Cheap Money Isn’t Monetary Policy

Easy money forever.  Close your eyes and buy stocks.  Feel the wealth seeping into your account?  Go follow that hedge fund or private equity fund and buy that house.  Borrow free money, if you can get it.
US Unemployment Rate Chart

US Unemployment Rate data by YCharts

Yesterday, the Bank of England and the European Central Bank pledged easy money forever. China’s central bank said they would work to get rid of excess capacity in their factories.

The US central bank has a conundrum.

It’s followed the easy money path.  Now it needs to find a way out.  And the door is closing.  When interest rates are close to 0%, market incentives change.  Psychology changes.  Juiced up rallies get really volatile when they end.

The economists that follow the Keynesian path think this is all okay.  The classical economists grudgingly will say that the first QE was probably needed.  But, like anything, too much of a good thing is not the right path.

Currently, there is a perverse incentive at work in markets. When central bankers talk about pursuing a responsible monetary policy,  markets fall like Humpty Dumpty.   When they continue irresponsible free money policy, markets rally.  It’s perverse, because a responsible monetary policy of interest rates going toward the long term historic mean would be a sign that the underlying economy is getting strong.

If you are elderly, or a saver, this policy of free money has been horrible.  The central banks of the world should be thanking you for helping them bail out the banks.  0% interest rate policy is a transfer of wealth from responsible savers to big banks.

The Central Bankers might not even believe they have created a base of sand to build on.  Groupthink is bad when it permeates legislative and central banking policy.

I have been watching farm prices for the last couple of years. With QE, and the commodity run up, land prices soared.  With the rise in cap gains, I started to see relatively unproductive 20-40 acre parcels being sold off to cover cash needs for taxes.  The drop in commodity prices has caused some farmland to drop in value.

Commodities had the perfect storm of QE, combined with weather and demand changes, that caused them to rally across the board in 2009-2012.

People I know deep into markets are telling me that the Fed has re-inflated the housing bubble.  But this time, it’s not the average Joe making a purchase with no money down and a no-doc loan.  It’s hedge funds, REITs, Private Equity.

They are getting money from investors, and leveraging by borrowing at cheap rates. They can snap up a lot of houses, and even rent them out to turn cash.  Some funds are even doing a little rehab on the houses they buy. Not much, but just enough.

Addicts get hooked on heroin in small amounts.  After awhile, they require larger and larger doses to get the same effect. When it all falls down, it isn’t pretty.

I don’t know the duration of the loans that the funds have used to purchase the excess housing stock.  Suppose it’s 5-7 years.   Assuming that they took out loans with balloons that come due in that time period.  Since QE started in 2009, in 2015-16, we better have a bunch of people ready to buy a house from them.

Not sure with under 3% GDP growth we will see that happen.   

US Real GDP Growth Chart

US Real GDP Growth data by YCharts

thanks for the link Doug Ross.  

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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