What if bears have been right all along? This has been my premise obviously looking at the big picture through a structural lens analyzing the math, demographics, debt, cycles, etc. What if the unprecedented ongoing efforts by central banks are simply a reflection of the desperate effort to try to avoid the reconciliation with reality? The coming structural reset?
The answer to this question appeared to tilt in favor of bears by a rather stunning admission by Fed Governor Evans yesterday:
“Chicago Federal Reserve Bank President Charles Evans, who votes on the Fed’s monetary policy committee this year, told reporters after a speech on Monday that he is a little “nervous” the causes of low inflation might be structural rather than temporary.
“It’s not obvious to me that this is such a transitory event that it’s going to pop back up,” he said of low inflation, adding that while he is open-minded about a possible rate hike at one of the next three meetings, it may take more than “a couple of months” to sort out the outlook for inflation.”
Excuse me, but that’s what the likes of me have been saying for a while now. And yet all these central banks kept at it with solutions that fought the symptoms but not the root causes which, to be fair, is not part of their policy mandate.
But here we are with $SPX at 2500 and all I see is central bankers waving the white flag of capitulation:
“Federal Reserve Bank of Minneapolis President Neel Kashkari reiterated Monday that he believes raising rates right now is a bad idea.
“The Fed should be under no pressure to raise rates. We have time to let inflation climb back to target,” Mr. Kashkari said. “
Janet Yellen has declared low inflation to be a mystery. Why is it a mystery to the Fed? The answer is all around us. Technology is the greatest deflationary force ever seen, labor has no bargaining power and wealth inequality has skyrocketed largely aided and abetted by a Fed responsible for pushing people into high risk assets, thereby inflating same assets. The beneficiaries: The 50% of people that own stocks, or better yet the 10% that own 90% of stocks.
These trends, central bank encouraged, that driven up wealth inequality, the very same wealth inequality the Fed now bemoans:
“Wide disparities in wealth and income remain in the U.S., Federal Reserve Governor Lael Brainard said, citing soon-to-be-published data from the central bank’s latest Survey of Consumer Finances.
“Aside from reducing the long-run productive potential of the economy, persistently high levels of income and wealth inequality may also have implications for the robustness of consumer spending,” Brainard said Tuesday at a Fed board conference on disparities in the labor market.
The gaps in household income and wealth between the richest and poorest households are at historically high levels, as income and wealth have increasingly accrued to the very richest households,” she said.
The share of income held by the top 1 percent of households reached 24 percent in 2015, up from 17 percent in 1988, Brainard said, citing the Fed’s most recent Survey of Consumer Finances, which will be released Wednesday. The share of wealth held by the top 1 percent rose to 39 percent in 2016, up from 30 percent in 1989.”
Janet Yellen’s response to her self identified inflation mystery? Caution and study, in other words, dovish as usual:
“How should policy be formulated in the face of such significant uncertainties? In my view, it strengthens the case for a gradual pace of adjustments. Moving too quickly risks overadjusting policy to head off projected developments that may not come to pass. A gradual approach is particularly appropriate in light of subdued inflation and a low neutral real interest rate, which imply that the FOMC will have only limited scope to cut the federal funds rate should the economy be hit with an adverse shock.”
Fed speaker after Fed speaker is starting to acknowledge the underlying structural issues that foil their stated policy objectives which means that their policies have been focused on fighting the symptoms but not the root causes. Indeed, their policies exacerbated them. Central banks have blown asset prices sky high in the hopes of organic growth coming. It never did. Instead now everything is loaded up with debt, wealth inequality is higher than ever & now they can’t raise rates. Again.
But here’s what they have helped achieve:
Congratulations. You got everyone loaded up on debt and margin.
What is Janet Yellen’s response to wealth inequality: “It wasn’t our job” thereby taking zero historic responsibility for any of the negatives. But wealth inequality bred discontentment and resentment toward the establishment and finger pointing. That’s why America got Trump, the UK got Brexit and Germany got the AfD as the largest party. It’s all related on some level. But guess what? NONE of the structural issues are being addressed. The entire public debate is drowned out with political theater and drama.
For 8 years central banks gave politicians license & excuse to do nothing and in process bred the very issues that have caused political turmoil.
So here we are following 8 years of permanent central bank intervention and just a few days after Janet Yellen announced she wants to reduce the Fed’s balance sheet this is what we get in her first speech following:
“The outlook is uncertain, reflecting, among other things, the inherent imprecision in our estimates of labor utilization, inflation expectations, and other factors. As a result, we will need to carefully monitor the incoming data and, as warranted, adjust our assessments of the outlook and the appropriate stance of monetary policy.”
Brimming with confidence. I jest, rather Janet Yellen knows that things perhaps are not as bright as they appear.
A few years ago I noticed a very close relationship between the Industrial Production Index and the $SPX. Indeed those two tend to go hand in hand.
And when IPI drops a drop in the $SPX is coming. Hand in glove. In 2015 and 2016 such a pronounced drop was in the offing that it signaled the end of the bull market at hand. And this was part of my premise for a bearish outlook. After all, it was record intervention that was required to generate growth at the expense of more debt & artificially fueled by low rates and without such intervention the case for growth was weak, indeed we witnessed what was termed the earnings recession.
Stocks started dropping hard and we knew the response: Even more central bank intervention cumulating in the trillions of interventions we have seen in 2017.
My premise always was: Ok, how far can they push all this, how far can they make markets rise with perhaps an incremental rebound in earnings? That was the question I raised in April 2016 with The Big Move.
We have seen the answer, GAAP earnings rebounded, but not to new highs, and stocks went through a dramatic multiple expansion:
Most of you know all this. But this is where it gets interesting. In process IPI moved higher too, BUT it has subsequently made a lower high before dropping again:
Indeed the growth rate has been making a lower high as well:
If we are at the cusp of economic expansion this growth rate should be expanding dramatically. It is not. It bounced to a lower high. Barely.
Why is all this important? Aside from the fact that this is the established trend ahead of prior major market tops it speaks to the veracity of bear theory:
Hand in glove. Look at 1998. Look at 2000, look even at 2005 & 2007. Even in 2011 it wobbled and Ben Bernanke jumped in with QE2 to right it all again. And so the drop in 2015 and 2016 was not only concerning it presaged the market drops that ensued thereafter. And it was only after a global central bank effort of unprecedented intervention amounts that IPI rose again.
Which brings me to what I have been saying all along:
I reiterate: There is 0 evidence that global stock markets can maintain or extend gains without trillions of $ in artificial intervention.
— Sven Henrich (@NorthmanTrader) September 20, 2017
And so here we are then. Perhaps IPI data then signals it all. We got the earnings bounce, we got the IPI bounce, and record central bank intervention got it all this far and now we have a Fed pondering whether structural issues are holding the entire class back.
And this explains the Fed’s confusion. How can they raise rates and drop their balance sheet into a slowing cycle? Well they can’t, so they need to wait and study incoming data.
And if the data shows that the cycle is indeed slowing already then this entire central bank experiment was a giant failure. An experiment that was put on in the hopes of reigniting organic growth to avoid coming to terms with reality: That the technology cycle has been deflationary and that pensions & benefits are hopeless underfunded and overstated in the wake of demographic realities. Central banks threw easy money at the problem, and with low rates enabled vast debt accumulation exacerbating wealth inequality in the process, all the while permitting the world to pretend that the barbarians were not at the gate.
But the barbarians never left and during the next downward cycle they are demanding their proper pay or they will ransack the village. And from all the central bank talk this week it appears the white flags are already being waved.
Best hope that more free money in the form of tax cuts will delay the inevitable surrender.
Categories: NT Blog