rates may also suggest that central bank policy has reached exhaustion. It’s almost like negative rates are the last thing central bankers are trying to make it work.”

Many investors and market observers wonder why the Fed/Central Banks just can’t print money forever and drive the markets even higher. The answer can be found in the law of diminishing returns. When Central Banks print money – in our case dollars – at a rate that exceeds the amount of wealth produced to “back” that money printed, it begins to diminish the value of each extra dollar created. As the system becomes saturated with dollars, the Central Banks then try to force the market to use the oversupply of currency bu taking rates negative. This problem is reflected in the velocity of money (the number of times each currency unit changes hands):

That chart is the essence of the law of diminishing returns as it applies to the money supply. Think of it as the “productivity” of each dollar in the system.  Greenspan initiated the paradigm of using money printing to “fix” credit market and stock market problems.  These “problems” were in fact the market’s price discovery and risk discounting mechanisms . He was given the name “Maestro” because seemingly fixed economic and financials problems, though all he really did was defer their resolution.

In fact, Greenspan used money printing to paper over the underlying system structural problems going back to the market crash in 1987.  Greenspan, who was installed as Fed Chairman two months prior to the crash, confirmed that the Fed stood ready “to serve as a source of liquidity to support the economic and financial system.”

In effect, the chart above reflects the fact that a large portion of the printed money, rather than circulating in a chain of economic transactions, sits stagnant in “pools.” As an example, the money printed and given to the banks in the first three QE programs sat in the Fed’s excess reserve account “earning” a tiny rate of interest which is nothing more than additional printed money used to boost bank earnings and give the banks no-risk, unearned cash flow.

As printed money sits idly, the Central Banks artificially lower the “cost” of money, which is also known as the interest rate, thereby making an attempt to force money into the system and incentivizing companies and consumers to use this money by making it nearly costless. Currently Central Banks are cutting interest rates at the fastest pace since December 2009.

Lowering rates toward zero is a temporary fix – i.e. it only serves to defer the inevitable economic bust cycle. But an oversupply of currency which can be used – or borrowed – at little to no cost also ushers in credit bubbles which become manifest in the form of the various asset bubbles, like the housing and stock bubbles, or is used for purposes which do not create economic value. The best example of the latter is when corporations borrow money at near-zero interest rates and use that borrowed money to buyback shares. There is absolutely no economic benefit whatsoever from share buybacks – none, zero – other than for the corporate insiders who dump their shares into buybacks.

This brings me to the quote at the beginning from Tad Rivelle: “the proliferation of negative rates may also suggest that central bank policy has reached exhaustion; it’s almost like negative rates are the last thing central bankers are trying to make it work.” The velocity of money chart is evidence that printing money and forcing interest rates to zero are measures which eventually fall victim to the Law of Diminishing Returns.

The Central Banking policy of near zero and zero interest rates combined with unfettered money creation has lost its “traction.” We are approaching the point at which money printing will not produce the intended effects. In response “rates have been pushed off a cliff by Central Banks.” It’s been acknowledged that Trump discussed negative rates with Fed Chairman Powell just a few weeks ago.

The imposition of negative interest rates on the financial system perversely turns the laws of economics inside-out. Ironically, perhaps fittingly, it’s a desperate act of economic treason that will boomerang back and decapitate the global economy, including the U.S. This reality is already reflected in the rapidly contracting manufacturing reportsand the confirmed by the freight transportation data, which have been collapsing for the better part of the last year.

The commentary above is from a recent issue of the Short Seller’s Journal. Despite the melt-up in the stock market, several stocks are sectors are diverging negatively and I have presented some short ideas that have been making money – Lending Tree (TREE) is a good example.  To learn more follow this link: Short Seller’s Journal information.



5 thoughts on ““Rates Were Pushed Off The Cliff By The Central Banks”

  1. The crooks helping only themselves not the economy.
    The gold needs something to break out , I hope they not planning anything during Christmas or just after.

  2. I’m going to provide arguments in favor of what the Fed, the other CBs and their constituent TBTF Banks are doing and why there will be no stock market crash or big inflation, or a faltering economy in 2020:

    1) The Repo markets in the trillions ensures there will be no big bank failures as they remain anonymous and secretly supported (it is fraud but the markets do not care).

    2) The Repo money and any other money funneled is used in the futures markets to suppress the prices of all food, livestock, metals, gas, electricity, etc commodities. End result: inflation is contained to the 2 percent Fed policy. Do you here the average person outraged on inflation? No.

    3) The Repo money is used to support the stock and bond markets and the stock market will continue to go higher which creates a wealth effect and it does trickle down into the economy. It is not phony, it is real as one can sell stocks at higher prices and has more money to spend how they choose which helps the economy.

    4) Low to negative interest rates are helping the economy recover. Copper has broken out to the upside, oil at $60. They buy time until the cycle bottoms out and manufacturing starts to increase.

    5) November and December are the biggest and best Holiday Retail sales ever. Where is this death of the consumer?

    6) Infinite money printing and low to negative rates are skillfully, strategically (and yes frauduently) used to keep the markets and banks all STABLE. And market participants do not care because stocks keep going up. There is no market or economic instability as explained.

    1. I concur there is no market or economic instability in the U.S. due to the Repo money. However, every time the fed skillfully and stragitically print, non market participants in Russia and China, perhaps maybe even Saudi Arabia do care.

      We flipped the table in 2001 and again in 2011. Somebody else may flip the table on us in 2021. I hope you don’t really believe this can last forever.

  3. IMO..the consequences of the Fed deferring the economic cycle is to ensure all entities public, private, sovereign, corporate, etc..all go bankrupt simultaneously. Instead of one sector with a debt problem such as housing, or government debt, or banking debt, we have debt saturation within every sector. All entities going bust simultaneously. There’s no one left to buy assets on the dip. Thus they’ve bankrupted the globe.

  4. After being called “Criminal enterprise by the DOJ ( https://www.bloomberg.com/news/articles/2019-09-16/jpmorgan-s-metals-desk-was-a-criminal-enterprise-u-s-says ), JP Morgan top investment call for 2020 is to short Gold ( https://www.bloomberg.com/news/articles/2019-12-12/jpmorgan-s-top-2020-trades-say-short-gold-buy-raft-of-stocks ).

    They said that on 12/12/2019 when the price of gold was $1466.7.

    I think it must be more interesting to know their investment type, position size and direction on the gold market instead of asking them why they said that.

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