“I think lessons were learned from that and I think it was really a marker that we’ve probably seen the end of the boom-bust cycle”, Bridgewater Co-CIO Bob Prince said Wednesday, during a discussion with Bloomberg TV’s Tom Keene and Jonathan Ferro.
His comments caused an immediate stir. Ferro, for one, was incredulous. Or at least he feigned incredulity.
“Bob, you’ve just it twice, and I’m still surprised. What does that mean?”, Ferro pressed.
The nuance is important. It wasn’t so much that Prince was suggesting that there will be no more booms and busts because policymakers have “tamed” the markets and/or domesticated “animal spirits”. In a way, he was suggesting exactly the opposite. Here is the crucial quote from Prince:
As I said, cycles in growth are caused by the boom and bust in credit – credit expansion, credit contraction. And those expansions and contractions in credit are largely driven by changes in monetary policy. We’re in a situation today where, with interest rates close to zero, and secular deflationary forces, you’re not going to get a tightening of monetary policy – they learned that lesson [in 2018]. You’re not going to get a tightening and one of the reasons you’re not going to get a tightening is that you can’t ease. See, if you can’t ease, you don’t want to tighten to cause a problem for yourself that you can’t get out of. And therefore you’re in a box. You don’t tighten and you don’t ease.
The message, basically, is that we’re in a place now where, because monetary policy has no further room to cut rates or expand the balance sheet without getting extremely “creative”, policy is effectively paralyzed.
The lesson from 2018 was that central banks cannot even begin to truly “normalize” without causing problems – and serious ones at that. This immediately calls to mind a 2017 piece from Deutsche Bank’s Aleksandar Kocic, who wrote the following:
In its core, policy response to the crises was an extension of what in a political context is known as the state of exception: Market laws had to be suspended to restore normal functioning of the markets. The intrinsic contradiction of this maneuver is resolved only by understanding that suspension is temporary. Stimulus will have to be unwound. However, the accommodation has been in place for a very long time, during which traditional transmission mechanisms have atrophied and investors’ mindset has changed in a way that has altered irreversibly their behavior, the market functioning and its dynamics.
Engineering a state of exception comes with considerable risk. The Fed (and central banks in general) carries an implicit responsibility for orderly reemancipation of the markets, which makes stimulus unwind especially tricky. This highlights the deep dichotomy of power: While a state of exception is an exercise of power, there is a clear tendency to disown that power. And the only way to avoid facing the underlying dilemma is to never give up the power. This creates a new status quo – a permanent state of exception.
If the prospect of another overtightening episode is taken out of the equation (if we are, in fact, in a permanent or semi-permanent state of exception), the odds of another bust are commensurately reduced.
No less of a mainstream voice than Mark Cuban said as much on Wednesday afternoon during an interview with CNBC. As you can imagine, it was a far less insightful exchange than Prince’s conversation with Keene and Ferro, but it was nevertheless useful for the extent to which we learned that (surprise!) billionaires like low rates. Essentially, Cuban argued that as long as rates are kept at rock-bottom levels, the market can keep pressing higher.
Of course, with Europe presumably treading close to the dreaded “reversal rate” and Japan having tried nearly every trick in the book in order to bring inflation back to a target that is still a mile away, there’s not much room left for monetary policy when it comes to engineering booms either.
That’s what Prince means when he says policy is “in a box”.
Back in September, while discussing a cycle model from BNP, we reminded folks that “there have been any number of false dawns for those looking to call dusk on the expansion”. In addition to being a clever turn of phrase, it was a warning. And not so much about being wary of calling tops in any particular asset class, but rather about the whole notion of “cycles” themselves.
“It’s possible that the ‘cycle’ conversation no longer makes much sense — or at least not vis-à-vis developed economies”, we cautioned.
This recalls a conversation we had with a rates strategist at one of the big banks last March. “My thinking is that this is probably the end of [the] traditional business cycle — no more big and ‘frequent’ amplitudes, but more like undulations around a flat line”, that person said.
Prince is effectively echoing that sentiment. It could simply be that there are no more recessions in the traditional sense. Just more or less of stagnation. (Again, we’re talking primarily about developed economies here).
It goes without saying that aggressively expansionary fiscal policy could change all of this virtually overnight (to say nothing of MMT), but that’s another story.
The overarching point is that if monetary policy basically ceases to foster credit expansions and refrains from encouraging contractions, that paralysis sucks the oxygen out of the fires which cause booms and busts.
Suffice to say not everyone is on board with Prince. SocGen’s Albert Edwards (who, as far as we know, is still on vacation), chimed in from Twitter. “Apparently it’s the end of credit cycle busts because the Fed can’t tighten because of what happened to markets in Dec 2018!”, he exclaimed. “Rest assured credit bubbles can burst simply once price momentum of the inflated asset begins to falter and investors cash out”.
Prince is one of the 119 billionaires in Davos this week for the World Economic Forum. He spoke to Bloomberg a day after Ray Dalio told CNBC that “cash is trash“, a call which, when taken out of context, conjured memories of January 2018, when Dalio made similar remarks just weeks ahead of a correction in global equities triggered by the implosion of popular VIX ETNs.