Peak Financial Engineering, by Robert Gore | STRAIGHT LINE LOGIC
This is an excerpt, the full article can be accessed via the link above.
Most of what passes for management consulting and investment banking wisdom is really fashion advice. In keeping with zero rates, the fashion right now is to lever up companies with cheap loans and bonds, sell “nonstrategic assets,” return money to shareholders through buybacks and dividends, promote a rising share price, and, not coincidentally, raise the value of executive stock options. Late to the show, GE is catching up to the trend, but it may be sashaying down the catwalk in oh-so-last-year’s garb. When Immelt retires in a few years he’d like that share price higher than the $40.50 it was when he started, but there’s less to this latest move than meets the eye.
Most of what passes for management consulting and investment banking wisdom is really fashion advice. In keeping with zero rates, the fashion right now is to lever up companies with cheap loans and bonds, sell “nonstrategic assets,” return money to shareholders through buybacks and dividends, promote a rising share price, and, not coincidentally, raise the value of executive stock options. Late to the show, GE is catching up to the trend, but it may be sashaying down the catwalk in oh-so-last-year’s garb. When Immelt retires in a few years he’d like that share price higher than the $40.50 it was when he started, but there’s less to this latest move than meets the eye.
Central banks pursue loose policy to try to get people and companies to invest. It's not working. Big companies are using their ability to borrow cheaply not to invest in their core businesses but to do buybacks and dividends. So they're essentially intermediaries distributing that cheap money, which is more available to large orgs with political connections, to their investors. They started out planning to take investor money and make widgets, and now they're mostly sloshing money from debt to equity.
How can this be? If they keep the easy money flowing and the number of goods and services people are producing does not increase commensurately, doesn't that mean inflation?
I've been expecting inflation since 2007. Thinking nominal long-term rates would rise, I shorted bonds and lost money. My crude understanding is that this loose monetary policy just replaced contraction due to deleveraging.
Every year I think, this year the yield curve will get steep, and people will start feeling safe raising their prices significantly, and the Fed will take about the punch bowl as the party gets started. I've been expecting that for about 8 years.
For most of my career I believed exactly as you have. If someone had told me that the FR's balance sheet would expand by over five times, from $.8 trillion to $4.5 trillion over a span of roughtly 5 years, I would have thought inflation was inevitable. However, in an economy already characterized by peak debt carrying capacity (total US debt is around $60 trillion and was about $52 trillion when the FR embarked on its program) its like trying to water ground that is already soaked; it has no effect.
All that being said, eventually your short in government debt will work out, but not due to inflation, but rather because the markets realize that governments have incurred far more debt than they can ever pay off, and start charging them accordingly. I have awaited that phenomenon, so far fruitlessly, for many years, but I believe that sooner or later it has to happen.
What's to stop the gov't from just allowing enough inflation to make the debt manageable? This means nominal rates rise, the borrowing must stop, hard choices that should have been made before must be made, and the gov't and monetary system muddle through.
That is exactly what has been wrong with financial markets for 5 decades. Small investors have been pushed (with tax encouragement from IRA's) into "investing" current and retirement funds into a rigged market designed to milk them for everything they have earned, and to enrich Wall Street financiers.
The "industry" has hired the most creative people in mathematics and law to produce more new schemes to fleece the customers, both industry and individual, that they claim to serve.
If there was a God, Wall Steet would be a smoking hole in the ground.