Read more from The Macro Tourist
OK, this is going to be a long one and it’s sure to p*ss off a great many folks, so without further ado – let’s do it! Make sure you hang on! It’s going to be a bumpy ride.
This morning we got a stupid “just-get-me-into fixed-income” rally. Bond desks look like Black Friday at Best Buy. The US long bond future is up 2 handles. The German 10-year bund is ticking at all-time low yields of minus 65 basis points.
Now the bond bulls will say this was preordained and easy-to-call. Maybe. And just for the record, I hold no grudge against them. They nailed it and this has been a rally for the record books. Look at gilts. They have now beaten equities for total return since BB:
And I know that US fixed-income is still in nominally positive levels, but I firmly believe much of this rally is emanating out of Europe. European monetary policy is Tom-Cruise-Crazy. No other way to describe it.
Let’s stop and think about the logic of the policy the Europeans are pursuing. Their economies are lacking end-demand. The private sector refuses to spend. So what does the ECB do? They lower rates to negative levels. TRYING TO FORCE THE PRIVATE SECTOR TO SPEND.
Ask yourself something – if negative 40 bps wasn’t enough to cause a European to borrow money, do you really think minus 60 bps will be the move that changes their behaviour? Of course not! It’s absolutely insane that Europe continues down this road.
Investors are rightfully realizing that: a) more monetary stimulus combined with b) fiscal austerity equals moribund growth with flat yield curves stuck at zero.
I am by no means a Paul Krugman we-can-dig-ditches-and-fill-them-back-up Keynesian. I am a firm believer in the broken window fallacy.
Yet the idea governments shouldn’t spend money to INVEST in infrastructure and their people when there is a clear lack of end-demand is bonkers. Germany is running a 1.5% of GDP surplus. Their entire yield curve is negative. Their economy has clearly rolled over.
Yet the German government REFUSES to SPEND. It’s a friggin’ gong show over there. If they aren’t going to spend with rates this negative, when ARE THEY GOING TO SPEND?
The German government is GETTING PAID TO SPEND. And yet they still think they can’t add any value by investing in their economy? So what do they suggest? Even more negative rates.
If minus 60 bps doesn’t work, then why not negative 200 bps? How about 400 bps? Just keep lowering rates until it works. The beatings will continue until moral improves.
The Federal Reserve has recently explored how negative rates might have helped during the last crisis. And Ken Rogoff has abandoned predicting the end of the world from too much debt and now advocates for ways to implement negative rates.
All of these carpenters wandering around looking for nails to hit when really what we need is a plumber who understands how the modern economy works. MONETARY POLICY IS INEFFECTIVE. The sooner we understand that, the better.
(BofA)
If we continue to rely on Central Banks to save us, they are going to break the financial system. Sure, it would be good if the Fed lowered rates. But that’s not the real problem. The real problem is an over-reliance on monetary policy.
I understand why an investor would buy US Treasuries. The financial system is unstable, and buying the world reserve asset is a prudent move. Yet buying any duration is an assumption that the world will continue with this over-reliance on monetary policy.
If you believe that governments will continue to follow the advice of the EU and Ken Rogoff’s of the world, then buying fixed-income is a great trade. But if you are worried about this changing, if you think that governments will realize the absurdity of lowering rates to extreme levels and instead choose to invest in their countries, then this rush into fixed-income will prove ill-timed.
Yet so far, I am wrong. Monetary stupidity reigns.
Read more: Here Are The 14 Biggest Problems With Central Banks Being ‘The Only Game In Town’
It certainly is a gong-show. It’s as if there was a pile of $ trillions sitting on the floor, and everyone in the room running around in a panic worrying about not having enough to fix the roof. It is nothing short of insane. It is almost as if the rich want everyone else to lose so they will feel even richer (a long as the rest lose more than they do).
So in this article https://heisenbergreport.com/2019/08/06/macro-tourist-presents-the-most-important-chart-in-the-world/ you were blaming Powell for starting the global slowdown. But now the issue is an over reliance on monetary policy?
It’s called fiscal responsibility and staying in ones means. They should not borrow any money to pay for that failed climate control package I read about. What a waste of money if they did it.
The U.S. Fed and Treasury should be SELLING all their U.S. Bonds holdings take every bid unwind all that 4 Trillion of QE as fast as they can so they can save the cash for a rainy day and buy it all back when yields hit 6%. Even Greece debt yield’s are low ****** INSANE
Re: “Yet the idea governments shouldn’t spend money to INVEST in infrastructure and their people when there is a clear lack of end-demand is bonkers”
The biggest driver since the Great Recession (maybe well before that) has been a lack of private investment, by corporations that are literally stealing “our” future, with insider compensation. That type of piracy leaves corporations weak with less and less future value. It’s the main driver behind low wage growth and low GDP growth and it’s also the reason we all have more and more wealthy people sprinkled among the tsunami of people around the globe tethered to poverty. The lack of private investment is a catalyst for social and political winds and it is destabilizing and destructive. Nonetheless, should governments step up to the plate and INVEST in infrastructure, yes, obviously, but at what expense? Turning back the clock 10 years, the Too Big Too Fail Pirates were all bailed out and then they hoarded their loot, while infrastructure crumbled. If we allow government to give lotto money and free rides to crooks, we end up where we are again and again because of greed and corruption.
FYI: DeLong and Summers (1991) found that the post-World War II cross-
country dataset contained an extraordinarily strong correlation between
growth and private investment in machinery and equipment. Public
investment by state-owned monopolies did not do it. Investment in
structures did not do it. The correlation was very strong in OECD-class
and middle-income economies.
That tidbit has been updated by an Irish economist:
“The absence of spatial correlation in the fitted residuals raises the possibility that the factors that lead countries within a region to follow similar growth paths work through the rate of equipment investment.
“
The point is well made with regard to Germany. With negative rates, budget surplus, downturn evident, they should spend and fast.
For the US, whether it should spend fast, it won’t.
– Political gridlock until Jan 2021
– Mismatch between “shovel-ready” infrastructure projects and “most important to do” infrastructure projects. You can get a road resurfaced pretty quickly, to build a major bridge or a new light rail line takes 5+ years.
– Federal deficit already $1.3TR and is set to balloon to >$2TR in a recession
– Populist social spending proposals (healthcare, student loans, education, etc) higher priority for electorate than infrastructure projects
I think the US won’t have infrastructure spending stimulus until 2021 and then it will be limited in size and slow to ramp.
According to M.M.T., if the German government is running a surplus of 1.5% of G.D.P., that means everyone else is running a deficit. Maybe the Germans are the real deadbeats…
Bob Denver is the only celebrity autograph I ever got, 1965 at the L.A. County Museum of Art, he was with his wife and baby in a stroller. I was looking at an outside sculpture installation, alone, when they strolled up. All I had was a Wrigley chewing gum wrapper that I unfolded. He had a pen. We all laughed.