Economy

QE Is Dead, Long Live QE

By David Stockman  |  November 4, 2019

The Federal Reserve has opened Pandora’s Box.

Our monetary central planners have trotted out a rapidly mushrooming pile of TOMOs (temporary open market operations) and POMOs (permanent open market operations) that at last count added up to north of $150 billion.

They’re strangling the last remnants of honest price discovery in the financial system, all for their moronic belief that ever lower interest rates are the key to growth.

The Fed wants you to believe there’s nothing to see here in this fresh scramble for cheap cash; it simply reflects some hiccups deep in the plumbing due to regulatory requirements for increased cash reserves, seasonality, and other technical quirks.

That’s what’s commonly referred to as a bunch of bullshit.

The Fed Is Being Played

For one thing, the geniuses in the Eccles Building have again been taken for fools down in the bond pits. A big part of the demand for repo funding comes from speculators simply playing the Fed.

For instance, JPMorgan analysts recommended investors use futures markets to position for the spread between the Fed’s directly pegged funds rate and the open market repo rates it’s indirectly attempting to suppress through its TOMO and POMO operations.

Now, there should be no doubt about why the Fed is literally inundating Wall Street with cash right now…

The Fed will stop at nothing to enforce its authority in every nook and cranny of the financial market. All that massive cash throw-weight is to make sure nothing priced in the multi-trillion-dollar money-market and repo sector dare deviate by more than a handful of basis points from its sacred targets.

Regarding consequences, of course it’s generating some serious speculative insanity. We’ll have more on that – facts, figures, and forecasts – in the November issue of The Stockman Letter.

Corruption at its Finest

When Lehman Brothers and other subprime gamblers collapsed back in 2007-08, the world professed to be shocked by the tangle of reckless excess and corrupt self-dealing.

But that was when the central banks had goosed their balance sheets from about $2 trillion at the turn of the century to $7 trillion on the eve of the Global Financial Crisis.

Since then, our monetary central planners have ballooned their balance sheets to a recent peak of $26 trillion. That’s another $19 trillion of high-powered, fiat credit injected into the financial system.

The recklessness and the corruption show up in things like WeWork and SoftBank and Uber and so many “Unicorns of Unicorns.” But this is only the tip of the proverbial iceberg…

The incentive structure created by easy money mean Corporate America’s cash-flow generation and balance-sheet capacity are being sucked dry. That’s what stock buybacks and other forms of financial engineering do, divert resources from real investment in new plant, equipment, and people.

And, by preventing the market from undergoing material corrections, the Fed and other central banks have simply encouraged the C-suites to massively speculate in their own securities with impunity.

Don’t Get me Started on Buybacks

There’s absolutely no fear that the trillions of dollars of company cash being channeled right back into Wall Street will come back to bite CEOs and CFOs and members of the corporate board. So, they simply do more and more of it.

Since 2008, components of the S&P 500 Index alone have repurchased nearly $6 trillion of stock.

The explosion of buybacks in the technology sector has been, of course, most spectacular.

Average annual buybacks totaled $66 billion from 2009 to 2012 – the immediate aftermath of the crisis, when a modicum of sobriety still pertained. Tech sector buybacks in the last two years have averaged $262 billion.

Then again, if the purportedly high-growth tech sector has nothing better to do with its cash except buy back its own shares, there’s either something rotten in Denmark or the speculative mania fostered by the central banks has now brought us to the blow-off stage of the Everything Bubble…

If This Is It…

This is the most politicized market in history. And the Tweeter-in-Chief is still in charge. So, the situation is changing almost by the minute.

It’s “Impeachment!” in Imperial Washington and all over the Mainstream Media. It’s “Easy Money!” on Wall Street and across Bubblevision.

And it seems as if the whole world has, indeed, gone mad.

Amid this chaos, prices will continue to rise and fall, trends will continue to develop and dissipate.

Well, The Stockman Letter is made for times like these. And we’ve updated our design to help us better navigate to not only the safest harbors but also the most promising opportunities.

The stakes are as high as they can be heading into 2020. Markets appear to be straining, catching up to an economy that’s been weak and getting weaker for years.

The Donald is tied up in the day-to-day movements of the major stock indexes like no president before him. The increasingly desperate incumbent will do anything he must to hold the White House.

It’s a major tipping point. And there’s no telling what the Donald’s great disruptions could do to your wealth.

You’ve got to be nimble to win in this market…

If You Need Your Money in the Next 5 Years…

America is at a crossroads. The middle class is disappearing… government spending is out of control… and the implosion of Bubble Finance will cause the greatest market crash in history. So, if… Read More
David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR