What else can be said about the Fed’s “epochal”/”epic”/”dramatic” dovish pivot which turbocharged the bounce off the December lows on the way to catalyzing the best start to a year for equities since 1987?
Well, not much, probably.
From the moment Jerome Powell “figured it out” in Atlanta on January 4 (while seated next to his predecessors) to the day the Fed enshrined three weeks’ worth of conciliatory, market-friendly messaging in official policy via a pair of overtly dovish statements which together tipped a prolonged pause on rates and an inclination to bow to market pressure on balance sheet runoff, the term “capitulation” has been defined and redefined by every mainstream financial media outlet, every market-focused blog and every sellside strategist on the planet.
Depending on your penchant for pretending like you enjoy seeing your money vaporized by a belligerent, rookie Fed chair, you’re either really pleased with the Fed’s decision to help loosen up financial conditions or you’re like Jeff Gundlach, who maybe thinks Powell is an “embarrassing” character who should “go back in his foxhole” – or somewhere in between. (We jest – Jeff’s bombastic soundbites are just too good to not poke fun at)
But whatever you think about the Fed’s relent following a harrowing Q4 for assets of all stripes, you’ll have no trouble finding confirmation bias thanks to the sheer quantum of “dovish pivot” analysis that continues to inundate market participants, unabated, day in and day out.
And you shouldn’t expect the cacophony to die down any time soon, because next up is an official announcement on what’s going to happen with the balance sheet and that will be promptly followed by a similarly all-hands-on-deck effort to divine what’s next for markets once we know what the “roadmap” for ending runoff looks like (for a preview, see here).
Given the above, it probably won’t surprise you to learn that the latest edition of Goldman’s “Top of Mind” series is called “The Fed’s Dovish Pivot.”
As a reminder, these are basically expansive takes on whatever the market topic du jour happens to be. They combine interviews with Goldman’s own employees and also with outside sources in an effort to provide a balanced and comprehensive assessment on whatever seems to be the most important question on market participants’ minds (hence “Top of Mind”). The bank’s Allison Nathan conducts the interviews and generally collates all the information.
One of the interviews in the “dovish pivot” installment (out Tuesday evening) is with Jan Hatzius, but since that’s just Goldman interviewing Goldman, we thought we’d go for some diversity by highlighting a few excerpts from Nathan’s interview with Rick Rieder, Chief Investment Officer of Global Fixed Income at BlackRock.
Anyone interested in more “dovish pivot” commentary can find some below, and because people like pictures, we’ll also include the following two visuals, the first of which is a “long history” of “long rates” (that’s Goldman’s idea of humor, I suppose) and the second is a useful annotated chart of the bank’s financial conditions index.
Selected excerpts from Goldman’s interview with Rick Rieder, truncated:
Allison Nathan: What do you make of the Fed’s dovish pivot?
Rick Rieder: The impact of the Fed’s reversal on financial assets has been tremendous. People underestimated the implications of the triple-barrel tightening during 2017-18; the Treasury was issuing a huge amount of largely front-end to intermediate term debt, the Fed was raising rates to make that debt attractive, and it was simultaneously draining liquidity by reducing its balance sheet. This created one of the greatest financial transmissions of all time, inducing investors to leave virtually every risky asset class; you didn’t have to own leveraged loans, equities, or high-yield credit because the two-year Treasury note was extremely attractive at 3%. So to pivot away from this dynamic was exceptionally important for financial markets.
Allison Nathan: But has the Fed been too responsive to markets? Do you give any credence to the notion of a “Powell put”?
Rick Rieder: The suggestion that there is a “Powell put” or a “Fed lower bound” on the S&P 500 is flat-out wrong. During 4Q2018, the concern wasn’t that the stock market was falling; it was that volatility was extraordinary and liquidity was absent. Financing markets had come to a stop across the board, whether it was in real estate, securitized markets, or credit markets. In my view, the Fed has a responsibility to respond when the financial system isn’t functioning. So I take great offense to people who say that the Fed’s third mandate is the stock market. It’s just not true. But I would argue that one of their implied mandates is financial stability. And if the financial system is not operating and liquidity is gone, then I think it’s the right thing to react. That’s a big part of why I think it makes a lot of sense for the Fed to be patient right now.
Allison Nathan: How significant is the Fed’s indication of an earlier end to QT? Some argue that this kind of change in balance sheet policy shouldn’t have a big impact on financial conditions.
Rick Rieder: I completely disagree. First, markets go up when there’s quantitative easing, but–and we’ve tracked this– markets tend to go down five times faster than the pace at which they go up on the perception of a significant change in the environment. Second, people underestimate how reliant on liquidity the global financial system has become; at almost 40% of GDP, global liquidity is crucial. And especially given that the US Treasury continues to drain liquidity to finance a tremendous amount of fiscal stimulus, I think the Fed is right in running a larger balance sheet.
Allison Nathan: What do you think the Fed does next?
Rick Rieder: I don’t see the Fed easing this year without some significant exogenous shock. To me, assuming no additional hike this year seems reasonable. But if I had to choose between whether the Fed’s next move is most likely to be a cut or a hike, I would choose a hike. As I’ve said, I do think they can be patient on that, though.
Allison Nathan: Overall, you seem to be on the optimistic side of the spectrum, particularly at a time when many investors are worried about recession risk. What leaves you less concerned?
Rick Rieder: I think the nature of today’s economy has made boom/bust business cycles a thing of the past. In goods-oriented economies driven by manufacturing, chemicals, and energy you’d close the output gap, create inflation, and then force the system to recalibrate. Today, we have a services-oriented economy driven by technology, education, healthcare, etc., in which these dynamics just aren’t relevant.
Allison Nathan: What risks do worry you?
Rick Rieder: First, I worry about parts of the credit market. In the leveraged loan and middle-market lending space, we’ve seen tremendous growth, and covenants and collateral are not what they used to be. So that could lead to continued pressures. Second, people’s willingness to short volatility during periods of low vol, which sets us up for aggressive volatility spikes, worries me from time to time. And the last thing I’d mention is China. If for any reason China’s extraordinary stimulus does not carry through and the economy continues to slow, that would give me cause for concern, given China’s profound impact on global growth.
Here’s what Reider, Hantzius, and all the other masters of the universe won’t say (in plain English): the American economy — the global economy — is a giant debt-fueled Ponzi scheme one major exogenous event from collapse.
It’s ultimately a problem of unproductive debt to reinforce vicious economic deflation. And for China, I think it’s more likely to be an endogenous crisis rather than an exogenous one.
No it’s not.
I mean, yes, it’s debt-fueled, but do you have any idea how much money has been lost by people who have relied on that “one major exogenous event from collapse” narrative since the crisis?
It’s silly. And to a certain extent, it’s meaningless. In the grand scheme of things, the entire world is “one major exogenous event from collapse”. For example, an asteroid could end this whole thing tomorrow. I could be the victim of an “exogenous” event (e.g., a bus t-bones me trying to get through an intersection) tomorrow and I’d be dead. North Korea could nuke Tokyo over the weekend. And on and on and on.
What “one major exogenous event” can you name that would single-handedly collapse your “giant, debt-fueled Ponzi scheme”?
What is the single catalyst that would all at once overwhelm policymakers’ ability to drown it in liquidity?
When Bernanke said printing money wouldn’t cause inflation, was he right, or were all those people who penned that open letter to him right to say that QE was going to spark hyperinflation? (you don’t even have to Google it, I’ll spoil it for you: Bernanke was right).
The point is, if I wanted to, I could spend all day cranking out different versions of that “it’s all a Ponzi scheme!!!” story and make millions in clickbait ad money. And I could use that money to then pay for ad space on other sites, so you’d see my stories pop up at the bottom of those sites with headlines like “This Is The Event That Will Collapse The Global Ponzi Scheme”.
But that would be stupid, wouldn’t it? Yes, it would. Because saying that is like saying “This Is The Day When The Asteroid Is Going To Hit.” Sure, I might accidentally get it right and pick the day when we go the way of the dinosaurs, but probably not.
Rather, what I’ll probably end up doing in that scenario is just come away looking like a moron, just like every doomsday blogger has come away looking like a moron every single day since the crisis.
Of course not really, because there’s nothing “moronic” about duping idiots for millions in click bait money and then plowing that money into the very same assets they’re telling you to sell because they damn well know that the asteroid isn’t coming, right?
Right.
No one’s asking you to crank out clickbait — we respect you too much, and that’s not why we’re here. And yes, yes, of course the CBs can drown the next clusterfuck in liquidity — that’s what they did in 2008 (and saved the system, although you won’t find a conservative or Republican who would admit as much). But, and I think this is a totally valid question, at what point does the rubber band snap? It didn’t in 2008, but it did in Germany in 1923 and it did in 1932 here and in much of the developed world, and those epic failures — collapses? — brought us national socialism, japanese miliitarism, and the worst calamity the world has ever seen. So, yes, i have some confidence that CBs can keep kicking the can down the road — until they can’t.
Here’s what I’d like to ask you to address. I read so much about Powell’s dovish pivot. There is no question he has changed his tune. And various Fed governors have also adopted a very dovish tone. And the fed isn’t raising rates. But are they really following through on their promises to ease off QT. I check the Fed balance sheet report every week. For the last 4 reported weeks, from Jan 23 to Feb 28, they have continued to reduce the balance sheet. I see a reduction of about $73 billion during that time frame. Here’s the site I check. You can see it best if you pick “total assets” and use a 3 month period:
https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm
So the talk is really dovish. And the market and Trump love the way he talks. But the Fed seems to be trimming the balance sheet in the past four weeks at least as fast as it was the prior few months. What’s the deal?
The FED never said that QT has already stopped. Actually in the last minutes (end January) it was written that QT will stop late 2019. Forecasts are for a reduction of another 300-400 bn $, mainly in ABS.
For the moment it has paused rate hikes. Only later it will pause the QT. You can see this as going from a strong tightening to a mild tightening.
Depending on how the macroeconomic situation will evolve, it’s possible it will stop the QT sooner and even start a new QE, maybe already in 2020.
Did Mr. Rieder just say “this time is different”????
Rick Rieder: I think the nature of today’s economy has made boom/bust business cycles a thing of the past. In goods-oriented economies driven by manufacturing, chemicals, and energy you’d close the output gap, create inflation, and then force the system to recalibrate. Today, we have a services-oriented economy driven by technology, education, healthcare, etc., in which these dynamics just aren’t relevant.
The SA
Yes he did imply though not explicitly, that this time is different.IMHO. May be he is right in the short term.