You can’t help but laugh – or at least emit a despairing chuckle.
The discrepancy between, on one hand, headlines trumpeting further gains on US equity benchmarks, and, on the other, the tone of stories documenting economic despair, the disintegration of the country’s social fabric, and the hideous perversion of American democracy, is nothing if not comedic. It’s tragicomedy, to be sure – but it’s comedy nevertheless.
That’s not to say there’s anything funny about mass joblessness, obscene inequality and the nation’s inability to move past deadly racial stereotyping and endemic xenophobia. Rather, the juxtaposition between “Stocks press higher erasing pandemic losses as bears capitulate” and “Pentagon chief says military doesn’t support invocation of Insurrection Act“, suggests a state of affairs so patently ridiculous that incredulity is the only emotion we have left.
It’s not that laughter is the best medicine, it’s that we have no other frame of reference – no lens through which to view things anymore. It is farce. Pure farce.
There’s no use blaming central banks. As I’ve gone to great lengths to explain, the Fed used the tools at its disposal to avert a calamity – to preserve whatever jobs were left – to prevent the market’s plumbing from freezing altogether – to forestall a cascade of systemic credit events – to stop the global liquidation of US Treasurys as the world rushed to raise US dollar funding in a panic.
Faced with the single-most harrowing bout of market turmoil in 100 years, and staring down the prospect of a total economic collapse, Jerome Powell did what he had to do.
Unfortunately, fiscal policy has been missing in action for a decade. That means that by the time a crisis acute enough to force politicians to roll out massive stimulus came calling, a decade of incremental monetary easing had pushed the wealth gap to extremes.
When the pandemic hit, it disproportionately affected those in low-paying jobs. It hit minority communities hardest. It further exposed the nation’s broken healthcare system. It pushed America to the brink, and the death of George Floyd shoved the country over the edge.
It takes time to mail out checks. It takes time to pass legislation. It takes time to dole out loans to small businesses. It takes time to process 40 million jobless claims in a system that’s not built for a tsunami of layoffs. The only institution with the capacity to act in real-time and make a difference was the Fed.
And yet, their toolkit is such that the actions they take are destined to work in trickle-down fashion. So, we are where we are. A massive dose of monetary morphine has the patient (the market) high as a kite – almost totally numb to the injuries inflicted upon the corporations whose shares and bonds are on the way to recovering the entirety of losses incurred during the panic.
Everyone’s a critic, of course. As if there were another, feasible option in late March.
Guggenheim’s Scott Minerd on Wednesday correctly asserted that the Fed sent the world a “buy signal” via its primary and secondary market corporate credit facilities. Chair Powell, Minerd told Bloomberg, is forcing companies to lever up even further. You’ll recall that investment grade issuance topped $1 trillion year-to-date late last month.
But companies weren’t borrowing in March and April and May in order to engage in the usual financial engineering (i.e., borrowing to buy back shares). They were borrowing to ensure they could weather a once-in-a-century storm.
It’s true that these companies are now more leveraged as a result. It’s also true that the debt burden could prove to be too much down the road – that companies won’t be able to service it. If revenues remain depressed due to structural damage from the crisis, the situation will be even worse. Coverage ratios could fall. Downgrades could occur (Guggenheim sees $1 trillion of downgrades in the cards). As Minerd warned on Wednesday, the corporate bond market could become “addicted” to Fed support.
While Minerd is characteristically long on criticism, he’s short on suggestions. What, exactly, would have been a preferable solution? Allow a wave of major corporate credit events? Or maybe leave taxpayers to clean it up through bailouts like the $60 billion package Boeing requested for itself and its suppliers prior to the Fed announcing its support for the credit market?
“Moral hazard” makes for great headlines. But adopting it as a guiding principle for crisis-era policymaking is a recipe for disaster.
Minerd is not alone. Mohamed El-Erian weighed in recently with a similar take. In an opinion piece for Bloomberg, El-Erian conjures a false equivalence:
Early on in my career at Pimco, I remember Bill Gross, the firm’s founder and legendary investor, reminding portfolio managers that “there are times when the best thing to do is to do nothing.” It’s important advice as most PMs are conditioned to continuously look for opportunities and react accordingly. They naturally get fidgety when market conditions dictate that the best thing to do is simply wait. The cost of ignoring Gross’s advice ranges from unnecessarily wasting money on bid-offer spreads to ending up with less-optimal portfolio positioning.
Gross (long live the real “Bond King”), was simply advising PMs not to trade when they didn’t have to. In no way is that applicable to policymakers acting to avert a panic. Jerome Powell isn’t buying corporate bonds and funding every kind of asset under the sun because he’s itching to trade. He’s doing it because he doesn’t have a choice.
Somehow, that is lost on El-Erian, or at least when he’s writing opinion columns it is. “Gross’s advice should be heeded by Fed officials who are under pressure by markets to do more”, he says.
With all due respect, no, Mohamed, the Fed should not be guided by your recollection of something Bill Gross told you decades ago about trading individual bonds. That is ludicrous.
To be fair, El-Erian does go on to make some valid points, namely that market functioning has been restored, volatility has fallen and companies are clearly able to tap the primary market.
El-Erian could have just said that (in a tweet, or something) and let it go. Instead, he folded that simple observation (that it may be time for the Fed to take a step back and see how things develop), into a needlessly critical Op-Ed.
After conjuring a younger Bill Gross, El-Erian cites an unnamed “prime minister” he spoke to in the 80s. This unidentified world leader explained a decision not to counter foreign aggression by a hostile government with the following bit of advice for Mohamed: “Be careful when taking an action that risks unintended consequences and is not easy to reverse”.
That is totally nebulous. What would be the opposite of that “advice”? “Shoot first and ask questions later”? Or maybe “Always act impulsively, even when the possible negative side effects are irreversible”?
Let’s face it, El-Erian’s latest Bloomberg opinion column is the same Bloomberg opinion column he’s been writing on a bi-monthly basis for years. Each one of them could easily be mistaken for the last. They are cookie-cutter blogs, designed for mass appeal and always written with just enough scary-sounding buzzwords to grab some headlines. Here’s that obligatory ominous paragraph from his latest:
By continuously intervening in market pricing or taking policy rates negative, or both, the Fed would risk creating not just additional distortions but also “zombie markets” — that is, markets that no longer send accurate price signals and that fail to play an efficient role in mobilizing and allocating capital. This undermines productivity, hurts the potential for growth and risks financial instability.
Again, it’s not that he’s wrong, it’s that he’s been writing some version of that paint-by-numbers warning for so long, that I’d be willing to bet he has various iterations of that paragraph stored in a Word document called something like “BoilerplateWarnings.doc”.
Insult to injury is added when El-Erian confuses the problem with the solution. To wit:
By contributing to higher wealth inequality and dragging the Fed deeper into ‘quasi fiscal’ funding operations, the central bank also risks its credibility and political autonomy.
The best way to ensure that the trillions the Fed digitally conjures don’t end up contributing to inequality is to admit that if we’re going to acquiesce to a world in which monetary policy works through large-scale asset purchases, that policy absolutely must be coordinated with elected officials (sane ones, obviously).
Otherwise, what do we have? We have trillions in ostensible stimulus being channeled through the nation’s largest banks, as opposed to being channeled directly to the economy via programs designed specifically to put Americans to work or to otherwise boost the country’s productive capacity and create a better standard of living for everyone.
El-Erian seems to realize Congress has a role to play, but he stops short of connecting the dots – deliberately, in my judgement. Consider this (abridged):
The policy priority now rests squarely with Congress and the White House and includes Another round of more focused relief measures to help those segments of the population in considerable economic pain and suffering, improving safety nets to reduce the probability that household economic insecurity will undermine consumption in the economic recovery phase, [and] combating the likely downward pressures on productivity and growth potential through infrastructure modernization efforts, labor retooling and retraining programs and expanded public-private partnerships.
All of that costs money – lots of it. If you assume that money has to come from somewhere, then there are (basically) two options: Sell debt or raise taxes.
Suffice to say the latter isn’t popular, especially in a recession, which is why America is currently doing the former. And guess who’s buying the debt? Here’s a hint:
Now, you tell me, dear reader: What kind of sense does it make for that blatant debt monetization by the Fed to be occurring at arm’s length?
Why doesn’t El-Erian or Minerd, or anyone else who complains about Fed policy exacerbating inequality, openly call for the abolition of the mechanism through which that perpetual motion machine of inequality creation works?
Why do none of these critics state the obvious, which is that if we do away with covert deficit financing/debt monetization and replace it with overt debt monetization, Fed accommodation will cease to manifest as liquidity riding the financial asset merry-go-round, and instead show up as real jobs, for real people, in the real economy?
Consider the following from Rabobank’s Michael Every (from a note dated Tuesday):
I am far from the first to say it, but this is socialism for the rich and raw capitalism for everyone else. As such, the results are obvious. Even during COVID-19, which is devastating the economy, pushing unemployment to depression levels, slashing incomes, destroying small businesses, and upending global supply chains, the rich and powerful have become vastly richer and more powerful in both nominal and relative terms. Heads they win; tails you lose. Until we all lose.
The only logical exception is if QE becomes MMT and is spent on ordinary people by the government. The other alternative is raw capitalism for everyone, major trust-busting, and an epic asset-price reset: But that Austrian cure is probably going to kill the patient at this stage.
Yes, if we were to see MMT really embraced then it changes domestic political dynamics; we can burn the economics textbooks – which we should be burning anyway; and it opens up a host of geopolitical problems. However, if the alternative is social breakdown and the army on the streets, which one looks more attractive?
The likes of Jeff Gundlach will tell you the reason they don’t address the questions posed above is because debt monetization is too good to be true. MMT is a “free lunch”, they’ll say. And “everyone knows there are no free lunches”. (El-Erian has addressed MMT in quasi-favorable terms – there’s an example here.)
Well let me tell you something, folks: The likes of Gundlach, El-Erian and Minerd have been getting a free lunch for years thanks to the very same dynamics they so readily decry in tweets, Op-Eds, and “outlook” pieces, which are consumed as gospel by the investing public.
They deride Jerome Powell, Janet Yellen, and other central bankers for ignoring “moral hazard”, while failing to connect the dots for the public and refraining from placing the blame where it belongs: On elected officials who collectively refuse to legislate in the interests of everyday people, preferring instead to perpetuate a system that only works for people like Gundlach, El-Erian and Minerd.
US equities rose a fourth day Wednesday. It was the seventh gain in eight sessions. The market might as well be back to pre-COVID levels.
Millions are jobless. Gundlach isn’t one of them. Neither is El-Erian. Neither is Minerd.
Where’s your damn free lunch?