A few weeks ago, while describing a meeting at the White House between Joe Biden, Janet Yellen, Kamala Harris and a handful of executives including Jamie Dimon, I wrote that “the whole thing has an unmistakable ‘caretaker’ feel to it.”
That wasn’t necessarily meant to be pejorative. I was just stating what feels, to me anyway, obvious. Harris, in her demeanor, comes across as a kind of President in-waiting. There’s a lot of energy there, and it feels like she’s bottling it up and saving it for the day when America is stable enough to have an outspoken, occasionally abrasive leader again. Biden and Yellen, by contrast, seem to be presiding over a transition period, during which compromise is possible (indeed, it’s welcome) but only to the extent it doesn’t jeopardize the mission which, basically, is to steer the Titanic away from the iceberg.
Part of that effort involves massive stimulus. The irony is that both the character of the stimulus and the size of it would have come across as an absurd reach a decade ago, and wholly laughable during Biden’s days in the Senate. So, while nominally “centrist,” Biden and Yellen are pushing a historically aggressive policy mixture. While short of Progressive demands, it’s decidedly left of center.
Of course, the world wasn’t coping with a pandemic previously, so it’s an apples to oranges comparison in most respects. But the price tag and the increasingly transparent nature of the financing (i.e., Fed bond-buying) does make this unique even if you could somehow “control” for the pandemic.
We’re issuing bonds and buying them from ourselves, and we’ve been doing that (along with other developed markets) for quite a while. It’s just more obvious now thanks to the size of the fiscal packages needed to combat the pandemic.
The fact that there’s an intermediary between the Fed and Treasury doesn’t mean this isn’t debt monetization. That’s a ridiculous charade, and if the Fed’s balance sheet is never completely normalized, then the circle is complete. Once you understand this, it raises immediate questions about the utility of the middlemen. As I’ve suggested time and time again, they are superfluous, at best. At worst, they’re inhibiting monetary policy transmission as evidenced by, among other things, the declining velocity of money.
Albert Edwards touched on all of this in his latest missive, out Thursday. He even alluded to the “caretaker” characterization of the current administration.
“Whatever the whys and wherefores of the situation I am certain of one thing,” Albert said. Actually, Edwards is “certain” of a lot more than “one thing,” but on Thursday, the thing he’s certain about is that,
A policy Rubicon was crossed early in the pandemic. The reflationists have then gone on to storm the Bastille of fiscal and monetary rectitude and hoisted their own MMT policy ensign. These revolutionaries have now ‘captured’ the policy levers with establishment figures like Joe Biden, Janet Yellen, and Jay Powell merely acting as continuity figureheads.
It’s hard to disagree with that even if you might couch it in less combative terms. Quite obviously, the US (and every other advanced economy) is now conceptualizing of policy through an MMT lens, just without admitting it publicly and while preserving the mechanisms which make it possible to retain plausible deniability when it comes to charges of overt government financing by the central bank.
Followers of Edwards might recall that this is part and parcel of why he believes that the “Ice Age” (his long-held macro framework) is on the brink of morphing into what he calls the “Great Melt.”
“With this ‘policy capture’, the Ice Age will ultimately transition into the Great Melt,” he said Thursday, before noting that we’re not there yet. “As it stands, the long bond bull market remains intact, even if 10-year yields rise to 2% – or a bit beyond, but with bubbles everywhere waiting to burst, a Japanese-style equity riot may be close,” he added.
He gently asked market participants to put this year’s (mounting) losses for bonds into context. “Prices may have fallen 4% over the last three months, but that is not unusual over the past 15 years, especially in the context of the huge price rises last year,” he said, before observing that when you look at declines from “previous 12-month peak, even the larger 20% price decline seen in the 30-year bond is not an infrequent sight.”
He also reminds you that value’s recent “comeback” is still in its infancy.
Value shares are on track for their best relative monthly performance since the dot-com bust (figure below), but that hardly makes up for years of underperformance.
Growth has been a perennial winner thanks, in part anyway, to the fact that it’s tethered to the decades-old bond bull. If the latter is in jeopardy, so is the former. And that’s a problem, because leadership has become so concentrated and so entrenched, that regime change could be destabilizing or, perhaps, impossible.
This is the “baton” argument again. Energy shares and banks are having an astoundingly good month, for example, and everyone is acutely aware of how far the Russell 2000 has run since the election. But years of outperformance means the baton carried by tech (for example) is heavy indeed. It’s not as simple as just passing it to cyclical value and saying “Run!”
Edwards underscored the point. “Global cyclical sectors such as materials and industrials have not yet been able to reverse even the 2020 outperformance of the technology sector,” he wrote Thursday.
You could argue that’s actually bullish. That is: Because there’s still so much ground to be made up by the laggards, the rotation has plenty of life left in it, and dispersion could drive realized volatility lower, thereby catalyzing (more) mechanical re-leveraging from vol-sensitive investor cohorts.
But Albert being Albert, he kinda doubts it.
“To be sure, if bond yields continue to rise and there is a smooth rotation out of growth and defensive stocks into value and cyclical stocks, the Fed will remain sanguine, but the risk is growing that with so many bubbles blown by the Fed something will burst soon,” he wrote, adding that “despite the widespread certainty that the Fed can micro-manage the equity market, and levitate it at will, the real shocker would be if the Fed lost control in any impending equity riot.”