The Universe At The Edge Of The Restaurant

We sit here. Whether it be the early morning coffee, or the late night Grand Marnier, we all sit here and ponder the markets’ universe. Our chairs are comfortable enough, but the swirling mass of data, and projections, that surround us, is anything but that. “It’s all going to Hell in a handbasket” or “Equities are headed to the Moon” and the Sayers of Sooth seems to be staring at parallel universes.

There is a theory which states that if ever anyone discovers exactly what the Universe is for and why it is here, it will instantly disappear and be replaced by something even more bizarre and inexplicable. There is another theory which states that this has already happened.

– Douglas Adams

The total size of the assets of the world’s central banks are now 21.7 trillion, and they are growing by approximately $300 billion per month, according to Bloomberg data. Yardeni Research has updated its last report and now pegs the assets of the PBOC at $5.5 trillion, the assets of the ECB at $5.3 trillion, the assets of the BOJ at 4.6 trillion and, in fourth place, the assets of the Fed at $4.4 trillion. This totals $19.8 trillion for the world’s “major” central banks and, make note, this number is not decreasing or Flatlining but “Growing.” The assets of the major central banks were up 5% in December alone, according to Yardeni Research.

Yardeni Research also shows that BOJ’s assets are 92.9% of their nominal GDP while the ECB’s assets are 38.0% of their nominal GDP and the Fed’s assets are 22.4% of our nominal GDP. This should give you a comparative landscape for judgment. What we are actually looking at here, in my view, is money created from nothing but “Pixie Dust.”

The economists call it “Quantitative Easing” but it is actually a parallel universe where money is digitally concocted from nothing and tossed out to be spent. at will, on the markets. You see, it is money for the markets alone, because there are no goods or services or virtually any costs, in this newly created central bank economic universe.

There comes a point. I’m afraid, where you begin to suspect that if there’s any real truth, it’s that the entire multidimensional infinity of the Universe is almost certainly being run by a bunch of maniacs.

– Douglas Adams

Oh no!

The significance of all of this newly created money is beyond compare when considering the debt and equity markets, in my estimation. This $21.7 trillion, in newly minted assets, is larger than any economy on Earth, according to data provided by the IMF. The central banks have created a whole new nation, if you will, out of “Pixie Dust,” without any government, without any voting and without any representation.

You may say that each central bank reports to a specific government, but the money that they have created and provided to all of the world’s economies now reports to no one. It has already been tossed out of the various vaults and is useable just like the old, created by some country, money. We once thought all of this impossible. We have learned otherwise. It is Bitcoin, nationalized.

The impossible often has a kind of integrity to it which the merely improbable lacks.

– Douglas Adams

This 21.7 trillion is actually a “free cash flow.” It is unencumbered by wages, or cost of goods sold, or any other data attributed to arriving at the “free cash flow” of a corporation or a government. It is just money, after all, and the cost to make it was almost NOTHING. There are no capital expenditures.

Investopedia states,

Free cash flow (FCF) is a measure of a company’s financial performance, calculated as operating cash flow minus capital expenditures. FCF represents the cash that a company is able to generate after spending the money required to maintain or expand its asset base.

Let us then turn to data provided by the St. Louis Fed. They stipulate that the Corporate Cash Flow of the United States was $2.231 trillion at the end of the 3rd quarter of 2017. This data may be found here.

This is at a time when the GDP of the U.S. was $19.74 trillion, according to the Bureau of Economic Analysis. This means that America’s “Free Cash Flow” was 11.30% of our total GDP. Consequently, since the central banks’ creation of money is not encumbered by any capital expenditures, at all, no cost of goods or services, zero, this means that the “real value” of the $21.7 trillion is 8.87 times its stated value if compared with the United States in terms of the “actual” effect on both the debt and equity markets.

In other words, the comparison of the central banks’ $21.7 trillion in assets is most accurately compared to the “free cash flows” of a government. This pegs its “actual” significance at a whopping $175.094 trillion, if considered, again, utilizing the “free cash flow” of the United States. Consider that for a moment. Where did this unnamed country come from?

There is no problem so complicated that you can’t find a very simple answer to it if you look at it right.

– Douglas Adams

Given this massive and unprecedented “Free Cash Flow” I state, with a good deal of certainty, that it is the money the money and the money that is driving equity prices higher, keeping yields relatively low and compressing all risk assets in upon their benchmarks. The economists may call it Quantitative Easing, but I say that the central banks used “Pixie Dust” and poured it into the markets and that we have entered a sort of financial Wonderland where every day is “Happily Ever After.”

The markets are flying!

There is an art … or rather, a knack to flying. The knack lies in learning how to throw yourself at the ground and miss.

– Douglas Adams

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