• Market Crumbs

Research Determines What "Conspiracy Theorists" Have Known For Years

You don't have to conduct a study to know water is wet or grass is green. However, the Bank of International Settlements apparently had to conduct a study to determine the expansion of central banks' balance sheets since the financial crisis has adversely impacted global financial markets.

Since the financial crisis more than ten years ago, central banks throughout the world have embarked on a non-stop, asset-purchasing binge in an attempt to stimulate the economy. For example, the Bank of Japan's balance sheet is now larger than the country's GDP. The BOJ is now a top-10 shareholder in nearly 40% of Japanese-listed companies as a result of their policy of purchasing ETFs. In the U.S., the New York Fed predicts the Federal Reserve's balance sheet could reach $4.7 trillion by 2025. In comparison, the U.S. GDP was just over $20 trillion last year.

The BIS' report maintained central bank's balance sheet expansion helped ease the stress caused to the financial system during the financial crisis. The costs of doing so, however, were a limited selection of bonds available for investors, lower liquidity in certain markets, increased bank reserves and fewer participants trading. “Lower trading volumes and price volatility, compressed credit spreads and flatter term structures may reduce the attractiveness of investing and dealing in bond markets,” the BIS said. Whether that is their goal, to force investors into equities, which in the U.S. are near all-time highs with stretched valuations, is debatable.

In what may appear to be obvious, the BIS noted "negative impacts have been more prevalent when central banks hold a larger share of outstanding assets." In a sign of how unprecedented this experiment has become, the BIS said "the full consequences were unlikely to become clear until major central banks started to shrink their balance sheets."

Last month, markets got a taste of what could happen once central banks wind down their balance sheets. For the first time since 2008, the Federal Reserve began pumping cash into money markets to ease soaring short-term borrowing costs using repurchase agreements, or repos. They had expected the banks that hold a bulk of U.S. banks’ total reserves to begin lending overnight once rates increased, but that didn't happen last month.

So as central banks lead the world into unchartered territories such as negative-yielding debt and buying up every bond and asset in sight, it will be interesting, and likely devastating, to watch how this financial experiment unfolds. The effects have already been felt by many, particularly those who are not among the wealthiest top 10%. The troubling part is we haven't been here before and so much faith is being put into PhDs who are seemingly proud of what they've accomplished so far.

Leftover Crumbs

  • Thank you for your service. General Electric said it's freezing the pensions of 20,000 employees, while offering a lump-sum payment option to 100,000 former employees. There will be no change for former employees who are already collecting pension benefits. The move by GE, which was once the most valuable company in the world, is aimed at reducing the company's debt burden. Former CEO Jeff Immelt, who oversaw much of GE's decline, likely won't need to worry about taking the lump-sum payment option. 

  • This probably won't be the last lawsuit. The Southwest Airlines Pilots Association is suing Boeing for $100 million in lost income as a result of the grounding of the 737 MAX aircraft. Southwest, the largest owner of 737 MAX airplanes, has canceled more than 30,000 flights since the FAA grounded the aircraft in March. Southwest didn't mince words, saying "We have to be able to trust Boeing to truthfully disclose the information we need to safely operate our aircraft. In the case of the 737 MAX, that absolutely did not happen." The $100 million they're seeking is a rounding error compared to what Boeing has spent on share repurchases.

  • But it would look so cool on Instagram. Harley-Davidson, which hoped to stem declining motorcycle sales with the introduction of the electric "LiveWire," is reportedly having a difficult time selling it to the younger generation it targeted. The majority of the orders for the new bike, which retails for $29,799, are coming from existing and older customers. Last year, Harley-Davidson recorded its first sales decline in the U.S., which is the company's largest market, in four years. Given the average net worth of Americans between 18 and 35 years old is less than $8,000, about 34% lower than in 1996, its not surprising they're not buying these bikes. 

  • Tell us how you really feel. In a recent interview, Impossible Foods CEO Pat Brown said its competitors make products that “suck.” He said “the best thing they could do for us is make better products because every time someone who hasn’t tried our product tries one of those products, it reinforces the idea that plant-based meat replacements are terrible.” He's also not only focused on Beyond Meat as their competitor. Citing the two companies share less than 1% of the U.S. market for ground beef, Brown said “it would be crazy for us to focus on Beyond Meat as the competition. We’re focused on the other 99%.” Given the company doesn't intend to go public anytime soon, Brown appears to be comfortable speaking his mind. 

  • There's always 7-Eleven. Kroger announced yesterday it would stop selling e-cigarettes at its stores and fuel centers once it sells its current inventory. The company's announcement comes just a few weeks after Walmart announced they would halt sales of e-cigarettes at Walmart and Sam’s Club locations. Kroger cited “mounting questions and increasingly-complex regulatory environment associated with these products.”