Well, Albert Edwards is back from another global jaunt, and by his own account, he’s “reinvigorated with enthusiastic derision.”
If you’re wondering where Albert’s travels took him this time, the answer is to Dylan Grice’s wedding at the Dead Sea resort in Jordan. “Rowan and I did the obligatory attempt to swim in the Dead Sea (impossible) and at dusk enjoyed stunning sunsets across the sea, and beyond the twinkling lights of Jerusalem”, he writes on Thursday.
After recapping the festivities, Edwards makes a hard pivot, using his visit to the Wadi Rum desert as an excuse to invoke Obi-Wan Kenobi and segue into an accusation that the Fed has spend the last decade playing Jedi mind tricks on financial market participants.
Apparently, Albert had some conversations at the wedding that “advanced” his understanding of Modern Monetary Theory, but his “already rock-bottom opinion of the Fed has plunged below sea level, just like the Dead Sea.” Here’s a highly amusing passage and the accompanying visual:
Fed Chair Powell’s tenure promised to be a break with the previous supine equity worshipping regimes of Bernanke and Yellen, who were joined at the hip. I was reminded of this as I wandered around the Amman Citadel Museum and came across these ancient statues (see below). If Bernanke and Yellen are joined at the hip, Powell could have stood separate, just as depicted by those ancient effigies. But, alas, these three Fed Governors are now but as one, even now appearing on CBS 60 Minutes together as ‘Team Fed’.
If you get the impression from that passage that Edwards isn’t particularly amused with Powell’s relent as manifested in the Fed’s “epochal”/(fill in your own superlative) January dovish pivot, you would be correct.
Albert does concede that there was cause to “ease off the pace of tightening” (e.g., data that looked like it wanted to roll over), but Edwards, like a lot of folks on the Street, thinks the U-turn was simply too dramatic. “The U-turn seemed to come out of nowhere, so shortly after the QT on autopilot comments, and with no warning”, he writes, echoing much of the “capitulation” commentary that came pouring forth from desks following the January meeting.
Edwards next cites a February 27 post from Epsilon Theory‘s Ben Hunt. Here are the money lines (figuratively and literally) for anyone who doesn’t frequent ET:
Nixon alternately bullied and cajoled and threatened and rewarded his hand-picked Federal Reserve Chair, Arthur Burns, to do the right thing and keep the money spigot open … wide open. Complaints about too much liquidity sloshing around were “bullshit”, and so what if they were running the economy hot? Good lord, man, imagine who would take over the White House in 1972 if he were defeated! Imagine the insane fiscal spending policies that those Democrats would push on the country if he lost!
Donald Trump has EXACTLY the same problem.
Donald Trump has found EXACTLY the same solution.
Jay Powell is the Arthur Burns of our day.
The only difference is that Nixon did all of his bullying and cajoling and threatening and rewarding in private, and Burns wouldn’t dream of saying out loud what Powell is shouting about the “important signal” of financial market “volatility” on monetary policy decisions.
After that, Albert channels Fred Hickey to lambast Kaplan’s unfortunate comments about corporate leverage and then gives an obligatory nod to Danielle DiMartino-Booth who everyone is citing this week following the Bloomberg Opinion piece published Tuesday. For his part, Edwards uses a quote from another piece.
“Had the Fed been using a 2% target based on the NY Fed Underlying Inflation Gauge, former chairs Janet Yellen and Ben Bernanke would have been compelled to raise interest rates much earlier than they did [and] we would not have entered this era of utter complacency where economies are less and less responsive to quantitative easing”, she’s quoted as saying here. Albert has a visual for you:
Moving right along, Albert assails the Fed’s apparent “single” mandate or, more to the point, the notion that the committee can pretty much ignore everything else as long as inflation expectations remain anchored.
“I seriously think the Fed has totally lost the plot”, he laments, adding that “the abrupt U-turn on their balance sheet unwind may have shredded their credibility, but then to say that monetary policy does not need to react to product and labour capacity constraints because inflation expectations are well anchored is simply laughable in my humble opinion”.
After sarcastically asking whether he has the right to question the “colossi of economics and finance”, Edwards proceeds to (implicitly) do just that, noting that inflation expectations are “driven by the current rate of CPI inflation, which in turn is heavily influenced by the oil price.” Heres a bit more:
If inflation expectations are primarily driven by the current headline rate of CPI inflation and hence the oil price, what is the main determinant of the oil price and commodity prices generally? Why, the economic cycle of course.
Albert forges ahead and after the standard shoutout to David Rosenberg’s Twitter, he flags weak leading indicators and falling corporate profit expectations as potential harbingers of a downturn.
He also talks about RVs in Elkhart County and slumping freight tonne kilometres, on the way to reminding everyone that before you go and call him crazy, you might want to note that being early isn’t necessarily the same thing as being wrong (to quote the old adage). To wit:
The recent decline in bond yields, with German and Japanese yields heading back into negative territory, suggests all is not well with global growth. Most if not all clients laugh at my predictions of negative US bonds and Fed Funds. But I’m used to it. Below are two charts of US and German yields from my Global Strategy Weekly dated Sept 2006. I noted then that that “In the same way that the technicals in the US are calling for a visitation to 2% for 10y yields – the bottom of the trading range, probably say by the end of 2008 (recession induced?) – the same simple technicals call for negative yields in the Eurozone by the end of this decade”. Ok, I was a bit early with the bund forecast but oh how they laughed!
Finally, as a brief followup to that trip down memory lane, Albert reminds you that he’s calling for US 10Y yields of minus 1% and negative Fed funds in the next recession which, even by optimistic accounts, is two years away at most.
Invariably, you’ll laugh at the negative US rates call, but, again, that’s fine because Albert is “used to it.”