“It’s easy to say that the Fed should tighten. And I think that they should,” Ray Dalio said Monday, in remarks to the Qatar Economic Forum.
The problem, he lamented, is that they can’t — tighten, that is.
I spent what you could fairly describe as an inordinate amount of time last weekend going on about why it’s mostly impossible for central banks (and especially the Fed) to truly “normalize” policy after a dozen years spent chasing ever farther down the accommodation rabbit hole. I’d immodestly suggest that the linked articles (below), are worth the time it’ll take you to read them.
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Beyond a certain threshold, the abnormal becomes normal. The extraordinary becomes ordinary. I know this because, for too many years, I spent most of the day in various states of inebriation, with the only saving grace being that I was nominally stylish about it. You might get apprehensive, forlorn looks if you’re buying a sack full of airplane bottles at 10 in the morning, but it’s all smiles and “Thank you Mr.s” when you’re buying Laphroaig. And no bartender is condescending when your tab is $500, no matter how worried they may be about you.
While not every occupation I’ve ever dabbled in was conducive to being blissfully scotch-ed, the “professional” ones were. You’ve heard of “functioning alcoholics.” Honestly, that’s an overused term. Just because your boss (or some colleague) has alcohol in his (or her) system all day doesn’t make them a “functioning alcoholic.” It just makes them someone who has a (mostly) harmless vodka habit which may (or may not) be preferable to taking two percocets every day for “back pain,” a klonopin every eight hours for “anxiety” or some nightmarish cocktail of antidepressants because their psychiatrist is getting kickbacks from the pharma company (I’m just kidding. But not really.)
Most Americans are under the influence all day, every day. There’s not much difference between you and your “alcoholic” colleague. She has “back pain,” “anxiety” and/or “depression” too, it’s just that rather than go through the charade where the doctor asks a series of leading questions in order to elicit enough “right” answers to justify a prescription, she decided it’s easier to sneak a shot of liquor every five hours.
A “functioning alcoholic,” by contrast, is someone who performs well, and in some cases exceptionally well, while being literally drunk. That was me. And it was normal. After a decade of practice, I was exceptional at things because I was drunk, not in spite of it.
Quitting was theoretically possible (alcohol isn’t heroin) but it would have translated to an immediate and dramatic decline in performance. My last employer (whose face I can barely remember all these years later) would invariably say that alcohol was the problem. But that wouldn’t be quite accurate. The problem was the accumulated tolerance. Any deviation from a consumption schedule that, frankly, would have killed most people within a week, led to severe anxiety, which in turn translated to a complete incapacity to perform as advertised. And I was heavily advertised.
That is precisely where we are with markets and central bank accommodation. I said last week that (and I’m quoting myself here) “the ‘addiction’ analogy is overused to the point of being a cliché, but it can be taken almost literally now.” The mere suggestion that policy rates may be slightly off the lower-bound two years from now, was enough to cause a fairly severe reaction last week, with the curve’s abrupt reversal being the most glaring example. As for the taper, the Fed is buying, on average, $4 billion in assets every, single day. That creates an acute addiction liability, even if part of it is merely psychological.
Any deviation from the current maxed-out accommodation — indeed, any hint that such a deviation might be in the cards at some undetermined future date — is enough to cause severe consternation and could lead to total incapacitation depending on the circumstances.
In his Monday remarks (see the video clip, below), Dalio described this to the letter. “I think you’ll see a very sensitive market, and a very sensitive economy because the duration of assets has gone very, very long,” he said.
“Just the slightest touching on those brakes has the effect of hurting markets because of where they’re priced, and also passing through to the economy,” he continued.
Regular readers might note that in addition to the two linked articles mentioned above, I also penned a piece last week called “Tapping The Brakes.” Go figure.
Ultimately, Dalio assessed that the Fed “can’t tighten very much without having a big negative effect.” He’s right.
The problem with suggesting that eventually, central banks may need to simply “cut markets loose” or otherwise allow some version of creative destruction to run its course in order to purge misallocated capital, is that this isn’t akin to one person detoxing. It wouldn’t be a controlled demolition.
Indeed, the Fed’s legions of critics are fond of positing a grand “reset” of sorts, the opposite of a controlled demolition. In such a scenario, policy rates would be reset to whatever “normal” or “neutral” is imagined to be, risk-free rates would surge and central banks would become active sellers of the assets they hold.
That would unleash cross-asset chaos, and the ensuing volatility would lead to the mother of all de-leveraging events across the entire universe of vol-sensitive strategies.
Note that I went through the “grand reset.” On (multiple) doctors’ orders, I’m never to imbibe again. Allow me to say, without equivocation, that the purging of my accumulated addiction liability was a volatile event, complete with seizures.
Extrapolating that to capital markets is something I’d rather not do. Selfishly (so, leaving aside for now the widening wealth gap which goes along with central bank accommodation), I’m content for markets to remain functioning alcoholics. After all, what’s the worst that could happen? Maybe ask some of my old friends.
Where does one hide from such an event, if it occurs??
https://www.amazon.com/Under-Influence-Guide-Realities-Alcoholism/dp/0553274872
Alcohol is exactly like heroin once it’s metabolized. Twice. Another, perhaps, useful metaphor for the current situation.
Gonna have to call BS on that one… addiction/biological reward mechanism may be similar, but besides that and the ability to make you pass out, they are very different things. Essentially the same as prescription painkillers though.
I’m not sure how to leave aside the widening wealth gap in our country from this conversation… Isn’t that THE story right now, both economically and politically?
Every article can’t be Thomas Piketty. There’s only so much time in a day.
Unless we grow our economy, which most likely will require significant immigration, the Federal Reserve will morph into BOJ.
The other alternative is we “reset”- which seems like that would be followed by war as we protect our own and try to take over other groups of people- resulting in significant loss of life, human and other, and possibly destroying the planet in the process.
Don’t be so sure the labor market is out of the woods. The next shoe to drop is white collar employment. See Exxon Mobil today as a good example. It is the second and third order effects that can get you. Like the GFC the economy is going through 10 years of restructuring in roughly 3 years. The fed is likely going to be singing a much different tune 6 months from now.
“The next shoe to drop is white collar employment.”
This is very logical move, and not only for Exxon. The number of white collars in industry is outrageous. It places a heavy burden on internal manufacturing costs, forcing companies to buy (In China, India etc) instead of in-house manufacturing.
H. If you didn’t detoxify you wouldn’t be here holding the rest of us together. If the fed doesn’t detoxify where will it end up?
The FED, like any good heavy drinker could do the hard work for 30 years, what else we gonna do? Pretend politics will come to the rescue any time soon.
The Fed/US government only needs to remain a half step more responsible than any other significant currency printer/economy.
To follow your functioning alcoholic narrative (which I agree with by they way). When has being an addict ever just “worked out”? In your case you medically had to quit the booze in the most violent way possible to stay alive. Others just end up dead. Now lets apply that to the Fed, there is no way to keep running this the way they are and not face consequences at some future point. I’ve said it before and I’ll say it again, the longer we wait to stop this nonsense the worse it will be for everyone when it finally falls apart. Either the US Dollar will be worthless or all of the assets being bought by the Fed will be. If not both.
Your personal stories make for some good reading (as well as market coverage)
Ever consider an autobiography? May be a worthwhile effort.
My college roommate was a functioning alcoholic at age 16. His freshman year he had the DTs frequently when he couldn’t get a ride to a bar (my school was dry, no cars allowed until Junior year, town was dry as well). He had to drink at least four ounces of vodka neat just to start his homework. He had a 3.5 average and ran European operations for a large bank for ten years. Never quit so now at 75 he has late stage alcoholic dementia. He tried to quit once, didn’t work. His twin is a doctor and still he wouldn’t quit.
I love these articles that reference your life — or past life, in this instance. You should write an extended “About Me” post, one that obscures all facts that necessitate obscuring but touches on current conditions too, like the AM cigars, if I recall correctly. Would love to know what your post-former-self routine looks like, professionally.
I had some extremely wealthy friends…….take functioning alcoholic and add cocaine…….it smoothed out the rough edges…..a round of golf was a beer/shot per hole……..7 of 15 never reached 55……Powell drinks wine with dinner….