Wednesday 24 February 2021

Are wild markets a late stage symptom of the policy disease?

 When can we be rid of this virus? No, not Covid, the Federal Reserve. 

Yes, I know, you think I am about to enter a conspiracy world of who owns the Fed and how it is all some cabal of Jeremy Corbyn's deepest and closest friends. 

Well, sorry to disappoint, but instead there is a huge story here. When Tesla fell on Monday 20%, erasing in truth only a month or so's gains, Bitcoin fell in sync. Suddenly, Jerome Powell, chair of the Federal Reserve, decided to remind the markets that the Fed would not remove the trillions of excess liquidity from the economy anytime soon. The liquidity is a feature, not a bug of the current system. 

The same is the case with our own Bank of England, but we have not had a huge run up in share prices and other assets like the US. Here, Government debt has easily absorbed all the extra debt created by the Central Bank. 

In the US, we are seeing crazy wild markets. Bitcoin and other digital currencies are hitting all time highs, SPAC's (Special Purpose Acquisitions Companies) are literally raised like South Sea bubble entities - "for reasons for which no one is to know the purpose." Sadly, I see the FT and lawyers etc rushing to promote shell companies in the UK and to try to get SPAC's registered here. 

SPAC's are a sign though, as are the crazed valuations of a few successful stocks. There is not much to invest in and there is far, far too much money chasing it. Private Equity sits on its largest amount of 'dry powder' - money raised but not deployed, ever. This is getting put into SPAC's to 'deploy' it but really it is just moving around savings and charging fees to the investors. 

With the markets the way they are, the underlying economy is in a wild phase itself with Covid smashing some sectors and boosting others. Forcing technology change in a year that would have taken a decade before. 

Central banks have created this monster and Governments love it - after all for them it is the magic money tree come true. Massive extra spending and no inflation. If inflation comes about then it is easy to cancel the fantasy QE bonds so goes the Central Bank theory and reduce money supply.

See below for what we are really doing though - a huge currency debasement strategy with apparently limited inflation impact. 

I am thinking hard on how this ends. In 2006, a huge run up in credit and debt ended in Great Recession, which was entirely predictable for 2 years beforehand. Here we see the Central Banks juicing the market and Covid providing both the spark but also the cover. My base case is the blow off phase lies ahead of us still - perhaps after another run up of asset prices. In reality the end phase must be some serious inflation or, if the Central Banks execute on slimming their balance sheets, huge deflation and bust. Either way, it is not a happy ending. 


Thud said...

Been hearing this song for a while now.

dearieme said...

Buy land because they've stopped making it?

Any old land? Can one own cemeteries? Is there a graveyards REIT? Diversify with crematoria?

Gold, Jim lad?

Or silver?

I think I'll cling tight to my Index-Linked Savings Certificates. The bastards wouldn't dare default on them - they are owned by UK voters.

Nick Drew said...

@ Index-Linked Savings Certificates

but maybe convert them to Consols? Happened before

DJK said...

Quite obviously, fiat money has lost all connection to reality. Didn't Labour lose the 1970 general election due to one month's poor trade figures (£30 million IIRC), inflated by BOAC buying a couple of Boeing jets. In 1990, the Conservative government blew £2 billion (and their reputation for competence) trying to defend Sterling. Today, we have Jeff Bezos alone worth $200 billion and our own government is merrily splashing a billion here, billion there, with no thought to tomorrow. Equally, one could look at the mad trajectory of house prices to see that money today is worth only a small fraction of what it once was. Wild debasement of the currency rarely ends well.

djm said...

The bastards wouldn't dare default on Index linked Certs - they are owned by UK voters.

Hollow laugh. The concerns of voters are linked to that far off time in the past when the fig leaf of democracy was still green.

Fast forward to today & the country can be run by edict, no need to involve voters.

Now that the political class has a taste of unaccountable power, there's no going back

Charlie said...

The goal is inflation. It's the only way out of the enormous debt pile that has been constructed by western governments since the early noughties.

The alternative is the mother of all debt deflations and a decade long depression.

The FED aren't even trying to hide it, and haven't for months.

I've said it before and I'll say it again: this isn't post-GFC QE. The new money isn't being used to fix the banks. It's getting spent.

E-K said...

The problem with any sort of decoupled credit (aka The Magic Money Tree) is when it hits reality.

That reality is finite resources.

The people who get to own, control and consume those finite resources are the ones who kept themselves the most real. China.

I expect huge inflation - which is the way governments (like gamblers hiding losses from their wives) try to hide their fuck ups.

And this Government has just made a huge one. Maybe the biggest since WW1.

It is high on the lockdowns we could never afford and the power (and excuses) it confers over its citizens.

It has been very busy being busy but if they refuse to change the counting of CV-19 from infections to hospitalisation/death rates then they will have failed in their busy-ness to acknowledge that the vaccines have done their job and decoupled infection rate from hospitalisation/death rates and will be guided by the wrong data.

I expect the refusal of minority groups to take the vaccine will result in the abandonment of vaccine passports (a bad ideological idea anyway) for fear of creating racial apartheid and so we will ALL remain under some sort of CV-19 restriction and lockdown while other countries pass us in vaccination rates.

= more magic money tree = more state funding = more inflation... and on.

Switch to counting deaths/hospitalisations because of CV-19. Get us out of lockdown with great urgency.

Does anyone notice an urgency to get us out of lockdown yet ?

No. Nor me.

Don Cox said...

When money was physical gold, silver and jewels, the only way to increase the supply was to open a new gold mine or invade Mexico. Now that money is just a number on a spreadsheet, the only limiting factor is inflation.

Do governments have the strength of mind to stop creating money when inflation rises beyond a certain level ? Obviously Mugabe's government didn't. Is ours any more sensible ?

So long as inflation stays low, raising the numbers on the spreadsheets is no problem. You don't even need more £20 notes now that cards have largely replaced cash.

Bitcoin (and its imitators) seems to be the same as an overseas currency. If you don't like the look of the pound, you can buy Yen, or you can buy Bitcoin. If you don't like the look of Bitcoin, you can buy dollars or pounds.

Physical goods such as land or jewellery do keep their value, until the government decides to confiscate them or some private operator steals them.

Don Cox

Jan said...

Charlie has it. Inflation incoming. You may like this blog thread:

I've been following it for approx 2 years!

Charlie said...

Unknown, you're missing the point. Inflation is the limiting factor alright, but the limit so far has been on interest rates, which are far too low for efficient allocation of capital. Once inflation has been stoked, IRs can be raised (although they won't keep pace with inflation), all the zombies can be killed off and we can get back to something resembling free market capitalism. Otherwise, the lost decade will become the lost generation.

Jan, I will check out that thread, if nothing else I will learn what a "dosbod" is!

Sobers said...

"Inflation incoming"

Can governments afford inflation? How much of government spending is index linked? Pensions, welfare and a lot of government borrowings definitely. State employee wages will have to match inflation or the unions will cut up rough. And other spending is de facto index linked - the NHS for example. I'd hazard a guess that there quarters of the UK Budget has to be uprated by inflation each year, enforced either by law, or political reality. And if the private sector is wilting under the strain, where is the extra revenue coming from? More money printing of course, so the whole thing can spiral out of control pretty quickly. Especially if you add in a falling exchange rate.

I'm not sure a Western government can run high inflation long enough to inflate their debts away and still keep the Big State show on the road.

Anonymous said...

It would be interesting to try to find the point when we moved from being a nation of wealth creation to one of debt creation.

Whereas before we used to fund tertiary education (creating wealth creators) that particular function has now become an exercise in creating a lifetime of crippling debt.

And if the MSM is correct, we'll be taxed to put more funds into the zombie high streets so we can load our credit cards once more.

Then if you want to go full tilt, there is the underpinning of mortgage debt with a 95% loan - as if the banks can't work out the financial capability of someone taking on a mortgage.

It is almost like HMG are addicted to OPM (other peoples money)