Jay Powell: Unlikely ‘Victim’
SocGen's Albert Edwards doubts the Fed will ever be able to normalize policy.
I doubt it too. I spent most of last weekend emphasizing as much (here and here, for example).
In a note dated Thursday, Edwards wrote that the reaction to the June FOMC (characterized by an abrupt reversal of reflation trades, especially steepeners), "demonstrates the market’s sensitivity to the Fed's intentions."
He flagged last week's long-end rally, on the way to asking whether the bond market "now realizes th
‘Hoist with his own petard’……
“But let’s face it: This isn’t Powell’s fault.”
Absolutely correct. The Fed is now completely politicized, there is not a single ‘president’ or would be for that matter who can tolerate another market crash on their watch. To your point, it’s not like every market recession translates to Main St. but for some reason all of these un-invested people seem to think that the market directly impacts them. So having a market crash of any significance even IF it doesn’t impact Main streeters who don’t own stocks will certainly be fodder in the next election for whichever party holds power.
Again, I don’t view any of this as sustainable, the steady state of Fed intervention is akin to Jerome Powell holding 15 fingers in the dam trying not to let it burst.
Thank you for putting things in perspective. Hindsight, foresight and in the moment you have a very sober way of looking at things.
There are ways to get out of this but they’re basically undemocratic.
We need to force deleveraging in financial institutions and (viable) companies that have a high debt load b/c low interest rates make it possible to borrow to the hilt. We need to raise taxes to aggressively run down the government debt so that rising interest rates don’t force monetization of interest payments.
We need to basically confiscate the country’s wealth to run down private and public debt to such a point where raising rates doesn’t crater those institutions.
The chances of that happening? I think it’s a lot more probable we continue to follow the Japanese example and hope for the singularity/death to bail us out…
While my family’s net worth is higher than 50k its not orders of magnitude higher. We have a mortgage.
I would not view us as infinitely worse off than someone who lost 50% of their net worth in a market crash. Even if my husband or I (or both) lost our job (assuming a hypothetical market crash led directly and immediately to mass job loss).
Ironically, a recession triggered by fed tightening could result in the very fiscal support that’s been MIA.
Anytime the cost of capital increases (stocks decline, etc) workers get hurt. Not all, some, many, it just depends. BUT allowing bubbles or excesses or whatever you want to call things lead to bigger (and probably inevitable) issues to develop further down the road. The ponzi scheme can’t go on forever and sadly portions of the upper middle class, the middle class and the poor will be hurt to some degree with job loss, etc. CEOs will always try to protect their own interests by cutting jobs, cutting investment, etc to hopefully stem stock (option) losses and protect bonuses.
So what to do know. Can we “work off” the excesses in a boring, smooth, non-shocking way? And if so, how? Or do we encourage the excesses and create a bigger problem down the road?
Valuations can’t rise forever in excess of fundamental growth. And the hard part of increasing that cash flow must follow or risk the rug being pulled out from under it. So ultimately w face the piper but maybe we can pull a rabbit out of the hat? Or just deal with it later the pain be damned………………
Total mess. The calm hides the challenges. Fiscal policy needs to protect those that will be hurt but how………………………..
“Can we ‘work off’ the excesses in a boring, smooth, non-shocking way?”
Maybe not, but we have to try. And we have a roadmap (gradual taper followed by gradual rate hikes). The missing ingredients are supportive tax and fiscal policy and the requisite political will. Unfortunately, Washington is where cowards go to make their fortune.
What does the tax and fiscal policy look like to allow for such a taper and rate hike?
They will ‘tweak ‘ till they realize Blair’s Hypothesis hypothesis is in fact true ..Jay is a fast learner though !
If only Jay stuck to his guns and kept rates up before the pandemic, he might have been a real hero and not a victim.
I believe the FOMC would be very happy with a “garden variety” 10-20% market correction / tightening event…allow for some time for P/E’s to adjust some…