Last week, everyone’s favorite bear Albert Edwards tried to warn us. But did we listen? Nooooo.
Janet Yellen, he said, might very well convey a hawkish message in her Valentine’s Day testimony to the Senate Banking Committee.
That’s actually not how Edwards put it. This is what he said:
I wonder if the ever cooing Yellen dove turns up on the day holding flowers in her beak, or will a machine gun be brandished in the same way it was on that fateful day in 1929. Either way it’s pretty clear to me that the markets’ relief on January’s subdued wage inflation might end up being very short-lived. The hawk may yet swoop down, talons at the ready and devour that cooing, market friendly dove.
Well, he was half right. Yellen was hawkish. Super hawkish. In fact, some opined that it was “easily the most hawkish we’ve ever seen” the vaunted Fed Chair.
But the market didn’t sell off on what amounted to a mini policy shock (well, that depends on how you look at it – I’ve argued that the fact that stocks didn’t immediately soar with yields and the dollar when Yellen’s prepared remarks hit the wires was evidence equities aren’t really ready to shoulder the burden in the event rates move sharply higher).
Instead, we rallied further. Sorry Albert, but it’s all “bigly” over here in America.
In any event, Edwards is out on Thursday with a new piece and he’s pissed. Pissed at Janet Yellen for suggesting that the Fed is determined not to fall behind the curve.
And also pissed at this:
What is that, you ask? That’s proof that all the Fed has cared about for some time is the extent to which the market is prepared for a hike. Or, as Deutsche Bank’s Aleksandar Kocic would put it, proof of the Fed’s reflexivity and proof that the “fourth wall” actually disappeared years ago.
So, without further ado, here’s the executive summary from Albert Edwards’ latest, entitled “Yellen warns Fed should not dither in raising rates – Is this a joke?”
I have a few (choice) words about Janet Yellen’s latest comments on Fed policy. But I prefer to focus on what commodity prices are telling us. Copper has hit a 20-month high this week, proving that reports of the death of Dr Copper as a reliable indicator for global growth are misguided. But where do we go from here?
In her eagerly awaited testimony before Congress, Janet Yellen warned against the perils of the Fed delaying raising interest rates, stating As I noted on previous occasions, waiting too long to remove accommodation would be unwise.” You what? Is this some sort of joke? Yellen has presided over a Fed that has dithered, dallied and dodged raising rates for the last few years, wheeling out feeble, data-dependent excuse after feeble excuse. We all know that the only data the Fed is really focused on is the daily S&P print.
This tardiness to normalise rates is exactly what we saw in the noughties with catastrophic results. Yes, the Greenspan Fed did raise rates from 1% in mid-2004 to 5¼% by 2006, but the pace was far too slow and the timing far too late. Their extreme caution so as not to upset financial markets was most evident in the fact that in 17 rate hikes they never raised rates by more than ¼%. My former boss at the Bank of England, Paul Mortimer-Lee (now Chief Economist at BNP Paribas) criticised this slow pace of tightening at the time. I heard him on the radio likening it to boiling a frog. If you put a frog in cold water and heat it, the frog won’t jump out whereas if you drop the frog in hot water it reacts immediately – I’m not sure how he knew this but I avoided supper at his place thereafter!
John Taylor (of the Taylor rule) was also withering in his criticism of Greenspan’s slow pace to normalise interest rates. His rule suggested that rates should have been hiked aggressively from 2002 onwards and he excoriated Greenspan for his disingenuous excuse that the bubble was caused not by the Fed’s easy money, but by surplus Chinese savings link. I am compiling a list of vituperative phases for the day when the Yellen credit bubble finally bursts and sinks the economy. Just like the Greenspan Fed, the die has been cast and it is simply too late for the Yellen Fed to avoid a disaster. But let’s now focus on commodity prices, with copper having broken its downtrend and surging to 20-month highs.