Why did markets bounce on Wednesday after initially sinking to day lows when the Fed revealed that despite lackluster incoming inflation data, a December hike is still the expectation?
Simple. Because Janet Yellen made it clear that the committee doesn’t intend to stand idly by in the event the bubbles they’ve spent years inflating burst in dramatic fashion.
“Clearly the reason for the initial selloff in risk assets was the near-term hawkish shift, while the rebound was driven by Janet Yellen’s performance during the press conference. It remains abundantly clear that the Fed put is alive and well, even as QE is unwound,” BofAML wrote, in a note out late Wednesday, adding that “the Fed will do what it takes in the future — even if that involves resuming the reinvestments or doing outright QE.”
Don’t let it be lost on you that there’s a certain perversity to this whole dynamic. They need to hike and normalize the balance sheet in order to head off the risks associated with persisting in accommodation (i.e. in order to curb risk taking), but also in order to free up room to respond when those very same risks finally manifest themselves in a painful drawdown. It’s a never-ending loop that is part and parcel of a fiat regime: accommodation leads to bubbles, bubbles burst, accommodation restores order but in a fiat world also creates even larger bubbles, accommodation is rolled back to head off risk, the bubble bursts, accommodation is reinstated, and around we go until we reach the limits of accommodation (for more on this, see “I’m Out Of Bullets, How About You?“).
Of course policymakers aren’t going to come right out and admit their role in this. That is, they like to point out that the flexibility inherent in an unanchored system (i.e. a system not based on some universally accepted, finite store of value like gold – and we think that universal acceptance is misplaced, but that’s another story) bestows upon policymakers the tools they need to combat crises. They’re right. But they leave out the rest of the story. They don’t like to admit that the use of those tools itself creates the very crises for which they are intended to fight.
“The Fed and BoE are once again presiding over a credit bubble, with the BoE in particular suffering a painful episode of cognitive dissonance in an effort to shift the blame elsewhere – the credit bubble is everyone’s fault but theirs,” SocGen’s incorrigible, but exceedingly affable bear Albert Edwards writes, in a new note out Thursday.
Edwards goes on to repeat his contention that eventually, everyday people will wake up to the fact that central banks are facilitating a state of affairs that renders everyone debt serfs. Here are couple of quick anecdotes from the note:
My friend and former colleague James Montier has described the process by which central bank QE has led to bubble valuations as the Foie Gras stock market, most recently in an excellent recent Barron’s interview. The same might also be said of the UK consumer.
I’ve heard stories of credit card loan search engines spewing out money on 4 year, 0% teaser loans. What really shocked me is that after having been offered a credit card loan facility via a search engine, one is able to make multiple further self-certified applications and be offered similarly large amounts! Amazingly there was no question about existing debts!
Needless to say, that is catalyzed and encouraged by artificially suppressed rates and more generally, by the persistence of policies that encourage excessive risk taking.
Those same policies have of course led directly to what more than a few commentators have dubbed “the everything bubble” and on that note we’ll leave you with one last excerpt from Albert:
Finally, listen up! The BIS are making the same dire warnings as they did in 2006 – and they will be ignored again. Their Chief Economist, Claudio Borio, warns that with asset prices at nose-bleed levels, even minimal rate rises are likely to cause a major asset and economic fallout (see chart below from the excellent Fathom Consulting). But who wants to listen to that!
I love a bearish narrative as much as the next girl, but that first chart is truly dumb. UK consumer credit absolutely cratered between 2008-2013, so it’s not really a shocker that we are seeing high growth rates now, coming out of the worst crisis in the post-war era. The nominal level of consumer credit is only now back to the level seen just before the crisis. Funnily enough, the FT and Edwards cherry pick the start date of their chart to be around the trough in consumer credit outstanding. Funny that…
Since 2008, gross disposable income – which you should really scale credit oustanding for, because, you know, people do make money to pay off that debt – has grown a cumulative 20% or thereabouts. So, if credit oustandting has net not grown since 2008, or only barely grown, and income has grown 20%, guess what? The ratio of credit to income has gone down! Math is magic.
Indeed, when scaling credit for gross income, we are actually nowhere close to the levels seen before the crisis. That ratio is now growing, but we’re only back to where we were in 2002, well before the pre-crisis excesses were at their worst. But everybody’s favourite perma-bear probably didn’t want to hear that when he went a-huntin’ for charts…
what does it look like if you scale it to median income? with most of the income gains going to the top 5%, and most consumer debt going to the masses, comparing gross debt to gross income can give a benign appearance. income gains vs increase in consumer debt per income decile would be more interesting and allow us to see how many people are experiencing greater affordability.
Albert my good fellow just come out and say it, “We are already dead debt walking”. The fiat bubbles are immense and every semi-intelligent central banker knows it, it’s all the people they supposedly serve that are the dupes who are going to be responsible for their folly. So the question has to be asked, who do they serve?