‘Very Good Moves,’ Very ‘Excited’ People

Jim Bullard did some talking on Friday and markets weren’t amused.

He did some more talking on Monday, and markets were kinder, although this time around, it wasn’t clear that Bullard was the catalyst for what, halfway through the first session of the week, was a rather voracious bid for some of the “stuff” that was out of favor late last week.

“You probably don’t want to be in a situation where you would have to pull in rate hikes while you’re still tapering,” Bullard said, chatting during a virtual event hosted by the Official Monetary and Financial Institutions Forum. While he emphasized the Committee would want to keep its options open, he seemed to suggest that a double-barreled tightening episode probably isn’t in the cards. “I’m not really anticipating anything like that happening,” he said, adding that,

The presumption has been in the past, out of the 2013-2014 playbook, that we would not raise rates while we were still tapering. So that’s probably the presumption in markets and in central banks going into this process. Could we do it? Sure, we could do a lot of things. But we want this to be transparent, non-disruptive [and] give everyone a good signal about how this is going to transpire.

That’s conciliatory (especially the “non-disruptive” part), although I’m not sure I’d characterize it as a “walk back” of Friday’s hawkishness. After all, it’s difficult to walk back a forecast you already made and a dot you already placed.

Bullard also said there’s no issue with claiming to have met the “substantial further progress” threshold. “I think we could make that claim at any time,” he mused, but did note that the Fed will tolerate an inflation overshoot, albeit while “retaining control.”

Robert Kaplan, meanwhile, reiterated his support for the Fed’s new framework, but also parroted himself on the notion that the taper process should begin sooner rather than later. Kaplan has repeated that line (verbatim) on numerous occasions over the past two months. The dot plot, Kaplan said, reflects a “dramatically improved outlook.”

Personally, I didn’t hear much that could plausibly be construed as an about-face, but I suppose one could suggest that Bullard at least attempted to smooth things over with markets that were visibly pi–ed off, for lack of a more polite way to describe Friday’s sour session. “The Committee is only now starting to talk about tapering and it will take some time to get that organized and to get that running,” he added.

Bullard did emphasize possible upside risks to inflation, and he was laudatory vis-à-vis the Fed’s pandemic response. “[We have] to be state-contingent, to be nimble,” he said. “Just as nimble coming out of the pandemic as we had to be going into the pandemic [when] we made a lot of what now look like very good moves.”

I suppose that depends on your definition of “good.” Regular readers are well apprised that I’m not anti-Fed. If it’s gratuitous Fed criticism and cheap, mindless meme humor you’re after, this isn’t the place. That said, some of the Fed’s “good moves” in March and April of 2020 amounted not just to institutionalized moral hazard, but almost glorified self-indulgence when it comes to wielding control of policy rates, the liquidity fire hose and unconditional backstops in the service of creating what it’s fair to describe as the largest disconnect between asset prices and the real economy in modern history.

Apropos, Bloomberg on Monday quoted Keith Lerner, chief market strategist at Truist Advisory Services, who said “if you look at returns over the past year, they’ve been phenomenal.” They sure have, Keith (figure above).

“When you have a really strong bull market, most money is brought in when equities are moving higher and people get excited,” he added.

At the risk of lapsing into colloquialisms again, people are indeed “excited” — excited as hell, in fact. So excited that, as noted here over the weekend, global equity funds are on track to pull in $1.2 trillion in 2021 (see the figure below, which annualizes the YTD haul).

The uninterrupted inflows prompted BofA’s Michael Hartnett to declare 2021 the “Year of Stocks.”

On Bloomberg’s math, equity ETFs have pulled in almost $336 billion so far this year, easily surpassing the $231 billion total from 2020.

As one CIO “explained” (and the scare quotes are there for comedic value), “part of it is you’ve had this huge run coupled with virtually no pullback at all.”

The S&P hasn’t had a 5% drawdown since late October.

That’s the longest such streak since just prior to Volpocalypse.

Many investors, the same CIO remarked, “are saying, ‘I can’t wait any longer, I’ve got to get back into the market.'”

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8 thoughts on “‘Very Good Moves,’ Very ‘Excited’ People

  1. Sorry to be slow. But I’m not sure I understand the market reaction to Bullard. I suppose it is comforting to think that in late 2023, he doesn’t think the Fed will be both raising rates and tapering. But if he forecast rate increases in late 2023, doesn’t that mean he expects tapering to be finished by late 2023, which means that it has to start relatively soon? And doesn’t it also mean that he thinks tapering will not be adequate to reign in inflation, which will create the need for rate hikes?

  2. I’ve been having a few disconnected thoughts on all this, what I think is appropriately termed an American version of Kremlinology. Here are a few aphoristically, without tying any of it together:

    All technocratic institutions have become increasingly and perhaps irredeemably politicized, including the Supreme Court. There is little reason to think the FED is any different, so we should probably approach their individual views with the same lens. The power pendulum could also swing widely in short order. I think it’s clear now they are not exactly taking the “teamwork” approach. Best of luck deciphering political jockeying of bureaucrats from economic “science”, which is an oxymoron anyway.

    The global economy is speeding down a structural crash course, and no progress, really, is yet being made anywhere to fundamentally change this. China has been consolidating power in order to attempt a difficult economic adjustment from their investment-driven model, but actually pulling off the transition the Sovets and Japanese failed at is an entirely different story. And we thought the FED was operating on a strategy to partially inflate away a historic debt bubble, 1940s style, but perhaps not. Perhaps they can’t even get out of their own way, much like the fiscal side of the government. Presumably they have this in common with the pre-revolutionary French aristocracy.

    Ossified bureaucratic systems than cannot adapt and adjust grow ever larger to mask their structural fragility, until they collapse chaotically. Essentially every major developed country is in this position right now.

  3. It was a negative to have to get out the fire hose. But that said, I am not sure what the alternative was? The Fed took a calculated risk and so far it has paid off- along with the generous fiscal aid. When you can borrow at low rates and a once in 100 years (but maybe its one in 25-50 years now) economic apocalypse happens do you sit on your hands and watch the system implode? Or do you take steps to cushion the blow? Getting out the fire hose is not plan A but when the house is on fire what are you supposed to do? We did the same thing in WW2 essentially and afterwards we were able to extricate ourselves. I would like to hear what the grand poobaahs like Ray Dalio and Lawrence Summers from their cushy perches would suggest? So far I think the right decisions have largely been made. Next steps is how to get off the drip of Q/E and low rates. But it is not going to be easy or cost free. It was a plan that was at least worth trying. I cannot forget seeing mile long lines of cars for food banks- “if they have no bread, let them eat cake”….is not a great alternative???

    1. The only way to get off the drip is for fiscal to take the baton in a serious way. But, 13 years “into” the GFC and its depressionary aftermath, the government of the people still cannot even agree on basic things like that it’s a good idea to spend a few billion to hire blue collar workers and replace all the old lead pipes around the country.

      1. It’s not that a majority of the people cannot agree to replace old lead pipes. It’s that we have a system of government that–at best–allows a minority to resist change, and–at worst–allows a minority to rule outright.

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