“The idea that somehow, there’s a way to have gotten out without chaos ensuing, I don’t know how that happens,” Joe Biden told ABC’s George Stephanopoulos, in an interview conducted as the US military worked to evacuate thousands of people from Afghanistan’s international airport, which was inundated with desperate Afghans after Kabul fell to the Taliban.
There may be no direct, mechanical link to markets from the resumption of Taliban rule in Afghanistan two decades on from the group’s ouster by US forces, but there’s probably a parallel for the Fed.
Maybe one day, Jerome Powell will be sitting across from Stephanopoulos. “The idea that somehow, there’s a way to normalize policy — to get out — without chaos ensuing, I don’t know how that happens,” Powell will say.
Although angst across equities late Wednesday and early Thursday likely wasn’t attributable to any “tantrum” concerns associated with the July Fed minutes, the taper discussion is playing out at a delicate juncture, defined by multiplying risks to growth and an unprecedented Chinese regulatory blitz.
On Thursday, Chinese tech plunged again and Toyota served up a reminder that COVID still represents a serious threat to global supply chains, with ramifications for inflation.
Read more: Chinese Tech Collapse Reaches 45%. Toyota Delivers Delta Reality Check
This is the problem with the “state of exception,” as Deutsche Bank’s Aleksandar Kocic once called ultra-accommodative monetary policy. There will always be an excuse to extend it. The longer it goes on, the harder it is to remove, even during periods of relative tranquility.
“Stimulus will have to be unwound. However, the accommodation has been in place for a very long time, during which traditional transmission mechanisms have atrophied and investors’ mindset has changed in a way that has altered irreversibly their behavior, the market functioning and its dynamics,” Kocic wrote, way back in 2017.
If you surveyed the headlines Thursday, you were met with a smattering of disconcerting news. It wasn’t just more regulatory rumblings out of Beijing and it wasn’t just Toyota. “Oregon Hospitals Near Collapse With Just 41 ICU Beds,” an AP story warned. “COVID Vaccines Are Less Effective Against Delta, Large Study Finds,” a Bloomberg headline declared. And so on.
There will never be days when there’s no news, or when the news is uniformly positive. Therefore, any day is a bad day to talk about tightening monetary policy, because you’re always going to risk exacerbating somebody’s concerns, somewhere.
The dollar hit a nine-month high Thursday (figure below).
That’s never good. Well, not for risk assets, anyway. And not for raw materials either.
Narratives about a “supercycle” looked to be in serious jeopardy as commodities entered a veritable death spiral. Copper’s below $9,000 for the first time since April and iron’s down something like 40% from the highs (figure below).
Oil, meanwhile, fell below $65, to the lowest since May.
“Given the uncertainty brought on by the second, third or fourth wave of the coronavirus, unpredictability is understandable,” PVM’s Tamas Varga said. “Everyone knows that the health crisis will be over, that the global economy will keep expanding, that global oil demand will keep growing, but no one knows when.”
I’m actually not sure about any of that. It’s by no means clear that COVID will ever go away, and while it’s probably safe to say the “crisis” phase will eventually end, lockdowns in New Zealand and China over a handful of cases suggest rolling mini-crises could become a fixture going forward.
As far as global oil demand, fossil fuels are on the way out. Or at least they better be. Otherwise we’re on the way out.
On Thursday, crude was mired in its worst streak of daily losses since February of last year (figure below).
“The market’s main narrative this week has shifted from monetary policy divergence clearly unfolding during Q4 to more immediate concerns over growth prospects,” Bloomberg’s Vassilis Karamanis wrote, noting that “geopolitical woes, COVID variants, China’s crackdown and Toyota’s plunge set the tone [and] the possibility that the Fed may slow the pace of bond purchases at some point this year offers no support to riskier assets.”
And therein lies the problem. Again, any hints at Fed tightening will exacerbate whatever the problem(s) du jour happen to be.
Biden this week said there was never a “good” time for the US to leave Afghanistan. On Thursday, SocGen’s Kit Juckes wondered if the same might end up being true of stimulus. “What if the Fed can’t taper, let alone hike?”, he asked.
Saying the Fed cannot ever taper, suggests we will never get out Covid being a serious economic impedement. I believe the market has been underpricing Covid risk, but I do not think high risk will go on forever. When we do have a better handle on vaccination and treatment we will be able to resume more normal behavior and economic growth. Balance sheet growth at that point will certainly be able to be removed. The real question is how high do short rates need to go? My thesis is not far- target rates probably need to be inflation plus zero. This event when it is eventually unwound will lead to subpar growth and low inflation as we have pulled forward a lot of demand. That is one reason why Biden and the Democrats want long run stimulus and better wealth/income distribution- it helps backstop demand as well as being desireable for society from a policy standpoint.
A few months (years?) of fiscal turmoil in late 2008-9, three more major bank failures & consequences, might have proven more prudent than what has ensued……and yet to come..
IMHO, the response to the option to burn the village to save it, is that they had to do what they did. The notional value of derivatives from just the four or five largest banks alone, is something like four times the world’s total GDP. The avalanche of unwinding that morass would have created a firestorm for the economy. That outcome was effectively was stopped with a contribution of $165 bil to AIG, a huge counterparty in these derivatives. These funds were quickly dispersed to the big banks to settle claims and close untenable open positions. The banks stayed whole, the economy didn’t collapse, and AIG was soon able to pay back the Treasury fully, with interest. Effectively nothing actually happened. If the choice was to destroy the assets of millions of people for a “principle” would that have really been better? I’m glad we didn’t try that approach.
Yeah, the idea of the Fed allowing three out of six major banks to fail is ludicrous to the point of being not worth a mention. Anybody who makes that argument almost by definition doesn’t understand what was actually going on in September of 2008. I mean, it’s nearly impossible for anyone with a solid understanding of that situation to argue that letting it play out as it might have would somehow have resulted in a preferable outcome then, now or ever. In no universe, on no sane interpretation, was that a viable option. There was a point in time when I would get irritable with people for suggesting as much. Now, I just accept it as another manifestation of propaganda. For a dozen years, a handful of websites and newsletter writers have been telling market participants that we should have let it all burn. Generally speaking, those folks are the same people telling you not to get vaccinated for COVID today.
It took about three years to reach a settlement on Lehman Brothers debt. Imagine how long the resultant economic paralysis would have lasted if all of the large banks as well as GE and many insurers were allowed to go bankrupt.
I agree, but if we wanted to make it a more teachable moment, we could have made all of aig’s counterparties take a haircut, say 25%. That would have scared the bejeesus out of the bankers with killing them…..
Also remember that the auto companies would have collapsed. Then the parts suppliers. And without intervention we clearly would have had a great depression- unemployment peaked at 12% but it would probably have been more like 25% with the auto industry decimated. And who would build the tanks and such in the event of an emergency. Clearly only the Senators that had transplants in their states would have liked that. The clear mistake that was made was not having some sort of rapid resolution of defaulted mortgages by stressed borrowers to either let them get current with a write down by banks or walk away with some spare change to start over in exchange for quick resolution. The recovery was delayed by 2-3 years from that.
It seems that all the Federal Reserve has to do is stay a little bit “more responsible” than ECB, BOJ and PBOC.
And the idiots who were behind letting the derivatives get so out of hand are allowed to just walk away??? No jail time. No being hauled into court and sued personally??? They weren’t fired for ineptness??? They were probably given raises and promotions.
Great analogy.
I agree wholeheartedly with Man of Lourdes. None of these executives paid any price for their greed, ineptitude and criminality. They should have paid large fines, gone to jail and lost their jobs. What kind of message was your criminal justice system trying to send? It’s ok to be immoral and criminal!