It’s Urgent

It’s Urgent

“It’s essential that we move with urgency — inaction will produce a self-reinforcing downturn causing yet more devastation,” Janet Yellen proclaimed on Tuesday, after being introduced as Joe Biden’s Treasury Secretary-in-waiting.

“To the great public servants of the Treasury Department, I look forward to working with you to rebuild the public trust,” she added.

Yellen’s short speech served both as an explicit commitment to combatting the myriad inequities embedded in American society and as a tacit rebuke of the outgoing administration, which, pretensions to caring about the middle-class notwithstanding, rewrote the tax code in favor of the rich and corporations and purposefully stoked the worst social tensions since the 1960s.


Some will scoff at Yellen’s remarks given the role monetary policy played in exacerbating inequality over the past two decades. As ever, I’d remind voters that you elect lawmakers to serve the public interest. When they are derelict in their fiscal duties or otherwise decide to outsource the job of fostering economic growth and stability to an unelected body of technocrats operating with a limited tool box and informed by a soft science, you shouldn’t be surprised when things go awry or when the outcomes aren’t utilitarian in nature.

I’ve been over that countless times before, so I won’t rehash it here. The bottom line is that whatever you want to say about the Fed, inequality, and bubbles, Congress has the power to ameliorate the situation and they never do. Not through competent regulation, not through common sense tax policy, not through fiscal policy aimed at closing the wealth gap, and certainly not through the kind of overt monetary-fiscal partnerships that would lift the veil on the absurd charade that says QE isn’t government financing just because there’s a primary dealer in the middle of it. Doing away with that latter arrangement has the potential to direct trillions in digitally-conjured dollars to some useful purpose, like infrastructure, as opposed to condemning them to purgatory where they reside in perpetuity as stranded, inert bank reserves.

You can argue these points with me if you like. Long-time readers will attest that you won’t win. And that’s assuming you can goad me into engaging, which isn’t guaranteed.

Anyway, US equities started December on solid footing, rising with their global counterparts on the first day of the last month of the longest year of our lives. Both the S&P and Nasdaq hit new highs.

Stimulus chatter was in play, with both Nancy Pelosi and Mitch McConnell apparently floating revised proposals, although one assumes the two sides are still miles apart. McConnell’s deal sounds like the same relatively meager proposal he’s floated twice since August.

“Waiting until next year is not an answer,” he had the gall to say. “I’m focused on accomplishing as much as we can” before year-end. Spoiler alert: No, he’s really not. And that’s not necessarily a partisan assessment as much as it is a reality check. Mitch’s calling card is the opposite of “accomplishing as much as we can.” His reputation revolves around an uncanny knack for stonewalling progress.

Despite the long odds of a lame-duck stimulus deal, the long-end did selloff materially Tuesday, with yields cheaper by as much as 12bps out the curve.

“Tuesday’s price action offered further confirmation that November month-end and rebalancing was offsetting the underlying bear-steepening sentiment in the Treasury market,” BMO’s Ian Lyngen and Ben Jeffery said, adding that Tuesday’s backup in yields was “at high risk of the classic folly of ‘explanation chasing price action’ as the move lacked any obvious trigger save the price action itself.”

There is, of course, plenty to inform a bearish bond thesis, whether it’s the pro-cyclical rotation in equities or the vaccine optimism upon which that rotation is predicated or the prospect of Yellen throwing her considerable clout behind big spending in Washington.

But it’s not clear why any of that would have manifested in a selloff on Tuesday specifically. “Strong US manufacturing data and long-end paying flows in swaps contributed, on the first day after a large month-end index rebalancing,” Bloomberg’s Edward Bolingbroke noted. Obviously, the curve bear steepened.

The month started off on an upbeat note with solid PMIs for key Asian economies. Generally speaking, market participants seem keen to ride what most assume will be a year-end melt-up catalyzed by vaccine optimism and the promise of political stability in the US.

Of course, this comes with the caveat that both the US and Europe are staring at likely double-dip downturns following the latest COVID lockdowns. This is the never-ending push-pull between a better tomorrow and a rather disconcerting today. Tomorrow can’t come fast enough.

Or, as the incoming Treasury Secretary put it Tuesday, “it’s essential that we move with urgency.”


 

7 thoughts on “It’s Urgent

  1. I’ve made optimistic comments about vaccine rollout before. But for the sake of argument, what happens if “tomorrow”, i.e. the return to normalcy following successful vaccine rollout, doesn’t happen very fast? What if we get to May-July, and we find that only 30% of the adult population is getting vaccinated? And with the pediatric trials lagging behind adult trials, the rollout to school-age kids (<12 years old) might not happen until late 2021 or 2022. We could be sitting in Sept 2021, vaccines rolled out, and yet we could still have distance learning, no child care, social distancing. I don’t think the stock markets are taking this scenario into account.

  2. I feel obliged to engage.

    Although I’m glad the market is finally waking up from the monetarist fantasy that started in 1998 with the LTCM fiasco and reached its ‘finest’ hour with the GFC, the terrible consequences of their actions will be felt for decades to come.

    The excuses:
    “… fostering economic growth and stability to an unelected body of technocrats operating with a limited tool box and informed by a soft science, you shouldn’t be surprised when things go awry or when the outcomes aren’t utilitarian in nature. ”

    The reality:
    “We’ll make society carry the burden of our mistakes once again with an experiment called MMT.” The size of government has swelled to gargantuan proportions following the same logic central banks do. If its not working its because its not large enough.

    https://www.wsj.com/articles/helicopter-ben-bernanke-says-bank-of-japan-government-can-cooperate-more-1495605120

    Everything they do makes the system more and more sensitive to the slightest breeze. Risk and volatility cannot be destroyed, just transformed or displaced. Top-down central planning has failed over and over again yet people keep asking for more. Complexity has defeated all central planners regardless of their position in government, being elected or not, and will continue to do so.

    Don’t get me wrong, trickle down economics are also based on flawed logic, but that’s a debate for another time. The answer is simple, reduce the size of government and shift its focus to regulation, not intervention and provide basic services being healthcare, education, security and basic infrastructure. Guarantee equality of opportunity, not equality of outcome.

  3. It is long past the time to put monetary policy on the back burner. Not that I am a harsh critic of the Fed, it is just that at this point, monetary policy has many bad side effects as a price for relatively ineffective stimulus. Monetary policy at this point should only be an adjunct to help implement the other intiaitives. Other policies- regulatory, fiscal- spending and taxation, trade, as well as social policy can have a much more effective impact without many of the negative side effects. And they can be more direct and effective.

    1. H: “Congress has the power to ameliorate the situation and they never do.”

      The main reason for this is that Congressional priorities are, in order: 1) Keep the job; 2) Raise lots of money from fat cats to fund the next election campaign (we vote every two years so this is continuous; 3) Don’t set up anything for the “little people” because they can’t do anything for you and anyway, that’s socialism (look how many of those socialist idiots lost this year); and 4) Openly hate abortion, LGBT rights and support the Second Amendment. That’s it; the rest is immaterial. Besides, there is no intelligence test or background check required for those running for Congress.

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