Monday, September 15, 2014

Janus Yellen and the Great Transition from Risk-On to Risk-Off

The end of risk-on cannot be prettily managed.


In ancient Roman religion and myth, Janus is the god of transitions--beginnings and endings of conflict, war and peace, journeys, trades and eras. Janus has two faces, as befits a god that looks both to the future and to the past.

In our era of omnipotent central banks worshipped by the Status Quo, we have a goddess of financial transitions--Janus Yellen, the two-faced chair/deity of the Federal Reserve--to usher in the Great Transition from risk-on to risk-off.

What is risk-on? Speculative bets directly enabled by central bank issued free money for financiers--also known by the bland technocrat perception management labels stimulus and quantitative easing (QE).

The primary risk-on policies are:

1. ZIRP--zero interest rate policy. This enables financiers (but not J.Q. Citizen) to borrow money for next to nothing and then use this free money to buy assets that pay dividends or interest.

This is effectively a gift to banks and financiers. The goal is straightforward: transfer great wealth from the peasants who once earned interest on their savings to the banks, who have rebuilt their bad-bet-shattered balance sheets on the backs of tax donkeys and savers.

2. Asset purchases. The Fed has bought almost $4 trillion of Treasury bonds and mortgages from primary dealers (banks) and other financial institutions. This is effectively a transfer of cash directly into the financial system.

Those closest to the Fed money-spigot benefit directly from asset purchases (a.k.a. quantitative easing). Those far from the spigot (the 99.9%) get nothing but slightly lower interest on their crushing debt.

Those with low/no debt have lost hundreds of billions in interest that has been transferred to the banks by ZIRP and QE, which actively suppresses interest rates.

3. Liquidity. This simply means the Fed will create as much money as is needed to meet the borrowing needs of the financial system. This unlimited liquidity is offered not just to U.S. banks, but to the entire global banking system. The Fed doesn't just bail out U.S. speculators--it bails out speculators worldwide.

In other words, the Fed deities are lavishly generous to financiers everywhere.

But all these risk-on policies have created extremes of speculative bets, which have generated corresponding extremes in systemic risk. Those who have skimmed profits from risk-on speculation with borrowed money and leveraged bets need to unwind/exit their bets to book their gains.

This unwinding of speculative excesses is risk-off.

It falls to Janus Yellen to oversee this transition from roughly 20 years of risk-on to risk-off. The trick will be to unwind all the debt and leverage without collapsing the global speculative house of cards.

Janus Yellen's job is to manage the transition such that banking sector profits are maintained.One way to do this is to raise interest rates incrementally.

Ilargi at theautomaticearth.com makes a compelling case for the Fed raising interest rates sooner than most believe possible as the only means left to maintain banking-sector profits: The Fed Has A Big Surprise Waiting For You.

Though we can be confident that Janus Yellen's face looking back in time sees the Fed's unprecedented efforts to prop up a failed, broken financial system as a success, to the rest of us, the past is easily visible: central banks did not fix what is broken in the financial system; they simply papered over the sources of speculative instability with multiple layers of additional bureaucracy, ZIRP, QE and unlimited liquidity. As a result, the threat of speculative instability was only deferred, not eliminated.

The future is much less clear. As Janus Yellen looks ahead, she finds no real historic parallels for the extremes of risk-on debt, leverage and speculation that unprecedented central bank intervention have conjured up.

She also finds no recent precedent for the gargantuan expansion of financial claims on real wealth that dwarf the actual expansion of real wealth since the 2008-09 Global Financial Meltdown: energy extracted, soybeans harvested, industrial equipment manufactured, etc.

Multiplying the financial claims on real wealth by creating money and selling Treasury bonds that are claims on future wealth does not expand real wealth. This is the foundational falsity of risk-on monetary easing and the speculation it fuels: expanding claims on real wealth does not increase real wealth.

The idea that expanding financial claims on wealth is wealth is entirely illusory, and this is why risk-on is a self-liquidating dynamic: as everyone holding a claim tries to cash in their illusory gains, the risk-on trade implodes.

Janus Yellen is trying to engineer an impossible "solution" to this destabilizing dynamic: gently transition risk-on to risk-off so imperceptibly that the market for phantom assets will magically absorb all the selling.

But this assumes there will be buyers ready to bid up the market value of these phantom assets as the smart money distributes/sells. And that is of course the dynamic of bubbles throughout human history: there are ready buyers right up to the point that prices start dropping sharply. Then the bid vanishes as the pool of greater fools has been drained and there are no buyers, only sellers.

Perhaps what Janus Yellen's future-facing eyes see is a future in which central banks are forced to become the buyers of last resort not just of trillions of dollars in home mortgages and sovereign bonds, but every other asset as well: real estate, corporate junk bonds, swampland, the debt of bankrupt cities--everything.

This is nothing but another expansion of financial claims, masked by the apparition of phantom assets on the central bank balance sheets. Buying up phantom assets does not transform them into real wealth. Regardless of how Janus Yellen tries to sell the idea as the miraculous "fix" to the systemic bubble in claims the central banks have inflated, it will fail just as predictably as her plan to defuse the risk-on trade while maintaining the inflated value of the phantom assets the speculative frenzy has created out of nothing.

The end of risk-on cannot be prettily managed. If Janus Yellen had looked far enough back in history, she would already know that.



Get a Job, Build a Real Career and Defy a Bewildering Economy(Kindle, $9.95)(print, $20)
go to Kindle editionAre you like me? Ever since my first summer job decades ago, I've been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible.


And like most of you, the way I've moved toward my goal has always hinged not just on having a job but a career.

You don't have to be a financial blogger to know that "having a job" and "having a career" do not mean the same thing today as they did when I first started swinging a hammer for a paycheck.

Even the basic concept "getting a job" has changed so radically that jobs--getting and keeping them, and the perceived lack of them--is the number one financial topic among friends, family and for that matter, complete strangers.

So I sat down and wrote this book: Get a Job, Build a Real Career and Defy a Bewildering Economy.

It details everything I've verified about employment and the economy, and lays out an action plan to get you employed.

I am proud of this book. It is the culmination of both my practical work experiences and my financial analysis, and it is a useful, practical, and clarifying read.

Test drive the first section and see for yourself.     Kindle, $9.95     print, $20

"I want to thank you for creating your book Get a Job, Build a Real Career and Defy a Bewildering Economy. It is rare to find a person with a mind like yours, who can take a holistic systems view of things without being captured by specific perspectives or agendas. Your contribution to humanity is much appreciated."
Laura Y.

Gordon Long and I discuss The New Nature of Work: Jobs, Occupations & Careers(25 minutes, YouTube) 



NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

Thank you, Camille G. ($50), for your gloriously generous contribution to this site -- I am greatly honored by your steadfast support and readership.Thank you, Lee V.D.B. ($20), for yet another superbly generous contribution to this site -- I am greatly honored by your steadfast support and readership.

Terms of Service

All content on this blog is provided by Trewe LLC for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at anytime and without notice.


Our Privacy Policy:
Correspondents' email is strictly confidential. The third-party advertising placed by Adsense, Investing Channel and/or other ad networks may collect information for ad targeting. Links for commercial sites are paid advertisements. Blog links on the site are posted at my discretion.


Our Commission Policy:
Though I earn a small commission on Amazon.com books and gift certificates purchased via links on my site, I receive no fees or compensation for any other non-advertising links or content posted on my site.

  © Blogger templates Newspaper III by Ourblogtemplates.com 2008

Back to TOP