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The Keynesian Fool Returns
David Stockman
June 7, 2014
The single most dangerous meme now extant among the Cool-Aid drinkers is that we already had something called the Minsky Moment in 2008--so six years on its still too early for another. Fittingly, CNBC trotted out one of Pimco's retired bond peddlers, Paul McCulley, to explain this, and why it is therefore safe to load up on bonds. That is, bonds which Bill Gross has already bought and which McCulley now invites the mullets to bid higher.

After all, in a world of monetary central planning appearing on bubblevision to egg on the mullets is what bond fund economists do for a living:

"'We don't have to be worried about the Big One. We had the Big One, and you don't have another Big One after you have had the Minsky moment,' he said."

Now lets see. Either the last Big One came crashing into Wall Street on the tail of a comet from deep space--in which case we need to consult the astronomical charts about the timing of the next one--or it was enabled, fueled and cheered on by the denizens of the Eccles Building. If the latter, then it is obvious that they have done nothing differently in the last six years and, in fact, have actually doubled down and then some on Greenspan's housing bubble maneuver.

Indeed, the Fed has pegged interest rates in the money markets at essentially zero for the past 66 months--a condition that has never before happened during the history of modern financial markets. That makes Greenspan's 24 month experiment with 1% money during 2003-2005 pale by comparison. Yet free or nearly free funding to the carry trades always and everywhere has the same effect: it incites massive leveraged speculation in the financial markets as gamblers seek to capture easy profit spreads between zero cost liabilities and "risk assets" which generate a positive yield or appreciation.

Now deep into year six of a monetary policy that is the mother's milk of financial bubbles, there are warning signs everywhere. Margin debt reached historic peaks a few months ago; momentum driving hysteria of dotcom era intensity afflicted the bio-tech, cloud and social media stocks until they rolled-over recently; the Russell 2000 is trading at 85X reported income–a wobbly metric which has only grown fitfully and episodically among its constituent companies; junk bond issuance is at record levels and cov lite loans and booming CLO issuance–the hallmarks of the 2007-2008 blow-off top--have made an even more virulent reappearance; the LBO kings are busy strip-mining cash from portfolio companies already groaning under the weight of unrepayable debt via the device of "leveraged recaps" –another proven sign of a speculative top; and now the LBO houses are furiously buying and selling among themselves what have become permanent debt-mule companies by scalping cash from buyers who then reload more of the same debt on the sellers.

In short, the financial system is saturated with ticking time bombs waiting for a catalyst. Yet some Keynesian clown who has the audacity to proclaim himself an economist shows up on CNBC to deny these patently obvious realities by reference to an academic theory that is laughable.

We are supposed to believe that a Minsky Moment is rooted deep in the irrational interior of capitalism's "animal spirits." Accordingly, it is not the consequence of central bank policy, but actually the reason we need central banks to come in after the fact with massive liquidity infusions to stabilize the system and "heal" the damage.

Yes, the Minsky Moment is the ultimate ruse of Keynesian central banking; it turns cause and effect upside down. It puts one in mind of the young man who brutally butchered his parents and then threw himself on the mercy of the court on the grounds that he was an orphan!

Perhaps one of the CNBC interviewers might have been alert enough to ask McCullley to riddle this: Why were there no Minsky Moments during the entire 58-year span between October 1929 and October 1987 when the stock market had its first spectacular meltdown? The answer is that for the most part the central bank was in the hands of sound money men---Mariner Eccles, William McChesney Martin, Paul Volcker--- and institutional arrangements--the Bretton Woods system---that precluded the lunacy of zero rates in the money markets.

So forget the Minsky Moment and all the rest of the neo-Keynesian gibberish which goes with it. Its just another content-free, made-up slogan that is being desperately peddled by Wall Street Keynesians in order to keep their customers in the game and therefore squarely in harms way.

Actually, the Minsky Moment ploy is even more insidious. Self evidently the Fed has destroyed the government bond market and turned giant funds like Pimco into front-runners who make money primarily by pimping for the Fed. So we are now entering the next phase of this destructive game in which the new regime will eventually be 2% money market rates in a 2% inflation world--and for as far as the eye can see. That is, free money in real terms forever.

And that folks is why you should invest with Pimco. The reality soon to be officially acknowledged is that Janet and her band of money printers have sentenced the millions of savers in America to forever earn nothing on their capital or to turn it over to crony capitalist con men like Paul McCulley and Bill Gross.

"And ultimately we had to get to this point where the marketplace broadly defined – all asset classes are accepting that risk-free cash trades at par – you get it back tomorrow – should not provide a real rate of return. It's preservation of capital – period. If you want to have a real rate of return you have to be in assets. So we're having a once-in-a-lifetime revaluation of assets. I think it's kind of cool."

Well, cool for him and his buddy Bill.

May 29 – CNBC: "Investors should not fear any of the kind of catastrophic 'Minsky moments' that fed the recent financial crisis, despite the reappearance of easy credit in the home mortgage markets, [Paul] McCulley said. McCulley is credited with inventing term 'Minsky moment' to describe a sudden crash in asset values, usually following a period of extreme speculation using borrowed money... 'We don't have to be worried about the Big One. We had the Big One, and you don't have another Big One after you have had the Minsky moment,' he said."

Paul McCulley, May 29, 2014, appearing on CNBC: "I don't think the world is upside down. I think the world is pricing in and coming to grips with the fact that post the 'Minsky Moment' – which was 2008 – and post five years' worth of healing in the economy and in the financial markets and in the banking system – that we're on the cusp of emerging from a liquidity trap. And that the Fed and other central banks around the world are going to be exceedingly low on short-term interest rates. This is a brand new regime. We are calling it here (Pimco) the 'New Neutral' and I love the phrase; I've been writing about it for ten years. And ultimately we had to get to this point where the marketplace broadly defined – all asset classes are accepting that risk-free cash trades at par – you get it back tomorrow – should not provide a real rate of return. It's preservation of capital – period. If you want to have a real rate of return you have to be in assets. So we're having a once-in-a-lifetime revaluation of assets. I think it's kind of cool."


David Stockman was the Director of the Office of Management & Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.

This article was originally featured at DavidStockmansContraCorner.com. Refer to original article for related links and important documentation.








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