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Saturday
Mar142015

The Volatility / Quantitative Easing Dance of Doom

The battle between the ‘haves’ and ‘have-nots’ of global financial policy is escalating to the point where the ‘haves’ might start to sweat – a tiny little. This phase of heightened volatility in the markets is a harbinger of the inevitable meltdown that will follow the grand plastering-over of a systemically fraudulent global financial system. It’s like a sputtering gas tank signaling an approach to ‘empty’.

Obscene amounts of central bank liquidity applauded by government leaders that have protected the political-financial establishment with failed oversight and lack of foresight, have coalesced to form one of the most unequal, unstable economic environments in modern history. The ongoing availability of cheap capital for big bank solvency, growth and leverage purposes, as well as stock and bond market propulsion has fostered a false sense of economic security that bears little resemblance to most personal realities.

We are entering the seventh year of US initiated zero-interest-rate policy. Biblically, Joseph only gathered wheat for seven years before seven years of famine. Quantitative easing, or central bank bond buying from banks and the governments that sustain them, has enjoyed its longest period of existence ever. If these policies were about fortifying economic conditions from the ground up, fostering equality as a force for future stability, they would have worked by now. We would have moved on from them sooner.

But they aren’t. Never were. Never will be. They were designed to aid big banks and capital markets, to provide cover to feeble leadership. They are policies of capital creation, dispersion and global reallocation.  The markets have acted accordingly. 

What began with the US Federal Reserve became a global phenomenon of subsidizing the financial system and its largest players.  Most real people - that don’t run hedge funds or big banks or leverage other peoples’ money in esoteric derivatives trades - have their own meager fortunes at risk. They don’t have the power of ECB head, Mario Draghi to issue the 'buy' order from atop the ECB mountain. Nor do they reap the benefits.

Retail sales are down because people have no extra money and can’t take on excess debt through credit cards forever. They aren’t governments or central banks that can print when they want to, or big private banks that can summon such assistance at will.

Federal Reserve Chair, Janet Yellen recently chastised these bankers. This, while the Fed has become their largest client and the world’s biggest hedge fund.  While she wags her finger, the Fed is paying JPM Chase to manage the $1.7 trillion portfolio of mortgage related assets that it purchased from the largest banks. In other words, somewhere along the line, the public is both paying to buy nefarious assets from the big banks at full value, thereby supporting an artificially higher price and demand for these and similar assets, and paying the nation’s largest bank for managing them on behalf of the Fed. Yellen says things like “poor values may undermine bank safety” and all of a sudden she’s on an anti-bank rampage?  What about the fact that just six banks control 97% of all trading assets in the US banking system and 95% of derivatives? Or that 30 banks control 40% of lending and 52% of assets worldwide?

Think about the twilight zone squared logic of this. Yellen’s predecessors, Alan Greenspan and Ben Bernanke, enabled the path of the US banking system to become more concentrated in the hands the Big Six banks, which have legacy connections to the Big Six banks that drove the country to disaster during the 1929 Crash, and have been at the forefront of the nexus of political-financial power policies for more than a century. Yellen had a seat at the Clinton administration banking deregulation table when Glass-Steagall was summarily dismantled thereby enabling big banks to become bigger and more complex and risky. Those commercial banks that didn’t hook up with investment banks back then, got their chance in the wake of the financial crisis of 2008. They also concocted 75% of the toxic assets that were spread globally and the associated leverage behind them in the lead up to 2008.

Rather than show meaningful initiative to engender safety in the financial system (which if she had, or wanted to, would have rendered her a non-viable candidate for her position), she reprimanded the banks while providing them cheap capital. That’s like egging people with a tendency toward excess on as they gorge on multi-course gourmet dinners, making disparaging comments about their girth, and being dubbed their coach for The Biggest Loser while serving them the next course. Political theatre is its own end.

This latest rise of market volatility, however, is foreshadowing the real end of global QE as a proxy bond investor packaged for political purposes as necessary to combat deflation, increase liquidity, or whatever the reason-du-jour providing the QE program legitimacy beyond its true function of providing cheap capital to the private banking system, is.

The reason that the artificial resuscitation of the entire global financial system has worked as long as it has is due to the collaboration of major governments, central banks, and powerful private banks behind it. These three pillars of power have been mutually reinforcing.  Since early 2009, the bond and stock market have soared on the back of external capital from the central banks supported by the elite government leaders of the countries with the largest banks.

Just this year, 23 central banks have cut rates due to ‘sluggish growth’ – as if this cheap money has helped main populations anywhere. In the process their currencies will weaken. The US may have a strong dollar on the back of having had the largest and first QE / ZIRP program which is why  (behind the banks’ need) there’s no particular reason – yet - for the Fed to raise rates. Plus, the labor situation is barely improving even if the headline unemployment figures based on low job-market participation and poorly paying jobs appears better. Also, the ‘lower demand’ for oil amidst higher production (and some big commodity trading desks slamming oil prices and blaming Saudi Arabia) has made inflation (outside of the cost of living and the stock market) look tame enough to make rates hikes unnecessary.  But the big market players think (or say, anyway) that rate hikes could happen soon. This uncertainty begets higher volatility.

Meanwhile, the Euro is tanking against the dollar because Mario Draghi's ECB is on a QE roll, buying covered bonds from the likes of Deutschebank, ING, and BNP while pummeling Greece for not wanting to further crucify its population in order to repay funds that had egregious terms to begin with. Their ‘bailout’ had nothing to do with helping Greece attain a stronger economy and everything to do with validating speculators and the banks that sold them bonds. The IMF even sort of admitted this. But the Troika has made plutocratic finance a blood sport.

All this is fodder for triple digit market swings. Somewhere in the madness, lies the notion that this particular policy of speculation subsidization for the upper banking class can’t last forever. There are only so many entities that can buy so many bonds and filter so much cheap capital into the system for so long. At some point the ECB program will run its stated course. Rates around the world will head to zero or somewhat negative. And then what?  There will be no more powder in the QE / ZIRP global keg. That’s when it gets really bad.

Meanwhile, the rising volatility we will face this year (to the downside) in the financial markets, will signal this unraveling. The best course for mere individuals is to reduce their exposure to the insanity.  “Know when to hold ‘em, know when to fold ‘em, know when to walk away” as the lyrics to the old gambling song go. Because rest assured, the big boys are going to be on the financial life rafts first…economic Titanic style. That volatility – it’s the iceberg finally looming. 

References (5)

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Reader Comments (21)

In this post the following sentence needs redoing, it soesnt make sense. (From Philip, editor at Talkmarkets)
"The reason that the artificial resuscitation of the entire global financial system has worked as long as it has is the due to the major government, central banks, and powerful private bank collaboration, the exercise has enjoyed."

March 15, 2015 | Unregistered CommenterPhilip

Thanks Philip! It's been fixed.

March 15, 2015 | Registered CommenterNomi Prins

I always kind of had the feeling Janet Yellen was the type to make Jack freeze in the water while she floated on top of a large piece of wreckage. All the while Jack is groaning in severe pain, Janet is spouting off about how she can never find economically priced hair coloring at Macy's.

But seriously Nomi, this is an awesome post. And you tied two words together that I had never seen used together and really like: "speculation subsidization". Another one which could be used is "Camouflaged Welfare Payments for TBTF banks". "Redistribution of Income From Main Street to Oligopolist Bankers". "The Public Subsidization of World Bond Market, Masquerading As PIIGS Bailout" In fact, if you are taking suggestion for title of your next book I like this "Speculation Subsidization (And Its Main Street Victims)". I'm assuming some editor will have to dumb titles down to something more memorable for CNBC anchors.

Also I like how you tie in QE to QE policy's REAL MOTUS OPERANDI: SUPPORTING THE BOND MARKET.


Finally, I am VERY excited about the news in the last paragraph of Greg Hunter's blog. I'm glad you're pushing on with non-fiction finance as I feel it's your strong point. If it sells well maybe you can give another whirl at being the next Rivka Galchen (As I know you have it in you).

March 15, 2015 | Unregistered CommenterTed K

Two other things I had wanted to touch on but had forgot:

Firstly, I saw this article on swaps regulation. I consider myself more knowledgeable on swaps than the average "joe six-pack" but honestly I couldn't decide if this was good news or bad. It seemed to be tilting to bad because you wouldn't know the sum total of derivatives risk in markets if this became law, correct??
http://www.wsj.com/articles/cftc-to-propose-swaps-anonymity-1424132424?mod=mktw

And although this is 3 months old story, I thought this was quite interesting:
http://www.motherjones.com/politics/2014/12/spending-bill-992-derivatives-citigroup-lobbyists

Secondly, Most European Finance Ministers are banker cronies, but I find Yanis Varoufakis to be a likeable/sympathetic character. I noticed the MSM (mainstream media) was making extra efforts to demonize him (including Bloomberg, which disappointed me). I expect that crap from Zerohedge and CNBC, but not from Bloomberg. I guess Mr. Varoufakis committed the "ultimate sin": Defending Main Street Greeks from ravenous and corrupt bankers. I suppose if Mr. Varoufakis keeps defending Greeks from Troika banks taking a dump on average Greek citizens, they will have to orchestrate a fatal "accident" for him sometime soon.

March 15, 2015 | Unregistered CommenterTed K

Thanks for the comments, Ted.

For going on 7 years, these policies of coddling the private system and capital markets have widened the inequality within and between countries. Yellen's own reports (from the Fed) have traced this inequality, so has the IMF and other entities. The myth of the 'economy' working because of epic amounts of central bank support is just that. Buying covered bonds from Deutschebank doesn't create jobs (except maybe for the covered bond desk at Deustchebank.) As for Varoufakis, his major and very valid point is that Greece can't survive for itself, or the EU, if it has to repay a 'bailout' on terms that were never sustainable for the country to begin with.

March 15, 2015 | Registered CommenterNomi Prins

Hello Ms. Prins,

I read your interview with Greg Hunter and went to your link that was mentioned. In your last paragraph you state, "The best course for mere individuals is to reduce their exposure to the insanity." If you have a 401k, do you move out of the stock mutual funds and into cash, or do you have a more specific route for us hard working people just trying to hold on to our retirement funds?

Thank you for your very interesting article!

March 16, 2015 | Unregistered CommenterlslK6ldr

Of course, my first inclination is to want to like Miss Yellen, as some of her white papers and writing have been sympathetic and understanding of the plights of labor, or a term no longer used---"the working class". But I think Chairman Yellen's writings and her flapping of her jaws need to be followed with ACTION.

From my individual viewpoint, I see Chairman Yellen's final success and any claims to legacy she might claim in the future (which currently stands at ZERO legacy, but I remain hopeful) in how much ACTION and APPLICATION she does with the Fed's REGULATORY MANDATE. If she wants to play footsie with big bankers, play footsie with the NYFRB's DOMINANCE of the Fed system, play footsie with The OCC, play footsie with the ABA (American Bankers association), etc... then frankly I have no time for the woman. She will put herself on the same shelf as President Obama, an initial source of hope which ends as a severely disappointing deflated tire.

I will NEVER forgive President Obama for this one:
http://www.nytimes.com/2009/05/01/business/01credit.html?_r=0

On April 30 2009 President Obama went from "potential hero" to "complete zero" in my book. Thankfully, all the SOBs who voted "Nay" are on public record, and I hope each and every one of them eventually has their own special cubicle in the darker depths of H*LL.
http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=111&session=1&vote=00174

President Obama did ZERO stump speeches or soap box speeches on this, gave ZERO effort to get it passed. That one will stick in my craw to eternity.

March 16, 2015 | Unregistered CommenterTed K

By studying your ideas and others, I've been searching for the death nail idea that calls the very existence of private for profit banking into question.

I think I've finally gotten somewhere. In summary:

Money is fiat (let it be thus, let it be so) - a matter of law. I see a dollar as a unit of law before and above all other definitions. Arguably, it is the most powerful law of a country and yet the legal aspect of a dollar is being systematically ignored by allowing private banks to dispense it. The crime starts with the normal operations of private banking. It is these historical powers (issuance, management, and allocation) that have allowed the private banks to gained control over the public sector and subvert all laws. Therefore, the only solution to the problem of crony banking is to shut down private banking altogether.

Legal aspect of money needs to be elevated to the point that money itself only makes sense within the public banking framework.

March 16, 2015 | Unregistered CommenterJeremy Hawton

Hi Nomi; I've read and heard your recent interviews and articles on this; I'd be very interested to hear your version of the Titanic hitting the iceberg i.e. what would be the steps that would a) finally trigger the breakdown and b) describe the early stages of the breakdown. I'm interested as this kind of analysis helps to better understand the system you describe, and its intrinsic weaknesses.

Thanks!

Mike (NZ)

March 16, 2015 | Unregistered CommenterMike

Ted….It's possible that Janet Yellen is a very nice person, and means what she says about helping the labor force, but the reality is that she has not put her weight behind reducing the size or complexity of the banking system. True, an act of Congress would be ultimately required. But that shouldn't stop pushing in that direction. What stops the pushing, is that the Fed created these beasts and only occasionally comes out with verbal reprimands, not actions.

401K question - When I talk about shielding from the insanity, regarding a 401K plan, I'd reallocate some portion into cash depending on how far you are from using the 401K, because I think a major down movement will come even if current volatility causes bounces around new highs and spikes downward for a while. You can reallocate back in afterwards. It's more to preserve an element of your capital, and that'a an individual decision.

March 16, 2015 | Registered CommenterNomi Prins

Jeremy,

Yes. The crime of this redistribution of public money or economic stability into private hands underlies this capital transfer combination of fiat currency, the banks leveraging it and thereby increasing the overall systemic risk for which they get subsidized upon failure, and the Fed, governments and private banks collaborating on this entire operation. The liquidity that returned into the system wasn't predicated on actual economic strength, but on the availability of zero or low interest rate money to the private banks, and the QE purchase program of bonds from them. This created an illusion of health, because the banks look better capitalized but it isn't based on elements of intrinsic value, just on this money creation circle.

March 16, 2015 | Registered CommenterNomi Prins

HI Mike,

In summary, my feeling is that the iceberg hits when all global avenues of QE are exercised. That would mean the ECB buying running its course, the US banks lowering their purchase of Treasuries which have increased as the Fed's QE program tapered to compensate (see my earlier piece on that), the Bank of Japan / People's Bank of China / etc. completing their monetary expansion and interest rate cutting. Basically the kind of race to the currency bottom that Rickards and others talk about, coupled with the end of sustaining the capital markets with global quantitative easing. At that point, bond prices drop, the stock market drops, the dollar weakens because other currencies have no more weakening based on their own rate reductions or QE to go, and to a gradual extent gold and other dollar replacement assets increase in value. I don't know the timing of this exactly. The ECB has a year to go, and during that year, other central banks will likely hammer away at their rates as well, and bets will be up and down on what the Fed may or may not do - hence the volatility I mention - all of these forces competing for supremacy. This is why I haven't thought there would be a cliff dive, but instead, a lot of increased volatility as these central bank movements play out in the capital markets and private banks readjust accordingly first.

March 16, 2015 | Registered CommenterNomi Prins

Nomi,

Some financial gurus such as Jim Puplava and Martin Armstrong contend that the FED will indeed raise rates very slowly, "until something breaks". Additionally, as the bond market pops towards the end of this year, they claim that capital flows will eventually rush into the US stock markets creating a major stock market bubble, possibly a doubling from these levels into 2017. As rates rise, so will the market. When rates rise to a level high enough that the market finally pops, the raised rates will give them wiggle room to "print" their way out of the crisis. Any thoughts on that scenario? Thank you for your time.

March 16, 2015 | Unregistered CommenterAnthony

The following sentence also doesn't make sense.
"Also, the ‘lower demand’ amidst higher oil production (and some big commodity trading desks) slamming oil prices and blaming Saudi Arabia, has made inflation (outside of the cost of living and the stock market) look tame enough to make rates hikes unnecessary."
Maybe the first parenthetical clause should end after "Saudi Arabia".

Then there's "bares little resemblance" (bears), "political-financial power polices" (policies), and "forbearer of this unraveling" (forebear?).

There's something to be said for proofreading.

March 17, 2015 | Unregistered CommenterGraham

Dear Graham,

I appreciate your edits and am a fan of proofreading……I do try my best to honor perfection, but as I'm my own researcher, writer, and editor on my blog, sometimes my zeal to share the information (even after many re-reads) gets ahead of my proofreading capabilities.

I trust the overall message is intact and will strive to be a better proofreader to myself in the future!

np

March 17, 2015 | Registered CommenterNomi Prins

Dear Anthony,

I just don't see how the US stock market doubles by 2017. At the moment, with volatility rising due to intensified Fed move guessing, upward swings tend to be met by downward ones. If the Fed were to raise rates, as a test of some sort (unless one believes the employment picture is as stellar as its headline figures), it would be met by more selling out of the US into markets that are not yet finished with their ZIRP/QE programs.

March 17, 2015 | Registered CommenterNomi Prins

Related to "proofreading", I am not sure if I agree with Graham's assertions. But I know as someone who runs an amateur hodge-podge blog (with leanings to economics and finance) that it's quite easy to make errors writing a blog. I know it's easy to make errors because I've done it many times, and catch the errors 2-3 days later and really hit my forehead with my fist wondering how I managed to screw up so bad.

I think most bloggers hold themselves to high standards (as I know Miss Prins does) because MSM media is constantly taking cheapshots at blogs. So when one blogger messes up all bloggers have to take cheap swipes from MSM over it. What is funny is many bloggers have special expertise in the subject matter they cover (as Miss Prins does as a former member of Goldman Sachs), and therefor can write about it more accurately and on a deeper level than a journalist, yet still have to eat sh*t from journalists who haven't even bothered to master their own SUPPOSED area of expertise (journalism).

Even some pretty snobby know it all types mess up. Even with books. Rogoff and Reinhart come to mind: http://www.nextnewdeal.net/rortybomb/researchers-finally-replicated-reinhart-rogoff-and-there-are-serious-problems

Two people I had ZERO respect for EVEN BEFORE the Chapter 5 error was found but seem to get a lot of popular attention is Levitt and Dubner. They had a HUGE screw up in Chapter 5 of their book:
http://delong.typepad.com/sdj/2009/10/sigh-last-post-on-superfreakonomics-i-promise.html

And even the stuffy snob (but admittedly highly intelligent) Nate Silver has been busted:
http://www.thisisthegreenroom.com/2012/the-signal-and-the-noise-errata/

When I see errors in blogs or books I USUALLY try to email the author/host on their private email. Then it isn't so "gotcha". They often will correct it in a humble but upfront fashion and then it doesn't seem so nit-picky. If they don't THEN you can jump down their throat.

March 18, 2015 | Unregistered CommenterTed K

Graham, ? to top off your 'Maybe..."Saudia Arabia".' sentence?

Be careful up on that horse.

Sean

March 19, 2015 | Unregistered Commenterpedantsareboring

Ms. Prinns
I value your info greatly. One reason is that you sometimes admit you simply don't know. Anytime anyone claims to be psychic in financial matters they lose me.

Like many others I have been expecting the economy to fall off a cliff for years now but lately too many things are coming together like never before. The fact that so many countries are repatriating their gold makes me a bit nervous. Try as they may the bankers don't seem to be able to re inflate the housing bubble. The recent action by the G 20 in Brisbane that put the speculators ahead of depositors in case of bank failure was the last straw. I am selling my TVA bonds (100K) very regretfully. A bank is, of course, the fiduciary (IRA) and the FDIC hasn't enough assets to cover even a tenth of the losses if one of the big six goes under. Who knows what the ripple effect will be? I can't even determine how much if any exposure to derivatives my bank has if any. I invested in this and thirty year treasuries for income in my old age back in the heady days of sky high interest rates. I did not invest in them as a trader. Gambling is not my style and I am eighty today.

I intend to buy about $50 K in gold (physical) and stuff the rest under my mattress. The rest of my thirty year treasuries are held by the US treasury. This way I am ready for deflation or inflation or both. I note that many feel there will first be deflation and then inflation.

In case you wonder, I am a retired brewery mechanic who happened to be fascinated by economic history and stumbled across Richard Wolff one fine day. I am now his disciple as well as yours and Michael Hudson's. I quit the stock market many, many years ago. That time when that they put me away it was for being insane, not stupid.

A reader wondered just how much in derivatives is floating round out there. According to Ellen Brown, the BIS estimates the number is around six hundred trillion dollars worth, more than the entire GNP of every nation on earth. I shudder to think of the amount of positions that would be wiped by margin calls if interest rates were to actually rise. That is why I doubt the Fed can raise them.....at all.

IMO our only chance long term is to get rid of capitalism and adopt the Mondragon model. It must be done gradually since armed rebellion is a non starter due to the fact both sides don't use muskets now.

In the meantime, thanks for all you do.

March 30, 2015 | Unregistered CommenterJon Skelley

@Jon Skelley: We don't have Capitalism, we have Fascism/Corporatism, i.e. govt controlled syndicates. True free-market Capitalism would be a godsend right now.

April 12, 2015 | Unregistered CommenterAnthony

Dear Ms Prins - I've been following your entries since encountering your writing on James Rickards' Twitter page and laud you for your research and penetrating style of delivering that to us.

The reason for this entry - you mention that a list of article-sources is included with the article - but I have been unable to identify them (find them). So - was attaching them an oversight perhaps? If so - please consider adding them. I always like to add and read them as well as your article(s) derived from them.

Thanks for considering this request - if you see it :)

May 15, 2015 | Unregistered CommenterScrittore
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