The Mess That Greenspan Made - Part 20

No, Central Bankers Are Not Learning

In his eight years at the helm of the Federal Reserve, Ben Bernanke really never had to raise interest rates – he finished off Greenspan’s “baby steps” normalization campaign in early-2006, but, in the understatement of the decade, it was all downhill from there.

Absent a premature departure from the central bank, expectations are that current Fed Chief Janet Yellen will have to raise rates at some point, but, given recent economic reports in the U.S. and stories like Debt Traders to Fed: We Dare You to Try Raising Rates This Year at Bloomberg, it is not at all clear when that might happen.

Of course, asset bubbles are gestating (see The Federal Reserve Asset Bubble Machine for more on this timely subject) as they are wont to do under overly accommodative monetary policy and, with fiscal policy aimed at boosting economic recovery permanently absent around the world, central banks are the only game in town.

Or so the thinking goes.

Now that the European Central Bank has entered the game in a big way and Japan’s monetary policy continues to be off the charts (as detailed in It’s Official: The BoJ Has Broken The Japanese Stock Market), it was interesting to stumble upon this item ($) at FT Alphaville that included the following comment by former Fed Vice Chair Donald Kohn from 2004 (i.e., about when we sold our California home and began a six-year, multi-state trek as renters):

A second concern is that policy accommodation – and the expectation that it will persist—is distorting asset prices. Most of this distortion is deliberate and a desirable effect of the stance of policy. We have attempted to lower interest rates below long-term equilibrium rates and to boost asset prices in order to stimulate demand…

I believe that at least for a while the macro imperatives are likely to outweigh any threat to financial or longer-term economic stability from accommodative policy. Any unusual distortions in asset prices that might intensify a subsequent correction are probably small…In our situation, a high burden of proof would seem to be on policies that would slow the expansion, leaving more slack and less inflation in the economy in the intermediate run to avoid hypothetical instabilities later.

The FT Alphaville story includes this comment by ECB Board Member Benoît Cœuré that “it would be wrong to treat bubbles as a welcome replacement therapy to a sustainable growth model”, but as in the case of Janet Yellen’s “warnings” about the housing bubble via Fed transcripts from a few years back, this is much too little and far too late.

No, central bankers haven’t really learned anything when it comes to asset bubbles.

Friday Morning Links

MUST READS
New Ways to Crash the Market – New Yorker
S&P 500 hits record close, Nasdaq tops 5000 – USA Today
Dollar still on the defensive after tough week – Reuters
ECB stimulus to stay ‘as long as needed’: Draghi – CNI
Draghi hits back at critics of QE as Greek woes continue – Telegraph
Greek Finance Minister Lashes Out at ECB Chief Draghi – NY Times
Just 38 Miles Apart, One Texas Oil Town Is Booming, the Other Is Dead – Bloomberg
No class action vs. Morgan Stanley alleging Detroit predatory lending – Reuters
Standard & Poor’s gives Chicago’s credit rating another hit – AP
Power To The People: Can We Privatize The Welfare State? – Forbes
Entitlements: Why the U.S. Can’t Keep Costs Down – Bloomberg
Fox News Is Angry That Obama Knows What’s on Fox News – NY Mag

MARKETS/INVESTING
Shares set for weekly gain as bonds stabilize – Reuters
Why Slow-Growth Economy Is OK for Stocks – Barron’s
Solving the $450 Billion Bond Rout Mystery – Bloomberg
European shares gain on ECB reassurance QE to persist – AP
Epic global bond rout is a QE success story – but it won’t last – Telegraph
New Breed of Endowment Managers Beats Harvard at Its Own Game – Bloomberg
Gold edges off 3-month high as dollar firms, eyes weekly gain – Reuters
Dalio: “If You Don’t Own Gold, You Don’t Know History or Economics” – Zero Hedge
India gold imports surpass 100 T for 2nd month – Mineweb
The Factor turns bullish on Silver – Factor

ECONOMY/WORLD/HOUSING/BANKING
Americans Warm to Redistribution – Bloomberg
Why US economic growth has disappointed this year – AP
Look beyond retail sales for what’s happening in U.S. economy – FP
Once near equals, China and India have radically diverged – Quartz
Hong Kong economy tepid as Chinese tourism weakens – AP
China’s Record Boom Looking A Lot Like A Bust – Investors.com
The Housing Market Finally Has Some Traction – Fiscal Times
Silicon Valley Homeowners Cash Out In Red-Hot Real Estate Market – CBS SF
Debt Traders to Fed: We Dare You to Try Raising Rates This Year – Bloomberg
The Federal Reserve Asset Bubble Machine – WSJ

 

A Recession Without Room to Cut Rates?

Just a few months ago, most in the financial media would have scoffed at the idea that the U.S. economy might enter a new recession sooner rather than later. After months of mostly disappointing economic data, they’re not scoffing any longer and this story at The Economist (replete with a Depression era black-and-white image) is a good example.

HOW strong is the American economy? Forecasters are pretty confident: the average prediction is for 2.6% GDP growth this year and for 2.8% in 2016. But actual growth was just an annualised 0.2% in the first quarter and, after disappointing retail sales numbers for April, the Atlanta Federal Reserve’s GDPNow model, which was pretty accurate about the first quarter, is going for just 0.7% annualised in the second. Citigroup’s economic surprise index (which shows whether data have been better or worse than forecasts) has been relentlessly negative since the start of the year.

Does this mean that America is heading towards recession? Not necessarily. Whether or not you call it “secular stagnation”, the developed economies are in an era where growth seems to be stuttering; last year’s first quarter dip in GDP was a case in point. However, as HSBC, a bank, points out in a new research note, it is now six years since the US economy was last in recession—a reasonably long cycle by pre-1980 standards. Suppose that developed economies did slip back into recession. What could the authorities do?

Of course, what makes the prospect of a new U.S. recession so scary is that interest rates have been stuck at zero for the last six years or so, taking away the “firepower” the Federal Reserve normally has to combat the slowdown, all of which reminds us of what Mark Twain may have once said, “History doesn’t repeat itself, but it does rhyme”.

Thursday Morning Links

MUST READS
Shale-Oil Producers to Raise Production – WSJ
Economic growth: Where’s the beef? – USA Today
How will we cope with another downturn? – Economist
The global economy has a ‘titanic problem’ – CNN/Money
The Recovery Itself Unravels; Consumer Recession – Alhambra Partners
Dollar Bulls Wonder What Went Wrong in Drop to Four-Month Low – Bloomberg
Dollar index slides to lowest level since January – MarketWatch
The Biggest Surprise of the Global Bond-Market Butchering – Bloomberg
Greece’s Varoufakis says debt swap fills Draghi’s ’soul with fear’ – Reuters
Why the Heck Is the Trucking Business Slowing Down? – Wolf Street
Food-Stamp Use Is Now the Lowest Since 2011 – WSJ
Australia Issues Death Threat to Johnny Depp’s Dogs – Vice News

MARKETS/INVESTING
Global stocks listless after retail sales – AP
It’s Official: The BoJ Has Broken The Japanese Stock Market – Zero Hedge
ETF Giants Aim to Sidestep Bond-Market Chaos With New Credit Lines – Barron’s
Buffett and Vanguard: Different paths to the same destination – Washington Post
Greenspan sees another taper tantrum once rates rise – MarketWatch
Gold hits 5-week high as soft U.S. data eased rate rise fears – Reuters
Russia continues to buy gold, China could cause a shake-up – Secular Investor
Germans pile into gold amid Greek eurozone default fears – Telegraph
Global gold demand drops 1%, but investments jump – Mining.com
Scotia: Gold ‘cheap’ safe haven – Mineweb

ECONOMY/WORLD/HOUSING/BANKING
An Economics to Fit the Facts – Project Syndicate
Facebook to Raise Minimum Wage, Benefits for Contractors – Wall Street OTC
Finland, Once a Eurozone Point of Pride, Is Now Faltering – NY Times
In China, Legal Status of Many Golf Courses Is Full of Holes – WSJ
Abe Vows to Limit Use of Force After Approval of Defense Bills – Bloomberg
China’s fiscal spending jumps 33.2 percent year-on-year in April – Reuters
Survey: More Millennials Renting, But Just As Many Want To Own – WSJ
China Housing Market Shows Signs of Turnaround – WSJ
HSBC: Central Banks Are Running Low on Ammunition – Bloomberg
We need the Fed to be credible – MarketWatch

 
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