QE's Folly: Diversion And Destruction

We got a problem here folks, and it's going to lead to the next crash -- and sooner than you think.

First, let's talk about the impact of QE on companies. The common mantra is that it makes it "easier" for firms to borrow money. The problem is that borrowing, in general, is a destructive act as you must pay back said borrowing with interest -- no matter how small. The bigger problem, however, is that long-established businesses have obligations that were all contracted with the expectation of lending other people money and earning a spread on it, such as their pensions.

"The continued decline in the pension discount rates, driven by the unprecedented low interest rate environment, has caused a significant noncash increase in our pension expense," said Greg Smith, Boeing's CFO.

No, really? You just noticed this now when I've been pointing it out in this column and in fact called out to union members that they were being systematically destroyed by these policies in The Ticker -- since 2008?

The problem with this impact is that it doesn't disappear when QE ends. It's cumulative and permanent. This is the nature of all compound functions and is why it's so destructive across the board to implement so-called "emergency" policies -- but nowhere is the impact going to be worse from a financial markets perspective than in companies who are now stuck with the pension impacts.

What's worse is that when these plans fail to be able to deliver in a decade or so the impact is going to come right up the chute of those around 50ish now, at the same time their earnings have been destroyed on their retirement funds.

Between now-retired people who have had their portfolio returns in fixed income destroyed over the last few years you can now add everyone who is in the "pre-retirement" mode, specifically those around 10-15 years from retirement. Those are the people who were made promises in pension funds that are not going to be kept because of the impossible-to-recover impact of 5+ years of "crisis" interet rates and repression.

In short what has happened is that the 50+ population segment has had its money stolen in The Fed's "monetary experiment" -- and few if any of them understand what has been done to them.

They will, however, when they're eating catfood -- and that day is coming much sooner than anyone would think.

The destructive effect of this policy cannot be overstated. The peak earnings years for most people are in their 50s, but it is those earnings that fund retirement spending which is to a large degree discretionary for those in middle incomes and above. And those returns, despite claims that "most of the wealth has been returned to people in the stock market", have been trashed.

What's worse is that as the stock market has more than doubled off the lows of 2009 it has sucked people back into the market, especially now in the last couple of months. Most people did not sell out in 2007 or early 2008, despite people like me shouting from the rooftops that you were about to get your head cut off. Nor will anyone listen this time either, yet the problem for most stocks is that the actual value of all stocks in the long term is determined only by the discounted cash flow of dividends; everything else is speculative premium in that someone has to come along that believes in the future appreciation of price or you cannot sell!

Finally, the paradox of "easy money" is that while it appears to make government borrowing "free" it is in fact not free at all. At the same time it makes running large fiscal debts appear sustainable and thus encourages overspending (and in fact is designed to cause such overspending) at the same time it destroys the incentive of banks and other entities to lend money in the private market as there is no return that can be earned by doing so. Since risk must be paid for in the form of interest as the rate is depressed the incentive to take said risk with loans evaporates as the profit in doing so disappears. Remember that nobody ever intentionally lends at a loss.

Finally, we have embedded into our budget process these trillion dollar deficits. Congress must stop this right here and now, but there is scant evidence that it will. If Boehner, Pelosi, McConnell and Reid do not stop the destructive cycle of deficit spending within this budget cycle the risk rises precipitously that the market will pull the rug out from under the charade for them.

We are headed for a crack-up folks, and not of the "hyperinflationary boom" sort either.

Last year we had this sort of rally in the early part of the year, then things went soft. This year we've got even more stressors that are in the marketplace but they're being ignored to a degree that is even larger. One of those is the ill-advised 2% Payroll Tax abatement that has done material and permanent damage to Social Security funding -- specifically, it has loaded a monstrous hosing aimed at the 50+ age group right as the rest of the monetary games have targeted this same group of people.

Folks, the entirety of the market's rise last year can be credited to multiple expansion, more or less. Expecting more of the same when you're destroying the component of the population that has the largest disposible income by age group is foolish.

The market can (and will) remain irrational for longer than you can remain solvent shorting it, but the fact of the matter is that the cliff edge is much closer and the edge far more fragile than you believe.

And this time there are no fed policies that can be brought in to "save the day."

Get out of the financial markets while you still can!

There will be no social security payments within a few years, and now, from what one can read here, no pensions either.

You still have a little time to prepare, like stocking up on food, other supplies, guns and ammo.

Read a history, if you can find one, of the financial collapse of the 1930’s. People were systematically sucked into investments which then crashed, taking their money. The mass media of that era was complicit, spreading ‘good news’ about the financial system. Whenever a ‘recovery’ or news of ‘the markets hitting bottom’ was announced, more people bought in. Sound familiar?

please forgive me but a few questions come to mind as a take off from this article. RE the value of the US dollar tanking from the Fed Reserves current QE policies; If the US dollar becomes irrelevant, will the politicians in DC keep getting pay checks, what will keep those in government loyal to their master's when their very own families start suffering, government takes our money to operate, what currency will fill the gap once the US dollar is gone? Will a one world currency have to be in place prior to or after the fall of America?

Denninger is right, but did not go far enough in this particular article.

The key is that you must get out BEFORE the stampede. Once the herd finally senses danger the stampede will start. Everybody will head for the exit at once. At that point it will be too late.

Unfortunately, a zero interest rate environment means you must either sit on cash, or be in the market. Bonds are a non-starter. And there is no way to reliably call the top of the market.

All you can say for sure about the market today is that the central banks of the world admit they have “backstopped” the market. They are patting themselves on the back for doing so, as is the financial press. The politicians are particularly pleased.

Nations have done this many, many times throughout history. It ALWAYS works for a short while, and ALWAYS ends up a FAILURE. When the fail finally occurs the damage is huge.

No one knows how long the central banks can keep doing what they are doing before the inevitable collapse. Since the world has NEVER had EVERY major nation doing the same thing at once, THIS collapse (when it finally comes) is likely to be different than anything we have seen in our lifetimes.

Exactly what things will “look like” is not known, but when the herd finally realizes the danger it will NOT be a gradual thing.

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