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Out of the Box: The Make-Believe Economies

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“If you are a dreamer come in
If you are a dreamer a wisher a liar
A hoper a pray-er a magic-bean-buyer
If you’re a pretender com sit by my fire
For we have some flax golden tales to spin
Come in!
Come in!”
-Shel Silverstein

Money created from nothing. The Alchemist’s dream. The nod of the head, the blink of an eyelid, the flick of a wrist, the subtlest of keystrokes and trillions of Dollars hit the marketplace, with all of the fury of a raging storm, as some trainee, at some central bank, follows the instructions of his Masters.

In the days of yore, the hope was to change lead into gold, and then change gold into money, and now even the gold part has been skipped over. Now all it takes is a computer, or an iPad, and gobs of money shows up from nowhere and “Make Believe Economies” are created along with bond levels, and debt levels, that are at magically low levels, because the “Crown of Monetary Creation” has been utilized by those very few people in the world that cannot be prosecuted for Counterfeiting money, the world’s central bankers.

“All you need is a little faith, trust, and pixie dust.”
-Peter Pan

Bank of America Merrill Lynch now says that nearly $160 billion has flowed into fixed income assets this year, dwarfing the $135 billion that’s moved out of global equity markets and pushing benchmark yields in the world’s biggest economies to multi-year lows. In fact, they state that nearly $13 trillion in fixed income securities now trade with negative yields. How can that be, any sane person wonders? How can lenders pay borrowers for the opportunity to lend money at an immediate loss while the borrower gets money for LESS than nothing.

If I would have projected this 10 or 15 years ago people would have thought that I had lost my marbles, or had dementia, or was in an LSD induced coma. No one on the planet, back then, would have found our current situation possible, and everyone would have thought it ridiculous. Yet, here we are budging up against $13 trillion of bank loans, and sovereign debt and even corporate debt that has yields less than Zero. It is great magic, alright, and all concocted up by the world’s central banks so that the global economies can keep spinning along, as if nothing is amiss.

In my forty-five years on Wall Street I cannot tell you how many times I have heard, “It’s different this time,” when it was nothing more than a “pimp,” or a variation of a reoccurring theme. Well, let me tell you, Negative Yielding Bonds are a “Different this time” event as you cannot go back to even the steps of Solomon’s Temple, where the money changers were engaging in these types of transactions, because no one would have engaged.

It may have all started as a “save the financial system,” by the central banks, after the Great Recession of 2008/2009, but that has not been true for many years. The “Saving Grace” has become distorted and morphed into lower the costs of borrowing for the countries, that the central banks represent, so they can afford the social programs that these nations need and desire while floating the economies along, and the markets along, with the Pixie Dust created by the independent Gnomes that inhabit these central banks.

“Now that ain’t workin’, that’s the way you do it
Lemme tell ya, them guys ain’t dumb
Maybe get a blister on your little finger
Maybe get a blister on your thumb”
-Money for Nothing, Dire Straits

The major central bank assets now stand at $19.5 trillion, according to Yardeni Research. In Japan, their central bank, the Bank of Japan, now has more assets than the entire country of Japan. The ECB’s assets are growing, as new cheap lending is promised for the European banks, at Zero or less, and the Fed is about to cut their rates soon, in my opinion. In fact, with the U.S. Treasury 10 year at 2.08% and the German 10 year at -0.26%, it now costs the American government 234 basis points more to borrow money than the German government. It makes no empirical or fundamental sense and yet, that is where we are at present.

I will say that the folks at the Fed have plenty of room to lower rates, should they choose to do so. Any such move would lower the borrowing costs of the United Sates, American corporations, mortgage rates and all individual bank loans. It would help the economy, and the markets, if the Fed lowered rates and I do expect this to happen sooner, rather than later. If nothing else why should the United States pay more to borrow than Germany, France, the Netherlands and Japan? It is up to our independent Fed, of course, but do not forget that the Federal Reserve Bank was created by an Act of Congress in 1913 and “Independence” does not mean that they are not part of the American government.

We are all living in “Wonderland,” a make-believe fairy tale, except that the central banks have made it our reality, and as we can’t invest “off-world,” we are stuck with what Tweedle Dee and Tweedle Dum have provided for us. This is our actuality, I agree, but it is one that borders upon magic, as the governments of the world allowed the central bankers to concoct money out of thin air, and with no end in sight.

“Be what you would seem to be – or, if you’d like it put more simply – never imagine yourself not to be otherwise than what it might appear to others that what you were or might have been was not otherwise than what you had been would have appeared to them to be otherwise.”
-Lewis Carroll, Wonderland

A recession in the United States, “Not happening,” I say, because any move in that direction would cause the Fed to open the spigots and pour more fuel, money, into the fire. The escape valve is now the currencies of the world, but even there it is highly dubious that the players in the markets will drive any down, significantly, because then the various governments would rise up and correct them.
You just can’t fight against the makers and controllers of money as they will win each and every time, period. City Hall may be one thing but the creators of currency have all of the ammunition while the largest money managers in the world have paltry sums, by comparison, to contend, and they are not permitted to mint the coins of the Realm. Strange it may all be but it is likely to get stranger still.

“I wish I hadn’t cried so much!” said Alice, as she swam about, trying to find her way out. “I shall be punished for it now, I suppose, by being drowned in my own tears! That will be a queer thing, to be sure! However, everything is queer today.”
-Lewis Carroll, Alice’s Adventures in Wonderland & Through the Looking-Glass

Mark J. Grant
Chief Global Strategist, Fixed Income
Managing Director
B. Riley FBR Inc.
U.S. 954-468-2366

Information herein is for general use; is not unbiased/impartial; is current at publication date, subject to change; may be from third parties; and may not be accurate or complete. Opinions are the Author’s, not B. Riley FBR, Inc., or their respective affiliates or subsidiaries. This is not a research report or solicitation or recommendation to buy/sell the subject securities. Investment factors are not fully addressed herein. B. Riley FBR Inc. and their affiliates may have a proprietary position in the subject securities.
Redistribution/reproduction of this material is prohibited. See additional disclosures at: http://brileyfbr.com/legal/legal_disclosures

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