Aug

17

This is a very old adage: don't fight the central banks. That provides me the gumption to label them as the Gods of the markets. Einstein had quipped God doesn't play dice. Perhaps he felt the unmanifest, invisible, unascertainable authority in the universe is the creator of the universe and had control over its creation. Coming back to the manifest, visible and ascertainable behemoths of the marts a.k.a. the central banks, one is pushed to think that for the first time in recorded history they are sitting on trillions of dollars of negative yielding securities.

Are these visible Gods of markets playing dice or they are still the deterministic factor in the markets who will still determine what happens?

Scenarios:

a) Keep dying a slow death losing small chips every year for a long time to come with the negative yields.

b) Raise yields and kill the balance sheet?

c) Inflate dramatically some asset to shore up the balance sheet while exercising option b to make financial assets have sense. In scenario c, the traditional asset of bonds is already inflated. In 5,000 years we have never had yields below zero. Equities are at all time highs. What else is not at all time highs? Again a real estate bubble? Or will it be gold sitting in the vaults beneath metro stations around the world? Gods wont let go of their stature to be Gods, even if these are man made Gods.

Now, after scenario c also plays out, since nothing is permanent and ever changing cycles will again at some point bring something down, what is it that is going to go down first and what is it that will go down most?

If the unthinkable of negative yields came in too, why can not the unthinkable and the least obvious scenario (a) persist? Imagine eventually people getting money to buy cars, homes, tuxedos, rolexes and receiving an interest for taking away the trash called cash from lenders, banks and Gods? This then is not an option that can persist for long? Or it can?

The whole earth is going the Amazon way!? Will Jeff Bezos be known as the pioneer of the new world, where you get paid to usurp and use up money that in any case is at a discount? Is the motor created by John Galt working now to produce energy from nothing? Who will cut this motor off? When? Why?

Is the motor already broken? The endless mint-churning has produced endless currency. This currency is akin to endless static charge that has accumulated. Its not creating motion. This currency is unable to and unwilling to move into the system. Why? Is it that the window dressing of every bank balance sheet that began in the aftermath of 2008 in the developed world is not yet complete? Only book entries are happening?

Why do I get illusions that the cigarette buts in my ash tray sometimes appear to have a $ insignia printed in gold? Well if I were to go by the wisdom of the Reflexivist that one makes big packets on betting on the unobvious, I call this Gold insignia bit an illusion since fundamentally gold is too obvious a bet.

Will the world return back to before Bretton Woods? Will every key central bank agree together to print only more currency equivalent to gold it has making the yellow shining bars jump up to 2200? Then chart reading pros and amateurs will find a divergence in momentum and short sellers will come in and the dream of the gold bugs would be fulfilled to have record shorts in the move from 2200 to 1800 so as a jump to 4000 will become feasible? Will that suddenly bring a solution that none of the banks are sitting really on junk anymore? Will it still allow the permanence of the Senator's observation that a good suit has always costed an ounce of Gold? Or then, a good suit will be available at half an ounce of gold?

Despite change being the only permanence in markets, few things have never changed. Of those unchanging ideas the infinitude of the abilities of mankind at struggle for survival, conceit, deception, keenness to find the next scapegoat don't seem will dissipate away with just negative interest rates. No one will believe that everyone will go down equally and in fair proportions. So who is the lunch now, when its almost lunch time?

Monkeys have been now using the Discounted Cash Flow model. Yes, the longer you hold negative yielding assets the larger becomes your Net Present Value. The more you are willing to bleed the wealthier you are now! If this negative yield quagmire has any shelf life in plain simple English (no Greek and no grammar-nazis required) no one will have an incentive to save. If there no savings incentivized why would investors be incentivized? Lord Keyenes we really wish this day has not come, yet it has.

The most illogical times have arrived. Why am I seeking to imagine the odds using any logic? Would an illogical unintended consequence save the world? Why don't we remember that in the yo-yo moment of 2008 when the biggest churning of the USD mints happened, the biggest flight of capital until then in the history of this world happened INTO the USA and not OUT of the USA?

Would logic have to prevail, eventually?

So I am sending out this humble hat to the spec-list citizens, please pour in your (ill)ogical bets into this seeking hat. If trend is your friend, until it bends or ends.


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1 Comment so far

  1. G Raja Mishra (@grmfiles) on August 21, 2016 12:14 pm

    Sir, In my opinion, the fundamentals have been crushed into submission by the ‘Gods’. There is no fear in the mind of most investors. ‘Buy the dip’ always works. The US elections are a reason for the markets not being ‘allowed’ to crash (forget price discovery, free markets,capitalism). So there is no risk (vix has been killed, bond vix > equity vix!!), but still there is reward. That is mind boggling to say the least. Everybody will flock to stocks and bonds to avoid negative returns. Still it will keep going up. Whatever happened to the soul of arbitrage? What is happening (as you may have alluded in your enlightening piece) is that the central banks are digging their own grave, albeit at the behest (or coercion) of the politicians. Central banks are making currency worthless (endless supply, means no value) and turning capitalism into socialism (owning stocks / bonds / private debt). For example, BOJ is the top holder in 55 of the 224 Nikkei 225 companies. Is this capitalism? or state ownership. Is this not corruption? Is this not helicopter money in some garb? If I go to a shop and lift INR 1 from the counter I am a thief. So INR 1 has life changing value for me. But for central banks, it is just a piece of paper that they can keep printing under the pretext of lifting the economy. What gave them that power? Who gave them that power? I did not empower them to make money worthless. If I did, why do I work so hard for a worthless piece of paper? Or, it is worth a life for me, and dispensable for the central banks. THAT (IMHO), is what makes them GODS. They are out of the democratic process. They are empowered to do the unthinkable (create money endlessly without any thing in return -e.g. work, gold). They are destroying the financial system. However, ‘evil’ fails in the end. The HFT bots will switch sides soon. They can’t control all the assets all the time. Markets have already failed, only, they have not fallen yet. Regards

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