An eight-day rally in global equities marched on Wednesday, as investors continued to follow the stimulus Pied Piper — nobody bound these markets to the mast and the siren song of fiscal and monetary accommodation is alluring indeed.
The Riksbank implied inflation may not reach its target until 2024, in the course of promising ongoing “extensive” support. Monetary policy, the bank said, “needs to remain expansionary.” In Italy, yields are near record lows this week as markets see Mario Draghi as a sure bet when it comes to turning the country around politically and financially.
The dollar is back on the back foot, and that too is positive for risk assets. “The Bloomberg Dollar Spot Index’s retreat below the 50-day moving average should have bulls — who thought they were in the ascendance — growing nervous,” Bloomberg’s Eddie van der Walt wrote Wednesday. “The trade-weighted gauge had appeared to break out of its recent downtrend, but a fourth consecutive down day suggests celebrations may have come too soon.”
I’m not sure who was “celebrating.” Dollar strength isn’t good for the reflation narrative, nor is it conducive to easy financial conditions. That’s a simplification, but the bottom line is that incremental dollar weakness is usually a tailwind for risk assets.
As the dollar retraced recent gains, gold rose four days in a row. Market participants cited the usual debasement concerns around stimulus and inflation.
Platinum, meanwhile, is sitting at the highest in a half-dozen years. If you know any late-90s rappers struggling with solvency issues, now would be a good time to sell any superfluous jewelry gathering dust. (It’s all about thick, gold cuban links these days.)
As you can imagine, the bubble calls aren’t going away. They’re just getting louder.
“Anyone with a modicum of financial market experience and a pulse is well aware that the United States is in the midst of multiple, concurrent financial asset bubbles,” JonesTrading’s Mike O’Rourke said, adding that,
The root cause of the mania is the Fed. In pursuit of [a] very narrow inflation target, the central bank has spent most of the past decade… purchasing assets for the purpose of pumping liquidity into the financial system. The Fed’s catastrophic failure in its analysis is that although its policies have pushed financial asset prices higher, only 10% of the population own 90% of the financial assets. That’s too small a group for the broad based spending that is necessary to push consumer inflation higher.
That’s a slightly more abrasive version of my boilerplate take, which is just that central banks underestimated the efficiency of the transmission channel from accommodative policy to financial asset prices and overestimated the effect of the same policies on the real economy. The vaunted “wealth effect” worked — it just turned out to mean something different than economists thought it did. I’ll just roll out “that” chart again (below).
“It is quite clear, according to a slew of commentators, that the ‘Everything Bubble’ has become more ‘Everything’ and more ‘Bubble’,” Rabobank’s Michael Every remarked, in his characteristically colorful daily.
“The Fed and other global central banks are still pouring their fully operational firepower into the economy, fully aware that little of this flows to productive assets or wages, and most of it to speculation: But when financial/asset speculation IS most of the ‘economy’, that looks like victory to them,” he added. “Indeed, doesn’t it feel like victory to those who speak Bloombergian?”
Maybe I’m oversimplifying this (and I’m sure that I am) but if the problem with the Fed’s stimulus programs is that they are being used improperly to inflate asset prices and NOT to encourage job and wage growth, maybe they need to come up with a more targeted approach to this stimulus? Again, this feels like a very simple problem to solve to me. Pumping money into mega corps has failed to result in job/wage growth for 10 years, so stop lending them the money. So why not set a ceiling on lending to businesses that are worth more than say, 500M dollars? And even that may be too high. But let’s take the same asset purchase approach and apply it to small and medium businesses who actually have the desire and room to grow. They likely don’t even have large swaths of shareholders to dump that money into anyway. That seems to me to be a more targeted approach that would realize the benefits the Fed is seeking instead of us just throwing money at people who already have way too much.
I’m getting too old to remember which programs belong to which agencies but it seems Yellen and others have the right idea, We need some fiscal policy here. Congress needs to allocate funds to programs that do stuff, as in build roads, rebuild bridges, catch up on deferred maintenance of public property and maybe fulfill our contractual promises to our veterans, for example.
Bottom line on fiscal vs. monetary policy is the following. The US as well as other developed markets had far too much reliance on monetary policy as an economic stabilizer. And even when fiscal policy kicked in, in the US it was too focused on tax cuts. Investment in infrastructure- both physical and intellectual has been too low for 40+ years. Low investment leads to low future growth. The US needs a giant fiscal stimulus for both short term and long term growth. Monetary policy does not cut it and won’t solve our problems. At best it can aid fiscal policy.
So… all of us here get it. There’s zero % chance that Powell and Yellen (and others) don’t get it too. Though, Powell disappointed in 2018 when he decided to both hike rates AND withdraw liquidity at the same time. Basic reasoning skills would have suggested going with either one, on its own, first and then do the other if the markets/the economy could withstand it.
But, yeah. I trust they get it.
So why isn’t it happening? On the fiscal side, the answer is easy. Rs are against it. They want tax cuts and nothing else. That explains the last 12 years, though Biden seems to have learn from Obama’s mistakes.
But could the FED have done things differently? Target small business loans? Offer tax refunds (aka give money) to the poorest tax payers? Throw money from helicopters for real? Are any of these practical as well as legal?
If the answer is ‘yes’, then Yellen and Powell must have been optimizing for something else than the wellbeing of the US Republic. Maybe career risk, personal post FED wealth, would knows? If the answer’s ‘no’ then maybe it’s time to give the FED more tools, independently of the Treasury/government (such as the bank account numbers of all US citizens/residents?)
With Democratic control over Congress and the White House,- I am surprised by their current agenda. Impeachment seems like a side-show.