Bubble of Bubbles, Why Global Economies are not Improving
Central bankers around the globe are pulling out their hair trying to figure out why the various QE’s are not igniting economic growth. For example, US industrial production reported yesterday was the weakest in 2 1/2 years, all during the period of QE III.
The answer is probably not that difficult. It could be simply that the engine of growth is the returns that savers get in terms of interest. Now savers have to join the paper asset game, buy Bonds for price appreciation not interest returns. The problem is, however, that the only way one can capture those returns is to sell those Bonds to someone else, and here is the Conundrum that Bernanke, and Yellen should have thought about in 2012.
Dr. John Hussman, hussmanfunds.com, to me one of the sharpest economists out there, said this a few weeks ago:
” The Fed has been attempting to create a “wealth effect” driven by yield-seeking speculation, despite no empirical evidence that consumption responds significantly to changes in volatile assets like stocks – Friedman and Modigliani were right. Instead, QE does little but to encourage yield-seeking speculation that temporarily enhances the distribution of paper wealth toward the holders of risky securities. Still, turning this paper wealth into a claim on real output requires that existing holders cash out at those elevated valuations and pass the bag to someone else. Fortunately or unfortunately, the holders of risky assets have come to believe that elevated valuations are permanent and reliable, so as in 2000 and 2007, we expect the majority of holders to simply continue holding the bag as valuations retreat over the completion of the market cycle. Technically, most holders will have to, because the ability to exit at current prices requires some new buyer to take the bag. My impression is that the sideways churning we’ve observed in the broad market since last July (see the NYSE Composite for example) has represented just that sort of “distribution” process.”
UPDATE AT 9:15 AM CDT FED’s Fischer is Fearful
And we just had to add this CNBC interview comment piece. The FED’s Fischer said that the FED always has to be a little fearful when making interest rate changes, because they might be wrong. Maybe they should get out of the way and let a free market do its job.