Bad News Monday

 

shutterstock_165156518 (1)When the economy is growing — as it did for years, under presidents as different as Reagan and Clinton — the inevitable down-cycles are more bearable. Going from, say, 4% growth to 2% growth isn’t as hard as going from 2% to -1%. (Hi, President Obama!)

It’s the same with asset inflation cycles. When the stock market is frothy and bubbly, everyone knows that a bounce down to earth is imminent. (Timing it precisely, of course, is a different matter.) In the autumn of 1987, when the stock market took a dive, the economy itself was strong enough (Hi, President Reagan!) to pull itself together. The point isn’t to eliminate the booms and busts — we couldn’t do that even if we tried — but to make sure that there are enough incentives and smart regulations in place to fuel a growing economy.

So, that said, this is worrisome news. From Business Insider:

The Bank for International Settlements — the Swiss-based financial institution that acts as a counterparty to national central banks — has declared that stock markets are in a “euphoric” state and has urged central banks globally to begin tightening interest-rate policies now while economies are growing rather than wait for another recession, when it will be too late.

Bankers, in general, love cheap money for themselves — they get to borrow at low, government-sponsored rates and lend at usurious, rapacious, banker-invented rates, and I’m being only half-facetious here — but cheap money chases things to buy, like stocks and real estate. Enough cheap money chasing enough assets and you get asset inflation. You get a bubble. And when bubbles burst, central banks move in with the only weapon they’ve got, which is….cheap money:

These words from the BIS ought to terrify anyone who thought central banks were unprepared for the last recession in 2007, when U.S. interest rates were “high” at about 5.3%:

“Financial markets are euphoric, but progress in strengthening banks’ balance sheets has been uneven and private debt keeps growing. Macroeconomic policy has little room for manoeuvre to deal with any untoward surprises that might be sprung, including a normal recession.”

And that crisis looks set to arrive any day now because stocks are at a peak.

Let’s look at the real estate market for a moment, if you don’t mind. Over at David Stockman’s blog, he reports the following:

Janet Yellen is an officious school marm. She constantly lectures us on Keynesian verities as if they were the equivalent of Newton’s Law or the Pythagorean Theorem. In fact, they constitute self-serving dogma of modern vintage that is marshaled to justify what is at bottom an economic absurdity. Namely, that through the primitive act of banging the securities “buy” key over and over and thereby massively expanding its balance sheet, the Fed can cause real wealth—-embodying the sweat of labor, the consumption of capital and the fruits of enterprise—-to magically expand beyond what the free market would generate on its own steam.

Um, he doesn’t like her.  But here’s where he lines up with the International Bank of Settlements:

Once upon a time the world knew better. The pre-Keynesian rule was that when central banks hit the “buy” key they always and everywhere create monetary inflation. Ordinarily that resulted in the inflation of credit, which, in turn, caused prices to rise—whether of commodities, services, wages, real estate or financial assets like stocks and bonds.

In other words, cheap money. And cheap money drives up prices, creates bubbles that burst, and that require cheap money to rectify. Sort of like this:

On the theory that perhaps at some point a picture can overcome the dense dogma of our benighted Keynesian money printers in the Eccles Building, the two illustrations below from the Dr. Housing Bubble Blog are offered. Arcadia and San Marino, California are most definitely not unique national treasures where cracker-box houses should be valued at $1-$1.5 million. No, they are just at the leading edge of the renewed speculative mania that has been touched off by the Fed’s latest and greatest monetary inflation.

Dr. Yellen, of course, claims there are no financial bubbles to worry about because the Keynesian bathtub of potential GDP has not yet been filled to the brim. Perhaps she would like to put in a bid for one of these.

The Dr. Housing Bubble Blog — which I’m obsessed with, by the way — is here.

What all of this suggests, I think — aside from the obvious, which is that this administration has failed in its central mission to restore and strengthen economic growth — is that we’re probably in for a nasty correction. Maybe, if tradition holds, in October. Which we can only hope is a preview of the nasty correction the Democrats will face in November.

Meanwhile, I’m keeping my assets dry.

 

 

There are 20 comments.

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  1. Tuck Inactive
    Tuck
    @Tuck

    “… they get to borrow at low, government-sponsored rates and lend at usurious, rapacious, banker-invented rates, and I’m being only half-facetious here…”

    Hey, maybe we can start demonizing bankers and Wall Street!  That hasn’t been tried yet, has it?  ;)

    Bankers operate in a market too… They compete for credit-worthy borrowers just as everyone else in a market competes for scarce resources.

    • #1
  2. iWc Coolidge
    iWc
    @iWe

    Tuck:

    Bankers operate in a market too… They compete for credit-worthy borrowers just as everyone else in a market competes for scarce resources.

    Nope. They are told to loan only to the best credit risks. Which would, of course, be the government. 

    All that money, being loaned back and forth between banks and gumint…

    • #2
  3. RushBabe49 Thatcher
    RushBabe49
    @RushBabe49

    I remember driving home from work in October 1987 and thinking to myself “I just wish I had money to invest in stocks right now”.  If we have a correction this year, I will think of it as a buying opportunity.

    • #3
  4. Paul A. Rahe Contributor
    Paul A. Rahe
    @PaulARahe
    • #4
  5. Paul A. Rahe Contributor
    Paul A. Rahe
    @PaulARahe

    Nearly all of the forecasters are predicting that the market will soar — which suggests that it may crash.

    • #5
  6. user_1938 Member
    user_1938
    @AaronMiller

    It seems that every economic pundit is always bull or always bear. Is there any middle ground between sweet dreams and impending doom?

    When Larry Kudlow stops smiling, look out.

    • #6
  7. Copperfield Inactive
    Copperfield
    @Copperfield

    Well, I created this nice chart that shows correlation between the Fed’s balance sheet and the Dow, but everytime I hit any button on a post, it just takes me to the top of the page.  Frustrating. 

    • #7
  8. Little Ricky Cobden Inactive
    Little Ricky Cobden
    @LittleRickyCobden

    Let’s see, Obama takes office in the midst of the largest economic downturn in 80 years. His policy prescription is a vast new entitlement, tax hikes to pay for it, a 40% increase in the entry level wage and demands for more increases, a “let the planet burn” foreign policy, vast new regulatory burdens enacted by fiat, and the most opaque and devisive administration in living memory. Did I leave anything out?

    Rob, are you really concerned with bubbles?

    • #8
  9. Fake John Galt Coolidge
    Fake John Galt
    @FakeJohnJaneGalt

    There will be no crash this year.  They will use every trick in the book and even make up a few to push the crash off till after the next presidential election.  If a republican wins then they will get the blame for the crash.  If not then they will blame the house or the tea party.

    • #9
  10. user_199279 Coolidge
    user_199279
    @ChrisCampion

    I’ve been reading Confounded Interest for the last year or two, and while it gets a touch technical, his charts show the reality that all of us know – there’s an inflation bubble that’ll pop at some point, that asset growth in the stock market is due to cheap money – not actual valuation of the stocks, and that household median income has shrunk in parallel with the Fed’s easing programs.

    When the Fed is propping up record deficits with paper at low rates, there’s very little income growth, GDP growth is stagnant or negative, well – to put it simply, someone’s going to have to pay the credit card bill that got run up during this Near-Decade At Barry’s.

    • #10
  11. Casey Inactive
    Casey
    @Casey

    Fake John Galt:

    There will be no crash this year. They will use every trick in the book and even make up a few to push the crash off till after the next presidential election. If a republican wins then they will get the blame for the crash. If not then they will blame the house or the tea party.

     A few executive orders to push back the worst aspects should do it. 

    • #11
  12. Fake John Galt Coolidge
    Fake John Galt
    @FakeJohnJaneGalt

    Casey:

    Fake John Galt:

    There will be no crash this year. They will use every trick in the book and even make up a few to push the crash off till after the next presidential election. If a republican wins then they will get the blame for the crash. If not then they will blame the house or the tea party.

    A few executive orders to push back the worst aspects should do it.

     That is the way I see it.  An executive order here or there, some bureaucratic regulatory adjustments and they can buy the time to get them past the election.  Second alternative is for them to crash it shortly before the election, spin it as the Republicans fault and run Clinton as “It’s the economy, stupid” candidate to come in and save the day.   

    • #12
  13. user_48342 Member
    user_48342
    @JosephEagar

    The purpose of monetary policy isn’t to prick stock market bubbles.

    The Fed is not holding interest rates low to boost stock prices.   It is doing it to facilitate an international adjustment process, whereby deficit countries like the U.S. consume less and increase exports, while surplus countries like China consume more and increase imports.

    Keeping domestic interest rates lower than abroad is half of this process.  That’s where the Fed comes in.  The other half is cutting the fiscal deficit, as House Republicans have done.  You can’t have one set of policies without the other.  Interest rates hikes and spending cuts do not go together, anymore than rate cuts and spending increases would.

    • #13
  14. Roberto Member
    Roberto
    @Roberto

    I cannot believe that I actually renewed my Ricochet subscription simply to respond to this. Fate is inscrutable it seems. 

    Joseph Eagar
    :

    The purpose of monetary policy isn’t to prick stock market bubbles.

    The Fed is not holding interest rates low to boost stock prices. It is doing it to facilitate an international adjustment process, whereby deficit countries like the U.S. consume less and increase exports, while surplus countries like China consume more and increase imports.

    This is wildly off target. Absolutely nothing the Federal Reserve does is going to change how the PBOC conducts its business. Even worse, the issue is not the Federal Reserve “pricking bubbles” you have it entirely backwards. Loose monetary policy is encouraging and creating this mess, the only action the FED needs to undertake is to stop propping up market bubbles.

    Rob Long:

    In other words, cheap money. And cheap money drives up prices, creates bubbles that burst, and that require cheap money to rectify. 

    You are dancing on the edge Mr. Long, these sentiments are almost Austrian. Keep this up and Monetarists such as Mr. Pethokoukis are going to burn you at the stake for your perdifery.

    • #14
  15. derek Member
    derek
    @user_82953

    We just finished the second quarter. I think that the tally will say that the economy shrunk again, two quarters in a row.

    I’m noticing cost push inflation where every price increase can be followed right back to the State house, a legislature, parliament or administration. 

    • #15
  16. user_199279 Coolidge
    user_199279
    @ChrisCampion

    A quick look at the money multipliers demonstrate that if the Fed’s idea of easing was to stimulate economic growth through cheap money, it is having the complete opposite effect.  Multipliers are down.  

    When median incomes are down, you will have less consumption.  That means the largest sector of GDP isn’t growing, and all the stimulus in the world won’t fix that.  It’s incomes that matter, less so interest rates and availability of capital.  I still think Pethokoukis has been upside down on this for a long time.

    • #16
  17. Tuck Inactive
    Tuck
    @Tuck

    iWc: Nope. They are told to loan only to the best credit risks.

     So who’s told them to do this?  Then you’ll be getting to the root of the problem…

    • #17
  18. Z in MT Member
    Z in MT
    @ZinMT

    I have been reading James Rickard’s books Currency Wars and The Death of Money and they have been quite the eye-openers. 

    In The Death of Money he explains very well the intentions of the Fed.  Right now the Fed is going all-in on inflation as a measure to protect confidence in U.S. Treasuries in the bond market.  Basically because real economic growth is too low and the primary federal deficit is too high, for the US Gov’t debt to be sustainable the Fed must keep borrowing costs low (low interest rates) and inflation high so that the size of the US debt starts to shrink relative to GDP. 

    He says that the Fed must target 3% inflation with 1% Treasury rates to keep the debt sustainable. 

    The problem lies in that Fed money printing in the long run is not sustainable and barring some miracle has already baked in the collapse of international dollar currency system.

    • #18
  19. Casey Inactive
    Casey
    @Casey

    derek:

    We just finished the second quarter. I think that the tally will say that the economy shrunk again, two quarters in a row.

    I don’t think so. I think we’ll see a pop that’s spun as getting back on track after some freak weather. 

    The reality is that the weather held down some spending in Q1 and that spending came back in Q2.  The 6 months taken together will show flat or slightly down but Q by Q comparison will make it look like we’re suddenly on a roll. 

    Then we will come in flat in Q3 and everyone will panic.

    • #19
  20. user_48342 Member
    user_48342
    @JosephEagar

    Roberto:

    I cannot believe that I actually renewed my Ricochet subscription simply to respond to this. Fate is inscrutable it seems. Joseph Eagar:

    Good thing I’m here, eh?

    Roberto:

    This is wildly off target. Absolutely nothing the Federal Reserve does is going to change how the PBOC conducts its business. Even worse, the issue is not the Federal Reserve “pricking bubbles” you have it entirely backwards. Loose monetary policy is encouraging and creating this mess, the only action the FED needs to undertake is to stop propping up market bubbles.

    Of course it does.   It forces capital to flow into China, appreciating China’s real exchange rate through a combination of inflation and currency appreciation.

    I agree it encourages bubbles here, but I don’t see how we have any other choice.  International adjustment is always a difficult process fraught with risk.  That’s just how the world works.  This isn’t like the 2000s, when loose fiscal policy was worsening global current account imbalances.  Fiscal policy is going in the right direction, and will continue to do so for at least the next several years.

    • #20

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