Nomi Prins: Trump’s New Dark Money Man Takes Over
by Nomi Prins via The Daily Reckoning,
ZeroHedge.com
Tue, 02/06/2018
During her last news conference in December, Janet Yellen stood firm on her record stating, “The global economy is doing well. We’re in a synchronized expansion. This is the first time in many years that we’ve seen this.”
While attempting to lock in her record, Yellen urged, “There’s less to lose sleep about now than has been true for quite some time.”
Well, a lot of people lost sleep these past few days. And they might lose more sleep in the days to come.
Markets were due for a correction. Whether it turns out to be something worse, time will tell.
A recent article in MarketWatch said 2018 could “be the year the stock market rally screeches to a halt.” That’s because at some point debt bubbles are going to pop, and after they do, stocks will follow.
The Fed has continued to provide what I call dark money to big Wall Street banks while they continue to buy back their shares with it.
Dark money comes from central banks. Ultimately, central banks “print” money or electronically create funds to purchase bonds or stocks. They also use tools like adjusting interest rate policy and currency agreements with other central banks.
Dark money then flows out to the biggest Wall Street banks and financial institutions. Policy makers set the tone for central bank fabrication and movements of money through markets, banks and the world.
Because of dark money provided by central banks, corporations have been piling on debt like arsonists hoarding lighters before a fire. They’ve been using that debt either to service old debt or to buy their own stocks. That move artificially elevates their share values and in turn makes more bond investors relish buying their debt.
Apple, for example, has been one stalwart that’s been riding “the borrowing bandwagon as it looks to fund its massive share buyback program.” Apple went as far as to issue $12 billion of debt in the last four months of 2017 in order to buy its own stock.
The entire U.S. primary corporate bond, or debt, market has been at record levels. There was $1.44 trillion of investment-grade issuance in 2017 compared with $1.34 trillion in 2016. There was $266.3 billion of high-yield issuance last year, that sector’s fourth-biggest year.
This debt creation can’t sustain itself forever. It doesn’t take but a tiny mistake by central bankers to throw the bond markets into disarray.
Equity markets don’t always follow right away, but they will eventually follow. And these past few days, equities marched in lockstep with the spike in bond yields.
The Fed’s balance sheet reductions until now have basically been a rounding error. But last week, the Fed sold $22 billion of assets. Is it a coincidence that stocks sold off?
But this would just be a taste of what could happen.
As the MarketWatch article I mentioned says, “If and when the bubble does pop, however, the deleveraging by lenders could create a credit crunch the likes of which haven’t been seen since the Great Recession.”
Let’s briefly review how we got here…
After the 2007–08 financial crash, the Federal Reserve starting buying $3 trillion worth of U.S. Treasury and mortgage-backed bonds from banks and the market. This epic purchasing power manipulated prices, drove down bond yields and “provided an artificial boost to the stock market.”
That’s not free market economics. The artificial nature of this move should concern any investor. The Fed’s maneuvers have only grown from there.
All told, the Fed’s book of assets has quadrupled from $914.8 billion in late 2007 to $4.5 trillion in 2014. It did this through a bond-buying program dubbed quantitative easing (QE) and in stages called QE1, QE2 and QE3. Even now the size of its asset book is over $4.4 trillion.
The Rest…HERE
