The Fed Fiddles While The Free Market Burns

We’ve all heard the story of how the emperor Nero fiddled as Rome burned. Today, we use it an as analogy, whenever fitting, to show the callousness of either a person or entity when they are obviously engaged in wreaking havoc or utter devastation; all while caring none-the-least.

Nobody seems to fit that bill today more than central bankers. And to show just how Nero-esque they can be, it was none other than our own Stanley Fischer, current V.C. of the Fed. who displayed in an interview with Tom Keene of Bloomberg™ what can only be deemed as the most infuriating lack of compassion, as well as sheer imperialist intoned advice. Here’s a few “gems” from that interview. When it comes to negative rates? To wit:

While the Fed isn’t “planning to do anything in that direction,” the central banks using them “basically think they’re quite successful,” Fischer said Tuesday on Bloomberg Television with Tom Keene in Washington.

“We’re in a world where they seem to work,” Fischer said, noting that while negative rates are “difficult to deal with” for savers, they typically “go along with quite decent equity prices.”

So what is one to infer? Easy: Fed too savers and the prudent: Screw you – buy stocks.

You don’t need to take my word for it. If you’re a saver, a retiree, an entrepreneur who just sold your business, a pension fund recipient, an insurance policy recipient, __________(fill in the blank) You know all too well the harsh reality of what the Fed. and others have wrought to these markets and their once stable products.

No, you’re now told to wipe those tears with those now negative yielding, once safe repositories for one’s wealth – and plow it into stocks. You know, where the Fed. believes things are pretty “decent.”

That is, until their next policy error. Then? Who knows. Although, with that said, what I have no questioning of is this: The ones who clearly don’t have a clue are the very ones now sitting back giving some form of altruistic investing advice. e.g., central bankers.

As bad as all the above is, what is even more concerning is that the Fed. (as inferred by all the latest Fed. chatter) is that they are absolutely clueless as to just how damaging they have been over the last few years. They have gone from self-imposed saviors of the world economy – to destroyers. And the evidence of that is now making itself known, much like the iceberg did for the Titanic. i.e., It may be too late to do anything other than see just how bad this is all going to end.

Based on what you may ask? Well, to my observations it can all be summed up in one word, and it too has to do with shipping. e.g. Hanjin™.

The issue with this story is two-fold. First: Not only is this story being brushed aside in an “Oh well, a shipping company went out of business.” story by the financial/business media. The second is: nobody seems to grasp the underlying destruction that may result in both business to business confidence and subsequent other damages it will have across the global supply lines in ways that will effect everyone – and the central bankers will be left powerless to do anything to quell it. For they are the cause, not the remedy.

The reason why this latest developing revelation (and it is – just starting) is so crucial to understand is this: It’s not about a company – it’s about how all companies will, or will not, send products to market going forward.

For if a company can no longer have surety that products will reach their destination, and they will be paid when they arrive – everything stops. And by that I mean everything. In other words; the company that produces the raw material, the company that produces the product, the middlemen, the retailer, and on, and on.

And when one of the worlds largest shipping companies with cargo aboard goes belly up stranding everything at sea, ports, yards and more out-of-blue? Everyone (as in every business) is now suspect.

Rates, letters of credit, insurance, and a whole lot more will most assuredly begin to go not only through the roof; some might not even be available going forward.

This is a direct response and result to central bank interventionism. For the pricing models, and market signals that would normally be present in a free market capitalistic environment have been either obliterated, or perverted so much to the point prudent business people can longer decipher market signals. And if you can’t see with some clarity – you just no longer take chances and sit on your hands. Even if that means lay offs, scrapping projects mid stream, and a whole host of others.

Central banks have destroyed market fundamentals. Pricing models that have worked, and been honed for generations, have been laid to waste by current central bank QE (quantitative easing) interventionism. And now those market forces are coming home to roost. And the premier of those forces is: Trust. i.e., getting paid.

Once there is even the slightest hint that that “trust” may be in question? All bets are off. And there isn’t a damn thing any central banker is going to be able to do about it if (or when) it happens. Period.

If central bankers are feeling frustration after flooding banks with trillions upon trillions of dollars and they still can’t get people to borrow or the banks to lend. Disruption in the “trust” when it comes to business to business transaction will make the first look like child’s play. And trust me, in practice? It is.

Pricing mechanisms along with their practical applications for hedging, price discovery, and more have been completely obliterated. And Hanjin is just another in an ever-growing list that many not only in academia haven’t a clue about, but also, those in the main stream business/financial media also seem oblivious to it’s all too real upcoming ramifications.

Want some proof? Just look to cattle futures. Or should I say – don’t look? For that market is all but been obliterated. After all, why make markets when all you need to do is take that money with little to no risk (at this moment) and BTFD in a “market” that’s more corralled than a stock yard? i.e., anything “branded” with a central bank bulls-eye on it.

That is – until beef begins swinging to-and-fro in ways that make going to a grocery store a decision on whether to bring your wallet – or a wheelbarrow?

Without stable markets to hedge livestock, vegetables, fuel, and more – don’t think for a moment some farmer or rancher is going to just “risk” raising or growing what everyone takes for granted to keep the shelves full. They won’t. And you’re already seeing the damage. It just takes time to work its way though when the decision, for the next decision, to raise, or plant has to be made.

For some markets (such is cattle) that time is now. But the results won’t be fully understood till later when there isn’t as much available, or worse, it possibly costs far more than most can afford. But hey – buy stocks right?

What most don’t understand (particularly those in academia) is just how quickly everything changes in business and commerce once the “trust” of being paid begins getting questioned. You don’t have to look all that far back for real life examples to see just how devastating, as well as how quickly, everything can go awry. I know for I was in the middle of it trying to conduct business during one of the most tumultuous times of the last few decades. e.g., During the Savings and Loan crisis of the late ’80s early ’90s.

During this period one of the most businesses hobbling things that manifested was the ever-changing terms of not only outright business credit, but also the terms on one’s revolving line of credit used to pay things like receivables (i.e., the bills) and you know that other little recurring expense – payroll.

Whether you, or your customer would be able to meet those obligations was at first, a monthly challenge, then weekly, then daily as terms via one bank to another changed from one day to the next.

An example went something like this, and this is from first hand experience, not speculation….

First you received a phone call out-of-the-blue and were told by your bank that your credit line on receivables, which were allowed for receivables 90 days old or less, were now reduced to 60 days.

In effect, what this did was this: Let’s say you had a customer that paid you 90 day terms like clockwork, never had a late payment, and did business with you at a rate of let’s say $300K per month.  You now just lost $300K in working capital. And that’s for just one of you accounts.

To make matters worse, these changes were implemented immediately, as in today, not tomorrow, not next week, not next month, but right there and then.

And the response when you questioned (or screamed?) “Sorry, those are the new policies, and if you want to pay your balance off and find another bank? We understand.” And there was an unmistakable tone (or hope) that that was exactly what you would do. But it didn’t stop there.

Then, just like the previous, you received a notice that 60 was now 45. Then 45 became 30, then 14. Till in the end, you could no longer afford or manage being in business. Remember, this was taking place at first over months, then it was weekly, to near daily. But it wasn’t just you. It was also the same at your customers. And as they too succumbed to the same thing happening to them, the banks themselves then started shuttering at an alarming rate. Hence the now “Savings and Loan crisis” moniker.

Any business that relied on credit terms (which was just about most small businesses) was crushed out of business. Meat and provision suppliers closed, restaurants closed, and on, and on. If you were working in any downtown during the crisis you know just how fast businesses you deemed as “main stays” of a downtown and more closed in rapid succession. And guess what? It was none other than “the Fed.” who supposedly came in to rescue what basically they created. Hint: Does “The Committee To Save The World” ring any bells?

Back in 1999 when the Fed. was much like it is now riding a wave of media inspired congratulatory press as the “markets” were still riding the bubble created that would set the stage for one of the largest market collapses in history. e.g., The dot-com bust.

It’s quite possible I’m completely off base on this, and in many ways I hope that I am. However, I just see this latest Hanjin disruption much like when I made the case about why one should be prudent when it came to commodities far before the ensuing collapse when I penned “The Scarlet Absence Of A Letter Of Credit.” One doesn’t need to be a commodity trader to remember what happened next.

Again, maybe all this angst when it comes to these most recent manifestations should be taken in stride. After all, as Charles Prince of CitiBank™ famously stated (paraphrasing) “While the music is playing – you have to keep dancing.”

Yes, that may be true, for it is unmistakable via Mr. Fischer’s latest remarks that both the Fed. and others are quite content at bowing their monetary fiddles.

All while free market capitalism burns at the altar of monetary imperialism.


© 2016 Mark St.Cyr