Jim Grant showed up on CNBC Thursday and dubbed all of us 'lab rats' referring to our unwitting participation in perhaps the most spectacular monetary policy experiment of all time. There is a growing sense among market participants that, having run out of options to stimulate growth, the Fed has simply decided to conduct a kind of clinical trial (a "science experiment" to quote Maria Bartiromo) where the drug is perpetual asset purchases and the subjects are the economy and the financial markets.
Indeed the appropriateness of the analogy becomes ever more apparent each time some formally useful piece of data is stripped of its ability to signal investors and thereby rendered useless by the Fed's heavy hand. Interest rates and spreads are now simply independent variables the Fed toys with and tweaks periodically to determine the impact on economic outcomes and financial markets.
Take the mortgage spread for instance. The spread between 30-year mortgages and 10-year Treasury bonds fell Thursday to just 19 basis points, a record low. Perhaps more important is the absurdity of what that supposedly says about the risk profile of MBS and Treasury bonds: would one really want to assert that mortgages are only 19 basis points riskier than risk-free Treasury bonds?
All of this speaks to a contention that I made last month which is that September will forever be remembered as a turning point; the beginning of the era of limitless money printing. This idea -- that a new regime is in place -- was echoed in a note dated September 18 from Nomura's Bob Janjuah entitled "When Money Dies". Janjuah says in the introductory paragraph that September marks a "significant pivot point":
"...I think historically important events may be unfolding. I think that by their actions both Fed Chairman Bernanke and ECB President Draghi may have belied how deeply worried they are about our economies and the financial system. In short, I see fear in their actions."
Janjuah goes on to say that Bernanke and Draghi have essentially become politicians (albeit Bernanke less so) and that this could jeopardize both the realization of a fiscal union in Europe and an expedient solution the problem of the fiscal cliff in the U.S. Moreover, Janjuah notes that
"Lest we forget, neither QE, nor the LTRO, nor the OMT either have, or will, do anything sustainably positive for growth. The evidence of the last four years is clear." (emphasis mine)
The fact is he says, the notion that because of central bank asset purchases individuals and corporations will begin to spend and consume as though there is no tomorrow is nothing other than wishful thinking. This is similar to the point I made in an article published Thursday:
"...the market expects consumers, tapped-out by years of ultra low or negative real returns on their income generating investments, to carry stocks -- and indeed the entire economy -- forward via a sudden propensity to spend in the midst of the uncertainty occasioned by the fiscal cliff debate."
This is pure 'hopium' to use a term popular with Fed detractors these days.
Ultimately, Janjuah concludes that the new policies could cost central banks their credibility as the current course of monetary policy seems to suggest that central bankers feel they have lost control of the situation and as such must continue to print money just to keep the wheels from falling off so to speak:
"...they [have] abandoned the search for "real‟ solutions. Instead...[they extend] the same failed policies that got us into our financial and economic despair in the first place. Namely MORE debt, MORE bubbles and MORE monetary debasement."
In the end, Janjuah says that thanks to QE3, a period of risk aversion has been averted and the market has likely skipped straight to the last leg of a cyclical bull market (2009-2013). While he feels the post QE rally could mean another 10% upside for stocks (maybe he's been reading Credit Suisse notes), his longer-term target for the S&P 500 (SPY) remains 800, representing a 45% decline from Thursday's 1460 close. While that's a bit too bearish even for me, you can't say you weren't warned.