What a week. “Silly Season” is August, when nothing happens and headlines say “Man Bites Dog.” It’s come early this year. Here in Boulder, a road-rage incident this week concluded with one participant throwing a pecan pie at the other’s car.
Markets have been upset by China’s stock crash and Grexit but now are happily rebounding at news of solutions certain to fail. “Fail” depending on how much time you’ve got. Put those two pie fights aside for Federal Reserve Chair Janet Yellen this morning:
“… This initial increase in the federal funds rate, whenever it occurs, will by itself have only a very small effect on the overall level of monetary accommodation … I currently anticipate that … normalization will be gradual, and that monetary policy will need to be highly supportive of economic activity for quite some time.”
The Fed is coming with the first 0.25 percent rate hike in September, unless the U.S. economy face-plants soon. I do not know one single person in the bond market who thinks it will have a “very small effect.” Tightening is tightening. And it’s opposite to every other central bank on the planet. And long-term rates are already up a half-percent, and are likely to go haywire at the prospect of “normalization” toward 3.75 percent at any pace.
Follow the pie fight, full circle …
The most astounding account of Grexit came yesterday from the London Telegraph’s Ambrose Evans-Pritchard, who claims Greek Prime Minister Alexis Tsipras called last Sunday’s plebiscite expecting to lose and resign. The “no” surprise meant Grexit on his watch, consequences his fault.
The Germans, in a style developed since Bismarck began standing on Greece’s air hose two weeks ago, expected closed banks and a shut-down economy would clarify Greek minds. And so Tsipras has belly-crawled back to the Germans asking for a worse deal (and economy) than he could have had two weeks ago.
But all of these “deals” are ridiculous, just fig leaves to protect German leadership from accountability, years ago loaning the Greeks impossible sums to protect German banks. This new can, probably kicked this weekend, won’t last its three-year term. Maybe not three months. Even the International Monetary Fund has advised a massive write-off of Greek debt.
China’s stock market crash, of course, involves a great deal more money — something like half of China’s gross domestic product — gone pfft in two weeks, and a greater hazard to the world. But the silliest stories of the week involve questioning China’s ability to stop the crash. China? Flood banks with cash, freeze the sale of half the listed issues, have the People’s Daily say it’s safe to buy — and patriotic besides — and anyone who still wants to sell stock can spend the next few years in re-education camp.
China’s markets will stay frozen (or slightly uptilted) for however long it takes to unfreeze. And add at least $3 trillion to the unsustainable pile of China debt, which it was trying to reduce by opening its stock market and then talking it up. Oops.
Circle back to the Fed and the all-time policy pie fight here and a lot of places.
Most of us believe in the role of central banks as firefighters. “Lenders of last resort” to frozen markets. Interventions heroic in proportion to the disaster at hand. A minority found on the political right and in markets think that these interventions are market-distorting mistakes. The central banks may get lucky, but otherwise just buy time before a conclusion worse than it otherwise would have been.
I believe to my shoes that the anti-interventionists practice creationist history, twisting the actual record to support their opposition, and forget altogether what economic life was like before central banks.
But. This time, the global central bank interventions are so huge, and the nations saved so deeply resistant to the reforms necessary to lift interventions and prevent recurrence … just let this sentence trail off.
The U.S. has done the best job of reform, especially banks and markets, hence a gold star to Janet Yellen for courage to proceed. China and Europe are still in fundamentally absurd stages.
While watching this unfold, rent “The Great Race” and toward the end, enjoy the most magnificent pie fight ever staged.
Above is the 10-year T-note in the last three months. Staggering in the same place since early May, dipping only on transient emergencies like this past week. The bond market is supposed to discount future economic growth, inflation and Fed policy, and I think has no idea what to make of the current situation. When in doubt, sell, rates up.
Yellen today again banged away at the Fed’s expectation that inflation would soon rise to the Fed’s 2 percent target. Nevermind the new breakdown in oil prices and near-collapse in commodities, nor the dollar, which will certainly rise at Fed liftoff. Nor the Fed’s deeply mistaken forecasts in the last seven years.
Those little down-wrinkles at the end tell the tale. Imports are down because domestic oil production is up. Exports are down because of the strong dollar, but the Fed insists that effect is “transient.”
If you think the Greeks are whining without reason, study this bar chart. It is flat impossible for Greece to recover on the euro, wildly too strong for its economy, and most unlikely for Italy, Portugal and Spain. Ireland has survived because of the lowest corporate taxes in the developed world, which the Germans want them to double.
Above is Bloomberg’s commodity price index, horizontal scale back to 1991. I can support the Fed’s desire for liftoff as an anti-financial-bubble measure. Inflation-fighting? Uh-uh. Deflation is still the world’s greatest hazard.
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.
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