Friday’s terrific US employment report sure has brought out the victory laps by all the neo-classical economists who have for the past half dozen years steadfastly stood by Bernanke & Co.’s policies. Their jubilant attitude can best be summed up by Matt Busigin’s terrific piece titled “Only Bernanke knew Oil is not inflation”. It is actually a good article, and even if you are the ZeroHedge “I only want to hear bad news” type, you should do yourself a favour and read it.
The crux of the article is that Bernanke was justified to not worry about aggressively expanding the balance sheet during the past few years.
In April of 2011, Ben Bernanke was universally lambasted and lampooned for claiming that inflation, which was accelerating and running above 3%, was “transitory”. He used this view to justify loosening monetary policy. The next few months of CPI were not favourable to the Fed chairman’s views: it peaked at 3.8% (nearly double the implicit target at that point) in September of 2011, sparking a feverishly pitched cacophony of criticism that the Fed chair was out of touch, and tone-deaf in his theoretical ivory tower to the practical realities on the ground.
This, however, proved to be Bernanke’s finest hour. Yes, even more so than the extraordinary measures taken during the height of the credit crisis. His detractors then, of which there were still many, included people and institutions on the brink that needed the Fed to extend them a hand. In September of 2011, the chairman stood very much alone in his call for moderated inflation now that the acute disaster removed influential institutions and people from needing the Fed to act in order to survive.
Bernanke was right. Holding the line with Zero Interest Rate Policy in the face of 3.8% CPI is now indefeasible. His decision spared the United States from a new recession, and the unnecessary excess economic suffering of millions that the Eurozone has experienced.
Now I think it is way too early to proclaim Bernanke’s policies a success. In the mid 2000s there was universal adulation about Alan “Maestro” Greenspan’s deft handling of the DotCom bubbling popping. We now know that we were simply building a bigger, and ultimately more harmful bubble, right on top of the smouldering ashes of the Nasdaq crash.
The fact that Fed has managed to engineer another bubble on top of the 2007/8 credit crisis should not give economists (nor anyone for that matter) reason to proclaim victory. I don’t dispute Busigin’s argument that had Bernanke not been excessively easy in 2011, the US would now be slipping (or already in the midst) of another recession.
But wasn’t this whole crisis brought on by a Fed that wasn’t willing to let the natural business cycle work its magic? Are we not fooling ourselves into thinking that the Federal Reserve can somehow repeal the business cycle?
And right now, I know everyone is all bulled up about pretty well all financial assets. Anyone who suggests caution is simply an old fuddy duddy who doesn’t “get it.” But look around and have a look at the wise old “fools” who don’t get it. Jeremy Grantham, Sam Zell, Bill Gross, even that crazy old jerk Carl Icahn thinks that we are sowing the seeds of a big disaster.
In direct contrast to Matt Busigin’s fawning piece about Ben’s policies, I present to you the best few paragraphs of warning that I have read in a long, long time.
“What will futurity make of the [so-called] Ph.D. standard [that runs our world]?
Likely it will be even more baffled than we are. Imagine trying to explain the present-day arrangements to your 20-something grandchild a couple of decades hence – after the crash of, say, 2016, that wiped out the youngster’s inheritance and provoked a cenral bank response so heavy-handed as to shatter the confidence even of Wall Street in the Federal reserve’s methods…
I expect you’ll wind up saying something like this:
“My generation gave former tenured economics professors discretionary authority to fabricate money and to fix interest rates.
We put the cart of asset prices before the horse of enterprise.
We entertained the fantasy that high asset prices made for prosperity, rather than the other way around.
We actually worked to foster inflation, which we called ‘price stability’ (this was on the eve of the hyperinflation of 2017).
We seem to have miscalculated.”
These eloquent words were spoken by none other than the famed Jim Grant at a recent Cato Institute conference.
I know that today it is easy to make fun of Jim. He sure seems to have gotten a lot wrong lately. The other day on my twitter feed I saw a trader ridiculing Grant’s recent portfolio choices of gold and Russian stocks. I am sure it got lots of yucks from the BTFATH crowd.
But the fact that it is so easy to make fun of Jim Grant should give you pause. The fact that almost all market participants believe that financial assets are a “can’t lose” game should worry you… The fact that even the pundits who believe we are inevitably going to crash, still think you have time to ride this bull higher (Jeremy Grantham), should cause you concern. The fact that right now you are saying to yourself that I just don’t get it, and that stocks are gong to keep going up for X,Y and Z reasons, should make you think about who is left to buy if this thing turns.
I know right now the upward momentum is massive. I know that it seems like it will never end. I know that from a trader’s point of view, it only makes sense to be long in the face of this tidal wave of buying. But for goodness sake, from a long term investor’s point of view, make some sales up here… And whatever you do, don’t start chasing it now.
The sounds of trumpets from the “Bernanke was right all along” crowd should be your sign to head for the exit, or at least get yourself closer to the door.
US Dollar update
Lately I have been worried that the global slowdown would spill over into the US. Friday’s employment report showed that my concerns seem to be misplaced. There is no way to put any sort of bad spin on this report. It was terrific news. The revisions higher for the two previous months were especially encouraging. The US economy is better than the “cleanest shirt in the dirty laundry pile.” The US economy is the shirt that was just returned from the dry cleaner while the rest of them sit on a ball on the floor with the dog using them as a bed.
It is no wonder that US short term yields are breaking out to new highs.
The US economy appears immune to the rest of the global slowdown. The fact that the US dollar exploded to the upside on Friday should surprise no one.
Yet, as I sat there watching the sharp move higher, it reminded me of a previous employment report day from October of this year. That report also moved the US dollar to new highs during an emotional Friday afternoon session. I remember it well because I was offside going into the report, and I puked at the highs.
Here was the action in the US dollar index on that day.
It ended up being an “all baked in” situation, and I learned the hard way about covering on a Friday afternoon.
This got me thinking – maybe this pattern is more common than most realize. So I made up a chart of the US dollar index and included the employment reports.
What I noticed was that although the US dollar did not always sell off after the report, it very rarely took off in the day following the employment report. Often the best you get is a week of sideways action, with the occasional more serious pause.
Although I understand all the reasons to be bullish on the US dollar, I still contend that the trade is crowded, and given the tendency for the employment report to mark an interim top, I do not think it is time to push your bets on the long side.
On Thursday I said I was taking a flier on some Yen calls (in CME currency terms), and even though Friday was ugly for that position, I am sticking with it. In fact, I might even roll the strikes down.
I said that I stand a better than usual chance of looking like an idiot, well so far that prediction has proven deadly accurate, and now I might even be making it worse.