Mother’s Milk of Speculation

“…It is undeniable that ZIRP is the mother’s milk of Wall Street speculation. After all, the money market is where dealers and hedge fund gamblers finance themselves and put on their carry trades. By contrast, no businessman with productive inventories of raw materials, work-in-process or finished goods would be foolish enough to fund his working capital in the overnight markets.

Speculators in tradable financial assets, however, are thrilled to do that all day and night. They know that the shills who run the central bank’s printing press would never allow the money market to be parched for liquidity or allow a temporary surge in the overnight rate to clear the markets of rank speculation. Bernanke’s hair on fire panic in September 2008 proved that beyond a shadow of a doubt.

They also know that the Keynesian scholastics on the FOMC are so utterly naïve that they believe telegraphing to traders exactly what they intend to do for months in advance is an effective form of “policy”. Well, thank you Ben, Janet, et. al. for removing risk entirely from the oldest sin of finance—–that is, borrowing short and hot and investing long and less liquid.

So the Wall Street gamblers back up their trucks and load-up all they can get of whatever is on offer in the casino. As long as it has a yield or a short-run appreciation potential, it is a no brainer to fund such “assets” in the zero rate money markets with repo, options and more exotic forms of bespoke leverage.

This creates unspeakable windfalls to the fast money which plays in the casino, of course. And it also generates enormous incentives for rampant gambling in the capital markets and an endless inflation of financial asset prices. Indeed, it sucks prodigious sums of capital, credit and collateral into the gambling enterprise that is enabled by contemporary Keynesian central banking, while depriving the real economy of true risk capital.

Needless to say, for the third time this century the Fed’s feckless money printers have generated a bubble extreme.”

David Stockman in “Can Kickers United—–Why It’s Getting Downright Hazardous Out There