Party like it's … pic.twitter.com/i7fTI4vyvl
— Not Jim Cramer (@Not_Jim_Cramer) January 9, 2020
On EV/Sales, the market is at 99th percentile in history pic.twitter.com/T75NSNwSNo
— zerohedge (@zerohedge) January 9, 2020
Note once does Bullard acknowledge the relationship between repo, balance sheet and asset prices. But he shows a chart confirming by implication that ALL gains have come since the Fed expanded its balance sheet and launching repo. t.co/HeG48m7GoB pic.twitter.com/frFHQsgvlb
— Sven Henrich (@NorthmanTrader) January 9, 2020
97% of CFOs say an economic downtown has already begun or will occur by the end of 2020, according to Deloitte
— ian bremmer (@ianbremmer) January 9, 2020
Surprise is a moment when economy keeps tanking despite cheaper money and higher leverage on lower and lower rates t.co/5I8TR6ZrBd
— GregTheAnalyst (@Analyst_G) January 9, 2020
If Bernanke had been @ the Fed in '99/00 + decided to stop the Dot Com Bubble burst by slashing rates to 0% + starting QE, would that have made that Bubble any less of a Bubble or just worse of a Bubble?🤔🤔🤔@RobSKaplan @marydalyecon @RaphaelBostic @EricRosengren @neelkashkari pic.twitter.com/e79dhrgYzc
— M/I_Investments (@MI_Investments) January 9, 2020
It’s a fragile house of cards waiting for a strong wind to blow it all downt.co/A45lXYFw7J
— Truthdig (@Truthdig) January 9, 2020
Although the repo market is little known to most people, it is a $1-trillion-a-day credit machine, in which not just banks but hedge funds and other “shadow banks” borrow to finance their trades. Under the Federal Reserve Act, the central bank’s lending window is open only to licensed depository banks; but the Fed is now pouring billions of dollars into the repo (repurchase agreements) market, in effect making risk-free loans to speculators at less than 2%.
This does not serve the real economy, in which products, services and jobs are created. However, the Fed is trapped into this speculative monetary expansion to avoid a cascade of defaults of the sort it was facing with the long-term capital management crisis in 1998 and the Lehman crisis in 2008. The repo market is a fragile house of cards waiting for a strong wind to blow it down, propped up by misguided monetary policies that have forced central banks to underwrite its highly risky ventures.
The Financial Economy Versus the Real Economy
The Fed’s dilemma was graphically illustrated in a Dec. 19 podcast by entrepreneur/investor George Gammon, who explained we actually have two economies – the “real” (productive) economy and the “financialized” economy. “Financialization” is defined at Wikipedia as “a pattern of accumulation in which profits accrue primarily through financial channels rather than through trade and commodity production.” Rather than producing things itself, financialization feeds on the profits of others who produce.
The financialized economy – including stocks, corporate bonds and real estate – is now booming. Meanwhile, the bulk of the population struggles to meet daily expenses. The world’s 500 richest people got $12 trillion richer in 2019, while 45% of Americans have no savings, and nearly 70% could not come up with $1,000 in an emergency without borrowing.
Gammon explains that central bank policies intended to boost the real economy have had the effect only of boosting the financial economy. The policies’ stated purpose is to increase spending by increasing lending by banks, which are supposed to be the vehicles for liquidity to flow from the financial to the real economy. But this transmission mechanism isn’t working, because consumers are tapped out. They can’t spend more unless their incomes go up, and the only way to increase incomes, says Gammon, is through increasing production (or with a good dose of “helicopter money,” but more on that later).
So why aren’t businesses putting money into more production? Because, says Gammon, the central banks have put a “put” on the financial market, meaning they won’t let it go down. Business owners say, “Why should I take the risk of more productivity, when I can just invest in the real estate, stock or corporate bond market and make risk-free money?” The result is less productivity and less spending in the real economy, while the “easy money” created by banks and central banks is used for short-term gain from unproductive financial investments.