Unlimited QE (Quantitative Easing—aka money printing) is now here, which means we are now experiencing the most distorted and dangerous inflection point in the history of our capital markets.
How’s that for dramatic?
Drama is one thing, but facts are another. As usual, let’s try and stick to the facts.
Normal Folks Aren’t Seeing the Full Story
Currently, I am concerned that the full reality, as well as disastrous (and I mean disastrous) implications of unlimited QE have not fully registered within the minds of average Americans.
There is no shame nor condescension meant by this, as most Americans (be they neuro surgeons, electricians or poets) would understandably have no reason or recourse to take a daily interest in the economic nuances of extreme monetary policy or unlimited QE.
Nor do most public defenders, school teachers, UPS drivers or musicians track or follow the hidden-in-plain sight collusion between an empirically rigged Wall Street, the Federal Reserve and the politicos on both sides of the DC aisle.
Instead, and for many, they understandably trust the officials in high places to simply do the right thing.
That’s an honest impulse, as well as an honest mistake. Let me explain why…
Insider Insights, Insider Lessons, Insider Warnings
Tom and I, who were literally educated, reared and trained in the heart of wall Street’s white-gloved graduate schools, banks, hedge funds and family offices, see (and have seen) the rot in these financial policies as easily as a dentist recognizes a cavity.
For many years, we have therefore sought to share and translate this experience transparently (rather than bitterly) to our readers, outlining the blunt yet disturbing details of this rigged and rotten game with plain-speak facts rather than dramatic opinions.
A History of the Absurd
In our March 2019 report on Real Financial Advice, for example, we charted the undeniable correlation between Fed policy and Wall Street wealth creation, which has undeniably benefited the top 1-10% of our country at the expense of the bottom 90%, who have been forced to exist on debt rather than the laughable “trickle-down” effect from the rising wealth of a small and exclusive minority.
Meanwhile, the financial media had described the debt-soaked, and money-printed “solution” to the 2008 debt disaster as a “recovery,” thus lulling the masses into over a decade of false confidence that the elites (i.e. Harvard guys like Larry Summers) in DC and New York actually knew what they were doing.
But what they were “doing” amounted to little more than serving their own primary interests, not those of the broader economy. This may sound radical or opinionated, so again, let’s just survey the facts.
Across the board and across the years, Americans have been told that these “best and brightest” all “have your back,” i.e. by brilliantly solving one debt crisis (2008) through the creation of an even bigger debt crisis (2009-2020), and then conveniently attributing unlimited QE and now unthinkable debt levels (March of this year) to COVID-19 rather than the bathroom mirror of just about every Fed governor, Congressman or bank CEO.
But as we have mathematically demonstrated here, here, and here, the US economy was already in a GDP-growth depression years ago and our markets, based on every traditional metric, were quantifiably broken long before the first Coronavirus death made the headlines.
Additional reports in January and November of 2018 further revealed the unequivocal disconnect between Wall Street and Main Street and the quantifiable weakness of our dying middle class well before the first $1200.00 check was sent to the locked-down average American Jane and Joe.
In both reports, we explained how the so-called economic “recovery” from the post-2008 crisis was a mathematical (debt-disguised) sham, as was the so-called record low unemployment meme/lie which has been masquerading as fact for years in the media and in DC.
And in both our best-selling Amazon book and special report of equal title, Rigged to Fail, we reminded readers that for every member of Congress there are four financial lobbyists out of Wall Street and corporate America who influence their so-called democratic “policies.”
In short, we’ve gone to extraordinary lengths to reveal (rather than rant) just how anti-heroic the anti-heroes passing as elites really are along the Acela Corridor between DC and NYC.
Thus, if you want this proof, as well as data, just click on all or any of the foregoing links and do your own math, critical thinking and awareness-raising.
You’ll quickly confirm that the truth is not only stranger than fiction, it’s scarier.
More importantly, by reading or re-reading these critical reports, you’ll learn how the sausage is really made in our financial markets, and see directly why and how classic, free market capitalism died years ago.
Speaking of capitalism, if you want to identify or date-stamp the final nail in its coffin being hammered in real-time, let’s get back to my opening remark and concern, namely…
The Absolutely Disastrous Implications of Unlimited QE.
As most of you know by now, QE is simply a nice euphemism for creating money out of thin air to pay for our own sovereign debt (i.e. Treasury bonds) as well as the still-radio-active sub-prime mortgage debt that no one else wanted to buy from the TBTF banks that once owned this debt in 2008.
Luckily for these nuclear banks, YOU the tax-payer helped DC buy those toxic assets (MBS—or Mortgage Backed Securities) and thus directly took a heavy load off the very banks who created the 2008 Crisis in the first place.
DC then called this disguised piece of fraud the Troubled Asset Relief Program (“TARP”), which justifiably raised a lot of angry eyebrows with its $700 billion price tag.
Thereafter, the Fed came up with another nice euphemism for counterfeit, i.e. “Quantitative Easing,” and within a matter of six years of QE 1, 2, 3 and Operation Twist, managed to create $3.5 trillion out of thin air to keep Wall Street and the otherwise brain-dead Treasury market ripping up and to the right.
The Fed called this “stimulus” and “accommodation,” but based on charts like this…
… it’s fairly clear that the only beneficiary of this “accommodation” was Wall Street and a stock market that rose by 350% while Main Street GDP, the very heartbeat of our so-called “economy,” flat-lined at annualized rate of 2%.
This disconnect between the stock market and US GDP tells you ALL you need to know about who the Fed really serves—and folks: It aint YOU or the ignored real economy…
But if programs like TARP and QE 1-3 seem a little crazy, distortive or unfair, what we are seeing as of April of 2020 and the new policy of unlimited QE is just plain parabolic when it comes to measuring the absurd.
QE 2, for example, raised a ton of stir years ago when the Fed agreed to print $500 billion in the span of 8 months to “stimulate” the economy, which the Fed had confused with the stock market and thus declared as “essential”, as it seemed Wall Street had lost its stomach for actually experiencing a natural recession, which is a key and necessary component of any free market system…
But folks, in the first volley of unlimited QE, last week the Fed printed more than $500 billion (i.e. greater than all of QE2) in a matter of just 5 days.
As reported here, the Fed’s balance sheet is now projected to more than double from the current level of $4.7 trillion printed dollars to upwards of $10 trillion.
When you combine such money printing levels (i.e. “monetary policy”) with the recent $2 trillion of COVID-19 support (i.e. “fiscal policy”), the sum tally of new debt and printed money (used to buy every otherwise unwanted bond from Treasuries to corporates) and then tag on to that the trillions already being thrown at Wall Street’s dry repo and commercial paper markets, we are talking about a $10 trillion dinner bill.
Ten Trillion. Folks, that’s 47% of our GDP, the Main Street equivalent of a debt soaked college-grad buying a fleet of yachts, vineyards and Range Rovers with money printed in his frat house basement. In short, lots of debt, no real income.
Free Markets or Just Free Money? Let’s Call It What It Really Is…
And here’s the rub—such figures and unlimited QE have absolutely nothing to do with capitalism nor sustainable reality.
When a central bank and centralized government (rather than natural supply and demand) creates money to buy corporate and government debt at levels like these, the only real name for what it looks, tastes and smells like to us is simply this: Wall Street socialism.
Luckily, however, the spin-sellers in DC and Wall Street are absolute masters at putting lipstick on a pig by hiding something otherwise awful behind clever acronyms or policy labels, in this case, the fancy name they most recently chose is “Modern Monetary Theory,” which basically maintains that a government can create all the money it wants (i.e. unlimited QE) with no hangover effect for the simple reason that it owns a money printer.
This sounds too good to be true simply because it is, and we rip the logic of MMT to shreds in a separate report you can read here.
For now, however, the Fed, media, DC and the Wall Street beneficiaries of this unprecedented hand-out of unlimited QE will try to convince YOU that such measures were necessary to “sustain healthy credit markets” (actually on a respirator) and support the millions of Americans in need of COVID-19-related support.
This too is just mathematically NOT honest or true.
The vast bulk of these trillions is going toward the bond markets, not Main Street.
Nevertheless, the pushers of this MMT fantasy magic will claim otherwise, as they’d prefer that the uninformed masses ignore such pesky details as outlined in all the various links and charts above.
After all, it’s better to give trusting Americans hope, headline bailouts and a check rather than truth and a pitch-fork. As per a bumper sticker I saw in Virginia today:
“Give me liberty or give me a $1200 check!”
Folks, what we are seeing unfold right now, in real-time, is the complete and utter destruction of free-market fairness replaced by Fed-market control and absolute DC fantasy masquerading as “economic policy.”
Moreover, and more importantly, by creating these trillions in new money supply and new debt, such policies are absolutely guaranteeing that the US will enter into an unprecedented economic and debt depression—and eventual inflation—the likes of which we have never seen before.
Inflation always follows deflation, which is where we currently sit.
You see, MMT and unlimited QE only works if interest rates, and hence, inflation are magically extinct forces.
For now, the printing press at the Eccles Building is creating unlimited QE dollars at warp speed to create enough money to buy enough bonds to keep their prices artificially up and hence their yields (i.e. interest rates) artificially down.
“The Bond Market Is the Thing”
This is critical, and as I’ve said hundreds of times: Everything now hinges upon the bond market in general, and bond yields in particular.
Why? Because with the deficit now skyrocketing well past the $23 trillion mark in which we opened the year, the Fed and DC literally cannot support or sustain such debt if interest rates (as tracked by the yield on the 10-Year US Treasury) ever rise past 2.6% or more.
Why? Because that would require more money than even unlimited QE can pay for without totally diluting our dollar and landing us in a world of hyper-inflation and currency-debasement.
If you add ten gallons of water to a martini, the vodka gets diluted. It’s the same with currency purchasing power…
In short, like 120 fingers in every hole of a broken dyke, the panicked 12 members of the FOMC are in a life and death struggle to keep bond yields (and inflation) artificially compressed.
But as I’ve argued in greater detail elsewhere, such dangerous yield compression is mathematically, historically and financially impossible to sustain.
Inevitably, natural bond market forces, rather than Fed fingers, will determine bond yields, and when they spike (or spring up), so does inflation, interest rates and the funeral march of the US we once knew and loved.
When Will These Bond Yields Spike?
I have absolutely no idea.
I just know they will, just as I know an apple falls down rather than up.
The laws of physics, like the laws of natural markets, eventually get the last say in any debate.
What we are seeing right now (in terms of debt and money creation) is simply and factually beyond the scope of anything I studied in school or saw at a trading desk, including my wild memories of the dot.com disaster or the sub-prime crisis of 2008 and the absurd stimulus policies which came in their wake.
These are truly uncharted waters, and all sailors know how dangerous it is to navigate without charts.
For now, all Tom and I can do is track the market weather as it plays out and prepare our subscribers based on market signals rather than cynical histories of “distortion, dishonesty and debt”—the three-D’s which define Fed policy in a nutshell.
Whether rising yields (and hence inflation and rates) humiliate the Fed in five months or five years, we need to prepare investors now rather than later, as we have successfully been doing for years at Signals Matter.
Again, this is not market-timing, just common sense with a dash of market skill.
Needless to say, for those who understand inflation and gold, the case for precious metals just became even more obvious, but that’s a whole other story…
For now, and as always, stay informed and thus safe. And for those who can, stay inside.
We’ll be back on Monday with more market weather to discuss. And if you haven’t already, get your affairs, and portfolio, in order by signing up with Signals Matter, here.
Best, Matt and Tom