The Most Disturbing Thing Central Banks Are Doing Right Now

At the end of August, the Federal Reserve met in Jackson Hole, Wyoming for its annual confab and investors hung on every word uttered by the former tenured economics professors comprising the committee to destroy the global economy.  There were strong hints from Fed Chair Janet Yellen and Vice Chair Stanley Fischer that they want to raise rates in the near future, but they have broken such promises before. (This “will-she-won’t-she” romantic comedy is really getting old.)

The worst thing the Fed could do is keep interest rates low; instead, it should announce that it will start raising rates by 25 basis points each quarter until the Fed Funds rate reaches 2% and then urge Congress to act on meaningful tax reform and fiscal stimulus that are the only policies that will help minorities and all Americans.  And then this nation should embark on meaningful civic and economic education for all of its children (and even the adults) to insure that they understand how economies work – which is not by increasing entitlements and reducing the cost of money to the point where it has no value.

When you look deep into Fed policy, all that stares back is a black hole. And the hole keeps getting deeper and deeper. While it went largely unnoticed at this meeting, the Fed also made some very disturbing noises about its plans to deal with the next recession.

These plans are unconstitutional and dangerous.

And they’re the next step in a quiet revolution that’s already being waged by central banks worldwide.

Here’s the most disturbing thing central banks are doing right now (and how it can hurt you)…

The Fed May Be Going Shopping – for Something It Has No Right to Buy

Acknowledging that it will not be in a position to lower interest rates by 300-500 basis points as in past recessions, the Fed is paving the way for the next generation of quantitative easing.  Some believe the Fed is hinting that it may add corporate bonds to its shopping list the next time it has to bail out the economy and markets.  While that would likely violate the Constitution, which vests Congress with the right “To borrow Money on the credit of the United States” (Article I, Sec. 8), the Federal Reserve has shown little regard for any limitations on its powers and Congress is asleep at the wheel.

Buying corporate bonds would be just one more in a series of policy blunders that destroyed global bond markets.  Fed purchases of corporate bonds would further reduce market liquidity and distort free market pricing mechanisms (if the latter can even be said to exist anymore).  While I have no doubt that we could see the Fed further expand its balance sheet, I am equally confident that further balance sheet expansion will do little to promote economic growth.

On a larger scale, central banks have already been on an illegal shopping spree for quite some time.

And it’s creating a radical change in the investment landscape.

Right now, central banks, sovereign wealth funds, and certain regulated institutions are buying assets without regard to whether they are fairly priced or generate reasonable returns.  I would also include corporations buying back record levels of stock in this category since they are driven by different motivations than investors seeking returns.  The fact that some central banks are large owners of stocks (Swiss National Bank) and ETFs (The Bank of Japan) tells you that something is seriously awry.  Rather than acting as lenders of last resort, these central banks are meddling in stock markets and inflating the value of companies to dangerous levels.  While these buyers can hold these stocks indefinitely, they are driven by different motivations than traditional investors seeking an attractive risk-adjusted return on their capital.

This is a profound change in the investment landscape that requires new thinking from investors.

Stock purchases by central banks in particular deserve more attention than they receive in the media.  They are nothing short of lunacy. There is no good reason why a central bank should own stocks.  That is not what central banks were created to do.  Central banks are supposed to act as lenders of last resort, not prop up stock prices.  It’s troubling enough that they are monetizing massive amounts of government and now corporate debt in a global Ponzi scheme that is destroying the world’s fixed income markets. Buying stocks is beyond the pale.

This May Mean The End of Post-World-War-II Capitalism

With central banks owning $25 trillion of financial assets and sovereign wealth funds owning countless trillions more, it is time to ask whether post-World War II capitalism is morphing into a new phase.  These non-economic actors have different motivations than traditional investors who buy assets in order to earn a profit over a reasonable period of time.  Central banks are buying stocks and bonds in order to monetize government debt and keep afloat the immoral Ponzi schemes required to finance massive entitlement promises to their constituents.  Sovereign wealth funds are looking for places to park their cash for extremely long periods of time and often focus on assets with trophy or strategic value. But the most important thing these two types of buyers have in common is that they don’t have to sell, which means that their ownership can inflate asset values for prolonged periods of time.  This destroys the price discovery mechanism that markets are supposed to provide.  And without price discovery, markets cease to allocate capital efficiently.

This remains one of the most baffling investment climates that my generation has experienced.  Central bank policies are distorting markets to the point where they no longer function as reliable indicia of the economy or the value of individual securities.  The more than $13 trillion of global bonds (today I read that the number is $16 trillion – who can keep track?) yielding below zero signal systemic distress, yet most investors and mainstream commentators and the financial media continue to shrug it off.  I beseech the readers of this publication not to shrug it off.  Negative interest rates and their causes are symptoms of serious problems at the heart of the global financial system.  Negative interest rates effectively allow governments to confiscate capital; they steal from the future to pay for promises that never should have been made and can never be kept.  They are another form of default.  As my friend David Rosenberg writes:  “So we know full well that the central banks want inflation – it is the easiest way to default on the global debt-to-GDP ratio without having to write anything down and generate real losses.”  Markets may appear to be sound, but that is an illusion; they are broken.  A combination of regulatory and monetary policy errors are draining liquidity, distorting pricing, and impairing the ability of the system to react to stress.  Markets are more fragile today than they were on the cusp of the 2008 financial crisis; governments and companies are more leveraged; and the geopolitical landscape is dangerously unstable.  Investors are ignoring these warning signs at their peril.

 Figure 1 Lulled to Sleep

Figure 1
Lulled to Sleep

What is an investor to do in such an environment?  The first mission should be to defend against losses.  Cash may yield nothing but it is still an important tool for managing risk and positioning to take advantage of future market dislocations.  I believe in the adage that many investors make 80% of their money in 20% of the time.  That is certainly the history of the credit markets, where most of the money is made after the market crashes; the rest of the time, the risk-adjusted returns are extremely unattractive (like today).  The human compulsion to act is the enemy of good investing; that is particularly true when markets are overvalued like they are today.  Rather than feeling they are missing out on the current rally, which has no relation to fundamentals, investors should not be reluctant to hold cash, avoid losses, and wait for better opportunities to buy assets at reasonable values. You can read about my cash recommendations here.

One of the symptoms of severe market distortions resulting from ceaseless central bank interventions is artificially low market volatility.  On August 23, The Wall Street Journal reported that stock market volatility over the last 30 days was the lowest in 20 years.  See Figure 1 above.  Factors contributing to this phenomenon include massive stock purchases by some central banks and the sharp reduction of market exposure in Europe after the Brexit vote.  Markets are complex systems.  Much like earthquake zones, they need to release pressure in order to prevent pressures from building up and unleashing larger fractures.  Markets have been unusually quiet since the financial crisis.  While human beings tend to assume that present conditions will persist indefinitely, there is abundant evidence that current conditions are unsustainable.  I believe volatility is significantly undervalued just as bonds and stocks are grossly overvalued. Future adjustments are unlikely to be gentle.


35 Responses to “The Most Disturbing Thing Central Banks Are Doing Right Now”

  1. John B. Schroeder

    You guys continue to see through the fog and provide a reality for those less gifted. If only I could convince my wife of this. Her financial “expert” working her IRA counsels “buy the dips”. Buying gold is the way to go, but she looks at my $11,000 in silver as lunacy. I see it as treasure after the bottom falls out. I’ll be sorry to be proven right ’cause that will be a disaster for many. John B. Schroeder

  2. I like your insight and assessment. I am a retired investor and have been struggling with the market for that appears to no longer to be guided by the normal actions market invested entities.
    So, given your understanding of Fed intentions, overwhelming power, and guidance, what are your thoughts regarding how we can position our investments to align with the Fed’s manipulative intentions? If the Fed actions distort the marketplace and inflate values, what does that suggest ?

  3. The FAIRtax® is America’s Big Solution. Replace the old tax system which requires annual filing, taxes on jobs, tax withholding and the IRS with just two pieces, a progressive national sales/consumption tax and one tax break, called the Prebate that helps most the impoverished and lower income.

  4. Robert F. Russell

    Michael’s assessment about the repercussions of the actions of the Central Banks is “spot on”, but limited. From an investor’s point of view their actions are illogical. From a Power and Control point of view, these disturbing actions are just some of their purposeful actions to cause fear and instability in world markets. But no one seems to have asked, what is their end game?
    One possible answer is in a book by David Wilcock, Financial Tyranny: Defeating the Greatest Cover-Up…

  5. Its very reassuring to finally read something that is true and that someone will print it. Thank you Michael! I do not trust the markets and do not participate in them ( except for some gold and silver miner ETF’s). I have believed since 2008 that the markets are rigged and not run by company profits and corporate metrics as they should be. I have lost money in my beliefs. I would have made alot of money playing the markets. But, in all honesty, I did’nt believe it would last this long! I know in my gut that this fantasy and corruption will end in probably the worst global depression ever witnessed by mankind. We are doing things, and going places financially, that are just unbelievable! Never seen seen it in my 59 years on this earth! I believe that gold, silver, and cash are the only logical way to go in this environment for just your average working stiff thats not sofisticated in all the differant market plays, as I am. I think the Fed and government corruption will be the ruination of this great country. Its very depressing to watch. Just a humble opinion from an average guy…

  6. Margie Artieschoufsky

    This is truly scary, especially for those of us who have a small nest egg. The Feds activities sound more like a sabotage of the economy than a stabilizing and growth approach. Why is this not publicized to enable everyone to make informed decisions?

  7. I agree with the author’s general assessment, but disagree that all assets should be converted to cash. I believe that in this environment, commodities are cheap and a portion of money should be held in companies in minerals and agriculture. I am also long silver big time. Regarding gold, I have 5% in Gld.

  8. Barry Murray, "TheProspector"

    Thank you for “This remains one of the most baffling investment climates that my generation has experience” . At 77-years I belong to the undefined demographic of being born in the gloom of the “Great” Depression, and experienced the fear of WW2 blackouts and rationing points during “the Big One” which actually brought the US to it’s bankrupt knees in our First Financial War [FFW1] not underwritten by vaults of California and Alaskan, and Nevada silver.
    Yes, I am one of those old Western-American prospectors. Call is “mushrooms” for usually being kept in the dark underground, and fed on BS about the fed.
    Our only relief from Nixon, following FDR, totally taking us off the historic gold to silver standard was to spend a Saturday might in a town whooping it up at the picture show running a B grade Western which proved what we already knew … that the now defunct Office of Minerals assistance required that you have proof that a bank had turned your mining project down for being too much of a risk.
    Who knew that our term for Black Bart Bankers as “black hats” would show up on the Internet.

  9. I have a problem that a lot of you may share. I am in the company 401k and have a significant amount of money invested. I would like to shift that in to physical gold, silver, platinum, and palladium, but that is not an option for me. I don’t want to lose what I have accumulated. My only option may be to liquidate, take the tax hit, and purchase the metal. Seems like a better idea than losing 50 percent when the system breaks.

  10. I am learning. You have a very good insight to what the Federal Reserve is doing. Rules of finance have changed since the deep 2008 recession. Today, It is a new ball game with new rules. Old rules do not apply..

    The way to play it in finance today is to follow the Federal Reserve. Don’t fight the Fed. It is dominant in our economy. It controls our economy. Like it or not that is the way it is. It is reality. Go along and you will do just fine. And another thing, it is not a monster. It is a super quasi governmental agency charged with keeping our economy going, in good and bad times, always mindful that its objectives are two-fold, maintaining price stability and full employment.

    For me, this is a very enlightening article. It reveals the other side of the Federal Reserve and its imperfections. Thank you very much!

  11. What is the story with America’s day of Reckoning by James Dale Davidson on the US Dollar & D-Day for the US Dollar on Sept. 30, 2016 by Jim Rickards? Note: the following story links: T
    As their warnings are obviously related to your warnings, any further comments are appreciated since we are all scared out of our wits around here, especially since my wife and I have 80+% of our cash in 52 week Treasury Bills in our Roth IRA with Charles Schwab (where I also have my trading account), the T-Bills are not maturing until April 27, 2017 and May 31, 2017, and I would love to have some of that cash available to buy Gold, or maybe even some silver.

  12. Rev. Mary Muennig

    Regarding what Ms.Artieschoufsky just said: There are a lot of people who know about what is going on and are getting the word out (i.e. Jim Rickards and other experienced economists who’ve been getting the word out via my email). Liberty Headlines is something good to read. Money Morning is another good one and there are some others. It sounds to me like “Fed” and the people who have the offices/positions where they can make decisions are/have been for a long time unwilling to make any sacrifices for country. They just keep spending money–“like it’s going out of style”. If they were really patriotic and cared about their people they would have taken the debt situation to heart and started pulling things very tight a long time ago. Personally, if it would have been me taking that office I would have taken a tremendous pay cut and recommended that a whole bunch of other people in government offices follow suit a.s.a.p. so we could get the situation straightened out–that what someone does when they truly care about other people and they want to get things straightened out.

  13. Sound of the Suburbs

    “And then this nation should embark on meaningful civic and economic education for all of its children (and even the adults) to insure that they understand how economies work”

    If anyone understood economics the global economy wouldn’t be going down the pan.

    Step 1 – Work out how the economy works
    Step 2 – Put this into economic theory

  14. I have two homes one I bought 3 years ago was thinking of renting it now I’m thinking of selling it I don’t know what to do I’m on Social Security don’t have a lot of money but this was for an investment for 20 years in the future to have enough money to live on now I don’t know what to do I think I should sell any suggestions please

  15. If I had a lot of money tied up in my employer 401k and I wanted to remain an employee I would see if I could borrow against it and invest the proceeds in gold (GLD) and silver (SLV). I would keep a years worth of loan payments in cash to repay the loan. I would reduce my holdings in the undistributed 401k and put it in cash in the 401k. I had my 403b (non profit equivalent of 401k) transferred (rolled over) into an IRA because the plan permitted it. I went with a very large entity
    which offered all kinds of investments. Right now it is all GLD and SLV. I don’t need to touch the money for a few years and then only minimum distributions.

  16. i like the article. i am from the land of oz and 78 years. i do watch the playwright named the fed. it is most amusing stuff. the jews who own it trot out all sorts of stuff and american bunnies lap it up like cat’s milk. for goodness sakes the fed is a PRIVATE bank! its sole purpose is to make more dosh and cripple the american economy in the process. 5 large american banks owe over 250 trillion $ on derivatives against about 10 trillion actual assets. and the ‘government’ that collection of professional; hitmen go along with everything and get rewarded handsomely. the next election will be fought over who is better connected to the ‘grey suits’…i believe that the vote counting will be done by an electronic device to ensure ‘security’. what a laugh. the elites have conned everyone in usa. the election is a fraud. blind freddy can see that. truly the fog is hard to penetrate in usa but its visibilty is ok from here. i don’t know what you americans can do in a rigged election.. just buy more silver. cheers from oz.

  17. Yes you can do self directed IRA without penalty. A bit of maneuvering involved so get a lawyer. There are a few outfits that will help you and the cost is considerably different from one to the next. If you work with a metals company oriented to PMs they direct you to the correct attorney. I can personally recommend Augusta Precious Metals that I set up a SDIRA.

  18. about rolling over your retirement account, you have to have more than $25 K and there are monthly storage fees of $75 for storing your gold/silver in a storage facility that does just that. You don’t want to keep that kind of “cash” at home even in your safe and you especially don’t want to store in your safe deposit box as there is precedent for the government confiscating all bank accounts and safe deposit box contents in depression type situations.

  19. You said: “this nation should embark on meaningful civic and economic education for all of its children (and even the adults) to insure that they understand how economies work – which is not by increasing entitlements and reducing the cost of money to the point where it has no value.” Well then you must mean pro-business (and pro-banking?) …propaganda that omits human rationalizations, justifications, without questioning those premises. Because what we claim to “understand” is how we order our lives, the institutions we create and live by. And I would not blame the victims of globalism for the unbridled greed of a comparatively few.

  20. One of the problems with following your advice and selling is that it appears that the supply of stocks is declining with fewer and fewer shares available for all the reasons you have mentioned. Add, a negative return to holding cash and it appears to be a losing proposition. How will we the baby boomer pay for our retirements if there is no return on our savings? The cost of buying stocks may go substantially higher as we are scared out of the market and the ten percent end up owning 100% of publicly traded companies. I think we need to stand our ground to protect what wealth we have left.

  21. Why does everyone fail to connect the dots and see the big picture? The incompetence of the players in the United States Government and those in power of other governments around the world is done intentionally and deliberately. Why else would they double down? Triple down? And make such stupid moves when they know what the ultimate outcome will be? The players are carefully selected persons who will act as necessary to achieve the results of the ELITE. The governments around the world are doing it with refugees despite the will of the people. And they are doing it to dilute the FUTURE power of the citizens of each country. So why is it such a stretch to believe that Alan Greenspan, Robert Rubin, Lawrence Summers, Haruhiko Kuroda, Fed Chair Janet Yellen and ECB President Mario Draghi (and others) are all acting in concert to achieve the end of Capitalism and usher in a new world socialist (or communist) economic system? One that will render the people powerless? Especially after they outlaw the use of cash around the world? After all, isn’t an egalitarian world the true goal of globalism? Then you must ask yourself…… could the world really be that unlucky to have so many like minded leaders “incompetent leaders” governing their countries at the same time? Leaders who deliberately act to destroy their economies like the United States? And when other governments like China and Russia who are not part of the conspiracy are stockpiling gold? Or is it really planned and how long can it last? Wake up people!!! It can’t last much longer before the dam breaks.

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