QE stands for Quantitative Easing. It is yet another one of those obscure schemes that Central Banks have to pump cash into banks on the expectation that people will borrow and hence reactivate a dead economy (for an explanation see Deficits Debts And Inflation). The US Central Bank (Federal Reserve or Fed) has engaged in 3 cycles of QE since 2008 and some time ago it decided that 3 is enough and it has been "tapering down" its bonds purchases (this is how QE works) ever since. It is expected that anytime soon QE in US will end.
Some time ago we mentioned that QE won't end and that there will be QE4 and QE5 and so into oblivion. Were we in error then? We believe not but the jury is still out. Allow us to explain.
BOOM PHASE
The more funny money (i.e. created out of nothing -literally-) a Central Bank pushes into banks, the more money becomes available for speculation to the banks… and its borrowers. This is so because short of speculators no entrepreneur is dumb enough to borrow with the intention of starting or expanding a business in this dreadful economic environment and banks need to loan to make profits. But any speculative business is based on a Ponzi scheme. You buy at a low price and off-load at a higher price to the next sucker. The problem is, for this sucker this price is the low price and therefore he must off-load at a higher price. But this will only happen if a second sucker can borrow cheap money from banks to buy those assets at an even higher price on the expectation to sell them at a much, much higher price… which will require a third sucker to borrow cheap money from the bank and so on. What drives this process is greed but the enabling mechanism is the existence of cheap money. Without cheap money this is not possible. Of course, this cycle does not end because every sucker at every step believes that there is another sucker willing to pay more for this stuff. And this evaluation is correct for as long as there is cheap money. This is the "boom" phase. We are currently in it.
BUST PHASE
But what happens when Central Banks stop pushing new money into banks? Interest rates go up because banks are all out of money and hence out of loans. Simple supply and demand. This means that previous speculators will see their interest payments for their existing loans go up dramatically. But they don't have the money to repay and therefore they must sell and as such the price of assets drops. Similarly, the last batch of speculators cannot afford to take a loan (too expensive) and therefore they don't borrow and they don't bid up asset prices. In technical terms this means that there is selling but there is no "support". In other words, every speculator understands that the party is over and they cut their loses selling… which triggers a selling mania. Nobody wants to lose more than absolutely necessary, which means selling as soon as possible while the price is still high. But the problem is, everybody does this at the same time. All speculators stampede out simultaneously which depresses prices very suddenly. This is the "bust" phase that Central Banks want to avoid at all costs. The problem is, there is no way to avoid it because of so many speculators owing assets on borrowed money. The only way out is to sell but this triggers a bust. It is for this reason that we forecasted that QE's will continue into oblivion.
SO FAR SO GOOD
Up to this point with the Fed tapering down QE purchases, nothing happened with the market. This is correct because the Fed is still pumping money into banks and for as long as this happens, the boom phase is the dominant one. If and when the QE finally ends (i.e. economic action must be an action not a plan) then the money will stop and the bust phase will begin.
A few days back there was an article published in Bloomberg titled "All the Markets Need Is $200 Billion a Quarter From the Central Banks". In the article very clever people estimated that if the money-pumping stops there will be a 10% drop in assets (i.e. speculative assets) per quarter or about 40% per year! The problem is not the drop in assets themselves (e.g. stocks, bonds, futures, etc) but the effect of this drop on the economy as a whole. If there is a sell-off in stocks everybody loses money which means purchases of goods and services drop which means that the economy stalls… on its way to stagnation and then depression.
As Central Banks world over are under the tight reigns of politicians and politicians are controlled by the power elite, a down spiralling economy is not a good thing for neither of them. Therefore Central Banks receive their marching orders to keep the economy going…at any cost. And this cost is QE…by any other name.
A drop of 10% per quarter in the markets is nothing short of a disaster. As this kind of drop prompted the Fed to issue QE2 and QE3, it goes without saying that market are fully expecting QE4… and so are we.
NO NEED
However, there is something else in play here. It so happens that the economies of Japan and the EU are in worst shape (if this is even possible) than the US. Concomitantly their Central Banks received the corresponding orders to QE all the way. As a matter of fact they will QE so much that they will overtake previous Fed QE's. Which means that cheap money will now be coming from EU and Japan instead of US. Does this make any difference market-wise? Not at all.
LOCKED IN
As this process cannot be stopped without a world-wide depression, all major Central Banks are now locked into QEs. There is no way out. Sure, many of them will call QEs by other names such as "bond purchases" or "asset purchase"… or whatever the "politically correct" and "psychologically non-threatening" names they may come up with. But don't kid yourself, they are QEs. Furthermore, every other option Central Banks have is even worse. We know this because the future already happened in Argentina. There is no mystery here. The only unknown is for how long can this last before taking the next step down into oblivion. If previous experiences with "developed" economies is of any teaching value, this could last a very long time; decades even.
But then again, there is always the "butterfly effect". As all this money is actually leveraged to the hilt, if anything of sufficient size (and it does not have to be too big) goes horribly wrong, it may quite easily trigger a chain reaction (see for example The 1.5 Quadrillion USD Bet - What Can Possibly Go Wrong). And this would not be a good thing. This would make 2008 look like a hick-up when compared to Ebola. We are looking at a massive world-wide annihilation of wealth at an unprecedented scale. Literally.
And so the Central Banks are screwed. They are marching towards the abyss on a slippery slope. The more money they print the slower they move but at the same time the steeper the slope becomes. Eventually, the slope will become so steep that there will be no stopping them from falling into the abyss… and us with them.
THE BIG PROBLEM
The problem with all of this is that Central Banks will take us with them and when this happens, rest assured that PR, marketing and propaganda machines will be put on overdrive. Everybody and everything will be blamed, except politicians and Central Banks who were fighting this from happening from day 1. Which is true, it's just that it is not the whole true and nothing but the true. The truth, the whole truth and nothing but the truth is that Central Banks created this inevitability from day 1 by printing funny money out of thin air in the first place. It is this printing that created the problem and, of course, more printing won't resolve it no matter how much more they print.
CONCLUSION
When the inevitable day comes and your economy goes down the tube and you hear politicians describing all the "initiatives" and "progress" and "plans" and "efforts" to "solve" the problem, remember that they are bullshitting you. It will be all lies, smoke and mirrors. A mirage destined to protect their privileges and jobs alongside with the power elite while the entire world burns. They will expect to inherit the ashes because real wealth (not fiat money) has the tendency to remain.
You may believe us or you may not. Just remember that this day will inevitably come. And when it does, listen to them. Attentively. Think through what they are saying. Follow their logic to the last consequences and then decide. You will be surprised to find yourself on our side, we won't.
Note: please see the Glossary if you are unfamiliar with certain words.
