When last we checked in on SocGen’s Albert Edwards, he was regaling readers with a story about the time he almost died in a road rage incident.
No, wait, that was the time before.
The last time we checked in on Albert was January 10, six days after Jerome Powell’s successful jawboning of markets in Atlanta. At the time, investors were wondering whether it would be enough to rescue markets. Albert’s answer was as follows:
If we are indeed nearing the point where the Fed stops tightening (both QT and Fed Funds), should this offer investors confidence that an equity bear market can be avoided? No! Traditionally the yield curve steepens as the Fed eases immediately prior to a recession. And market confidence that the strong December payroll data means a recession cannot be imminent is equally misplaced…payrolls often accelerate just ahead of a recession.
Well, payrolls “accelerated” again In January and since Edwards last wrote, the Fed has obviously made explicit/official (in the statements and presser) everything communicated via various speaking engagements and media trial balloons.
On Thursday, Albert is back and he kicks things off by letting everyone know that he’s fresh off another trip to Jamaica Inn. Last year, he visited the same “haunt” – and you can take “haunt” figuratively and literally there. There’s a backstory to this. Recall the following from a February 1, 2018 post we did documenting Albert’s last trip to Jamaica:
You’ll be happy to know that Albert Edwards is “restored to [his] bearish best” after taking a couple of weeks off to relax in Jamaica, where he apparently stayed at a hotel haunted by the ghosts of Marilyn Monroe and Winston Churchill.
Additionally, you should know that “neither a State of Emergency being declared down the road in Montego Bay nor what locals said was the wettest January weather for decades” stopped Albert from “absorbing large quantities of sunlight,” something he says is necessary to “fight against the Seasonal Affective Disorder” which he partially attributes to being persistently bearish.
Here is Albert describing how this year’s visit went (from his latest note, out early Thursday morning, US time):
I have just returned from my usual two week annual Caribbean break where I have consumed large quantities of vitamin D and sugar (via fruit punches). I usually de-camp immediately after our annual ‘bearfest’ conference. We returned to the Jamaica Inn again this year communing with the ghosts of previous guests the hotel has been the haunt of actors (Noel Coward), film stars (Marilyn Monroe), politicians (Winston Churchill) and even royalty (Princess Margaret)!
As you may be aware (or actually, you’re probably not aware of this, so I’ll tell you), Albert likes to “check in on the local economic situation” when he’s in Jamaica and as it turns out, the central bank there is now making literal reggae videos and posting them on Twitter in an effort to explain to the public why low inflation can be as problematic as high inflation. Here’s one of them:
#BOJspeaks #InflationTargeting pic.twitter.com/NHJVLkcBUI
— Bank of Jamaica (@CentralBankJA) December 28, 2018
“This is inspired thinking and I hope other central banks follow the’ trailblazing lead”, Edwards quips.
If Kuroda ever does something like that for the other BoJ, I will never write again, because he will have killed off satire for all eternity.
In any event, Albert goes on to cite a San Francisco Fed paper that we actually highlighted in the live feed earlier this week on the off chance it would be relevant. Long story short, the paper makes the case for negative rates in the context of 2008. To wit, from the study:
The Federal Reserve dropped the federal funds rate to near zero during the Great Recession to bolster the U.S. economy. Allowing the federal funds rate to drop below zero may have reduced the depth of the recession and enabled the economy to return more quickly to its full potential. It also may have allowed inflation to rise faster toward the Fed’s 2% target. In other words, negative interest rates may be a useful tool to promote the Fed’s dual mandate.
Albert seizes on that. “In the next recession I expect core CPIs in the US and eurozone to turn negative [and while] many clients accept my general thesis, including the prediction of the introduction of helicopter money, my prediction of negative Fed Funds is typically met with incredulity”, he writes, before flagging the San Francisco Fed paper as “significant!”
After noting that we’re probably a long way away from the Fed actually taking the NIRP plunge, Edwards reminds you that negative rates are “just one” of many controversial ideas floating around out there in anticipation of the next downturn. Here’s Albert on MMT, the hottest of hot topics right now and something he promises to write more about later:
There has also been an increased flow of articles favourably disposed towards the controversial ideas of Modern Monetary Theory (essentially it is the idea that there is no government budget constraint when there is a sovereign central bank). I note that many of the more radical Democrats in the US seem to be adopting the idea and since I expect the US budget deficit to soar to 15% of GDP in the next recession, the ideas of MMT will surely become even more popular. I will write about that another time, but I certainly think the Fed and other central banks will be desperate enough to adopt outright monetisation (aka helicopter money, that is to say the direct central bank financing of public sector deficits) in the next recession. And as that will coincide with public sector deficits in the mid teens, we will be conducting a live MMT experiment. Welcome to a brave new world!
And speaking of a “brave new world” and things that will rancor the hard money crowd, Albert goes on to say that the Fed’s decision to tip an early end to balance sheet normalization is, in effect, an admission that QE was simply outright monetization.
Central banks have always contended that “QE is different from outright monetization because they (the central banks) were absolutely going to unwind QE as soon as practical”, Edwards writes, adding that “his own view has always been that until QE is actually fully reversed, it is to all intents and purposes the equivalent of outright monetization, and so central banks are merely splitting hairs.”
Given that, if the Fed does in fact go ahead and throw in the towel on the idea that the balance sheet can ever really be “normalized”, there will be “no doubt” in Albert’s “mind that what we have seen since 2008 is in fact outright monetization.”
Of course this is one of the worst kept secrets on the planet. Everybody knows QE has always been tantamount to a Ponzi scheme and as we’ve detailed on any number of occasions, Japan is destined for helicopter money.
Mark Your Calendar, The ‘Era Of Helicopter Money’ In Japan Has A Date
The question is whether it matters. That is, all of this – the entire financial edifice – is a human construction. That raises questions about whether there really are any inherent “limits” to how ostensibly “insane” things can get. In any case, that’s another debate entirely.
As far as what happens in the next crisis, Edwards says that corporate credit is likely to be the real problem and the good news is that banks won’t be “at the apex” this time. This is a familiar refrain.
“Due to the Volcker Rule and other macro-prudent regulations, banks do not sit on mountains of corporate and mortgage paper as they did in 2007”, Albert reminds you, before warning that “it is pension funds, insurance companies and via ETFs, mom and pop, who bought the avalanche of US corporate bonds issued since the last GFC.” That is a risk in and of itself, and one that is surely underestimated by a lot of folks.
Next, Edwards dives into a fairly lengthy discussion of the deflationary risks across economies, but in the interest of brevity – and also in the interest of finally getting to my morning cigar three hours after I would have preferred – I’ll leave you with the money quote from Albert’s Thursday missive:
I do not believe the Fed wants to rush to cut Fed Funds into negative territory, but the cost of not doing so will be very high if others are doing it (via a strong dollar). The Fed will be forced to participate as avoiding deflation will be the number 1 priority – not the profitability of the banking sector. Investors should contemplate a brave new world of negative Fed Funds, negative US 10y and 30y bond yields, 15% budget deficits and helicopter money. Sounds ridiculous doesn’t it? What I said in 2006 sounded ridiculous too. I hope I am wrong, but fear that I will be proved right.
9 thoughts on “Albert Edwards Returns From Jamaica, Talks MMT And The Likelihood Of Negative Rates In The US”
Yeah, I figured Powell would stick to his guns long enough to look the fool but he blinked and the only other logical assumption is Helicopter Money for days… the only question is will wage inflation ever be allowed or will asset values skyrocket while wages stay flat?
The only factor limiting MMT is inflation (i.e. over-pressuring available capacity). A long as deflation is a worry, the party will continue”’and for longer than most believe possible.
Wage inflation should be added as a Fed reserve mandate. That is, increased wages should be viewed as a positive goal, NOT a reason to raise rates and slow the economy…. It is possible to have progressive wages in a “managed” growth economy….However, the Fed’s track record has been an abomination….Life after the Fed would be great, if only we had a functioning government with sufficient (unconflicted) oversight of the banksters.
Like the Heis has reminded us, the financial world is a human construct. Which means we get to make up the rules.
MMT thinking is young and has a shorter record (good results so far) than the older way of thinking where we thought of government debt and deficits as being the same as household debt. But that longer record involves a lot of suffering each time resources where pulled back without having inflation as a problem. MMT does not tighten if there is no inflation problem, but governments need fiscal policy that targets infrastructure (including education and heath) in order to get the most benefit out of the easing. Otherwise it stays in the financial industry alone.
I think the limiting factor will be whether or not people retain confidence in American money if they implement MMT. If a large percentage of people start transferring their US money into Yuan or Swiss Franks or Norwegian Krona because the US money is not backed by gold or the value of American goods or anything of value, why hold it?? If the currency is in fact a fiat currency and they print the US monopoly money whenever they need it there will be no controls on it. Why bother collecting taxes?? They can just print ad infinitum.
The dollar is in a unique position. It is the world’s reserve currency and that would take a lot to change. Easy monetary policy everywhere (that matters), means all currency are in the same boat. In fact, the reserve currency MMT’ing forces the rest to follow.
“Why bother collecting taxes??”….why indeed!? Taxes only remove money from the private sector. They have been removing taxes for thirty-five years, but not replacing all of it with growth. In addition, most of the benefit has gone to the top and has stayed there (the velocity of M2 is historically low).
The next decade will be as exciting as the last.
Aging population, productivity issues, educational issues, budget deficits, debt levels, etc all suggest the next downturn will lead to Albert being correct for the most part. The average person has no idea of the carnage that is likely coming.
We have been hearing for several years now that the apocalypse is upon us. As I recall, Mr. Ricard picked a doomsday date that came and went two years ago. Mr. Dent told us about the demographic cliff that we fell from. There’s Gundlach now and the permabears that have always been there. Buffet never worries, just keeps his faith in the good ole U.S….We have been whipsawed by the Fed and the stockmarket and the banksters. The experts advertising on tv convince us to buy gold. You can do a little better now on cds. The banks may or may not be safe in the long run. Ain’t nobody that knows nothin, thats for sure. Its a risky world, but at least we can say we are civilized.
Out of curiosity… has MMT already started here in the US?