Federal
Repression System
By John Mauldin
“However
beautiful the strategy, you should occasionally look at the results.”
– Winston
Churchill
Scottish version:
But
Mousie, thou art no thy-lane,
In proving foresight may be vain: The best-laid schemes o' Mice an' Men Gang aft agley, An' lea'e us nought but grief an' pain, For promis'd joy!
English translation:
But
little Mouse, you are not alone,
In proving foresight may be vain: The best laid schemes of Mice and Men Go often askew, And leave us nothing but grief and pain, For promised joy!
–
Robert Burns, 1785
The
Federal Open Market Committee, to almost no one’s surprise, did absolutely
nothing at its last meeting other than say that maybe, if the data allow,
they will raise rates in December. My cynical view on their dithering will be
detailed below. And of course, the Bank of Japan met and decided that maybe they
had gone a bridge too far; and rather than lowering already negative rates
when the yield curve was flat out to 40 years, they decided to see if they
could create a fulcrum around the 10-year Japanese bond at zero.
So far, the
move has not been a rousing success.
This
is partially because their banks are bleeding cash and screaming at them, and
they have got to figure out some way to walk back what is becoming a very
destructive program. When you look at what low rates have done to the
Japanese economy and Japanese retirees, Kuroda-san’s coming to Jackson Hole
and declaring that negative rates have been a success demonstrated a fair
amount of chutzpah. But then he supplied only a small helping of the
staggering amount of hubris displayed at Jackson Hole by central bankers from
all over the world, who were celebrating the success of the most repressive
monetary policy conditions in the history of mankind. The IMF, the BIS, and
the World Bank are all revising their global growth predictions downward at a
rapid clip. You get the feeling these guys could spin Napoleon’s invasion of
Russia into a positive story and one they could take credit for.
In
today’s letter we are going to look at the FOMC’s decision-making process for
monetary policy and survey the unpalatable future that our leaders are
cooking up for us. But we won’t be living in the fantasy world they have
created for themselves; we are going to have to live in the real world
instead, where investment portfolios make a difference to our lifestyle and retirement,
not only for ourselves but for our families and clients.
I
must confess, the more I think about where the “monetary policy community” of
academic elites has brought us, the angrier I get. It has been a long time
since I have been this passionately upset about something. And not merely
because the policies are stupid. If I got passionately upset about every
stupid idea I come into contact with, I would soon require serious blood
pressure medication. Having been intimately involved in the political process
for almost 25 years in a prior life, I daily came into contact with stupid
ideas and thought myself somewhat immune.
No,
what the Fed has done is to destroy the retirement hopes and dreams of
multiple tens of millions of my fellow US Boomers, and when we include the
effects of the destructive policies of the rest of the world’s central banks,
the number becomes hundreds of millions.
The secure and protected world our
central bankers live in is far removed from that of the American or European
middle class retiree. The purity of their theory and the clarity of their
economic thought is evidently far more important to them than people’s
wellbeing is.
However,
numerous thoughtful scholars and those in the business community are mounting
a serious pushback. They may be considering the wisdom of Winston Churchill’s
remark, “However
beautiful the strategy, you should occasionally look at the results.”
Central
bankers of the world look around them and see nothing but confirmation of
their brilliance. Mostly they see it reflected from the stock markets, but
some of us are beginning to think they are going blind.
This
week I want to expand on my recent Federal Reserve criticism. I’ve talked
about the mistakes I think they will make in the next recession (whenever it
starts).
We need to think about that future in the light of the Fed’s
mistakes in the wake of the last recession. That is really where our
disagreement with them began. The Fed believes its policies worked. I say those policies did not work,
and the dismal recovery we have suffered through occurred in spite of the
Fed, not because of it.
Federal Reserve policy has actually thwarted the
normal recovery process.
If
the Fed had really believed their own post-recession forecasts, they would
have been normalizing interest rates by 2012. Instead, they went on devising,
deploying, and now winding down various shotgun stimulus tools. Maybe they
honestly believe they hit the target, but the rest of us aren’t convinced.
Almost
everything the Fed did to us since 2008 falls into two broad categories:
interest rate repression and quantitative easing.
Here
is the federal funds rate from 2007 to 2016. The shaded area is what we now
call the Great Recession.
The
Federal Open Market Committee entered 2007 with the rate target at 5.25%.
They starting lowering it in August of that year – months before the economy
went into recession. Why was that? Recession or not, many folks weren’t doing
well. Even then there was talk of banks having difficulty, though the worst
was yet to come.
Look
how fast rates fell. In July 2007 savers could buy Treasury bills,
certificates of deposit, or other principal-protected savings instruments and
enjoy a 5% or better risk-free yield. Longer-term fixed-income products
actually offered even higher yields. A year and a half later, the fed funds
rate was bumping the zero bound, and savers could make nothing without taking
on market risk, which few wanted to do at the time, because iconic brands
were blowing up everywhere.
Here
is the great irony and possibly the most iniquitous part of the Fed’s
monetary policy initiative. They wanted investors to move out on the risk
curve. But did they bother to look at the demographics of this country? We
have a huge bulge of Boomers – retirees and near-retirees who do not need to
be moving out the risk curve at this time in their lives.
They need
Steady-Eddie returns, and they need to be reducing their risk, not increasing
it.
A
sober look at the current economic environment reveals overvalued,
overbought, and illiquid markets everywhere. The global central bank
community’s ultra-low and negative interest rates have created an environment
of risk that is looking more and more like a bubble in search of a pin. If
and when it bursts, it will take the retirement dreams of millions of
Americans with it.
From
the Fed’s perspective, super-low interest rates were economic stimulus. With borrowing
costs so low, we were all supposed to race out and buy stuff. Companies
should have expanded and hired more workers. Homebuilders should have been
incentivized to build more McMansions in the suburbs, knowing qualified
buyers would appear like magic.
What
was supposed to happen was a normal recovery. What we got was the weakest
recovery on record. The Federal Reserve will offer the counterfactual that if
they had not given us their stimulus, the recovery would have been even
weaker.
That, of course, is something that neither they nor we can prove, one
way or the other. We can go back and look at a far worse recession in the
early 1920s, when the government did nothing and the resulting recovery gave
us the Roaring ’20s.
Very few people remember what was called the
Depression of 1920–21.
Unemployment was close to 12%, and there was
extreme deflation – the largest one-year percentage price decline in 140
years of data. Christina Romer estimates it was a 14.8% decline. Put that in
your CPI pipe and smoke it. Industrial production dropped by 30%. And there was
a horrendous bear market.
By
the time President Harding and his Commerce Secretary, Herbert Hoover, got
around to calling for a conference and organizing committees, the economy was
already recovering. Notably, the administration did cut income taxes, which
helped reinforce the Roaring ’20s.
A
large part of the problem in the late ’10s was that the Fed was raising rates
into the recession in an effort to protect the dollar and fight what they
considered to be inflation.
Central bankers of that era had a gold and
hard-dollar fetish that led to massive policy errors. When they actually
began to normalize their monetary policy, the economy took off. A normalized interest rate policy,
what a concept…
In
our own generation, we got stimulus for Wall Street in the form of QE, and it
led to an inflation of asset prices. No one really minds if the value of
their stocks, real estate, and other assets go up; and there was the
assumption that a rise in the stock market and real estate would trickle down
to Main Street. Clearly, it has not.
Speaking
of asset price inflation, Peter Boockvar writes this week:
The inflation/deflation debate we know
goes both ways for consumer prices.
Where there should be NO debate is the
asset price inflation we’ve seen over the past 5+ years. We also know that the asset price
inflation was more than just in stocks and bonds. It also spilled over into
high-end apartments, antique cars, and paintings. It also spread into other
‘hard assets.’ In 2014, the Action Comics #1 comic book that introduced
Superman sold for $3.2mm up from $2.2mm three years earlier for another copy
of the same comic in similar condition. That was a record high price. A few
days ago a T206 Honus Wagner sold at auction for $3.2mm, also a record high
price for the same exact card that sold for ‘just’ $2.1mm three years ago
earlier. In case you missed it yesterday, the WSJ quantified the returns on
Mickey Mantle baseball cards over the past 10 years. For the ultimate Mantle
card, his Topps rookie year of 1952, the percentag e increase has been 674%
for a high-grade card. The average return for his 16 Topps cards was 544%.
These returns compare with 85% for gold, 40% for home prices, and 59% for the
S&P 500 over the same 10-year time frame. The Fed, though, has no reason
to be fearful on inflation for as long as they don’t include asset prices in
the CPI or PCE so we magically won’t have any inflation much above 2%.
(Okay,
how many Boomers just like me are kicking themselves for not keeping their
shoeboxes full of baseball cards? I had those Mickey Mantle and Willie Mays
cards, and all the others. And because my dad had played semipro, I collected
a lot of the older cards of several previous generations that he told me
about. The Ty Cobb and Cy Young cards were the anchors of my portfolio. Ahh,
but I dream…)
Back
to the real world. What did
happen was the opposite
of stimulus, at least for those who were not the direct beneficiaries of
quantitative easing. That would be the people who actually wanted to be
prudent and save and put money in fixed-income and certificates of deposits.
Remember when you could invest in a CD at 5% to 6%? What a quaint notion.
By
reducing the incomes of retirees and terrifying near-retirees, the Fed
successfully reduced economic activity. Hopefully, that was not their intent,
but that is what happened.
They claim they managed to save the banking system
from collapse, and I would agree that QE1 was necessary and beneficial to the
system. I guess that’s something to their credit, but it came at tremendous
cost. They put much of the cost of rescuing the banks on the shoulders of completely innocent people.
The cost was borne by savers and small investors.
I
would argue that the Great Recession was a result of a massive monetary
policy error: keeping rates too low for too long, which, when coupled with
lax or no regulation in the mortgage markets, resulted in a housing bubble
and a crash, which bled over to global markets. This outcome should not have
been a surprise to anyone. A number of us were writing as early as 2004–05
about the problems that were the primary triggers for the Great Recession.
As
noted above, it was central bank errors in 1919 and 1920 that caused the
1920-21 depression. And pretty much everyone agrees that the Federal Reserve
had a big hand in causing the Great Depression. Certainly, the wrong monetary
policies resulted in the recessions of ’80 and ’82. Note: it was not the
policies of Paul Volcker that caused the back-to-back recessions but those of
his immediate predecessors who allowed inflation to get out of control.
Volcker’s hand was forced, and he had to act aggressively. I lived through
that time as a businessman, and I vividly remember borrowing at 18%. It was
not fun.
I
believe we are again suffering the effects of a massive monetary policy
error. The error has already been committed, but we have just begun to endure
the consequences. We are still living in a dream, but we’re nervous, much
like we were in 2006. The Federal Reserve has repeated the mistakes of the
last cycle. They have kept rates too low for too long, but this time they
have outdone themselves, clinging desperately to the zero bound. In doing so
they have financialized the economy and made it hypersensitive to interest
rate moves.
Ben
Bernanke made a big mistake by opting for QE 3. Arguably, if he had begun to
normalize rates rather than to create a “third mandate” for the Federal
Reserve to support stock market prices during and after QE 3, we would not be
in the situation we are in today, where the very hint of normalizing rates
sends the markets into a frenzy.
Bernanke
should have looked the stock market straight in the eye during the Taper
Tantrum, summoned his inner Paul Volcker, and told the market, “I am not
responsible for stock market prices.” The markets probably would have
suffered a rather quick, sharp correction and moved on. And it might not even
have been much of a correction. Markets often correct, as they did in 1987 or
1998, without becoming lasting bear markets if there is not a recession.
Admittedly,
a normalized short-term interest rate today would likely still have a “2
handle” or even lower. Short-term rates, at least in normal times, have tended
to be in the vicinity of inflation. The 10-year Treasury bond rate has had a
close relationship with nominal economic growth.
I
would prefer to allow a market mechanism (rather than a committee of 12
people who are prone to enormous biases) to determine short-term rates. A
committee that prioritizes the interests of the stock market above the
interests of savers and retirees and pension funds is a dangerous committee.
If
the FOMC had begun to normalize rates in 2012 rather than looking at the
stock market as a primary indicator of the health of the economy, the economy
and the stock market would be doing much better today, and savers would at
least be getting some return on their money. And perhaps, if rates were
normalized, the governments of the world would be motivated to control their
deficits. (I know, that last statement proves I’m a dreamer.)
Greenspan
had monstrous confidence in the wealth effect and how it would trickle down.
The data is now in; the papers have been written; and the nearly overwhelming
conclusion is that the wealth effect is, at best, inconsequential. What we
have is another instance of the Federal Reserve ignoring Winston Churchill’s
maxim:
“However
beautiful the strategy, you should occasionally look at the results.”
Yet,
the policy geniuses at the Fed appear certain that the wealth effect is going
to trickle down to Main Street any day now.
How Do You Mess Up the Easiest
Prediction in the
World?
A
few weeks ago we got the new dot plots showing where FOMC members expect
interest rates to be in the future. If you were to look at this predictive
path in isolation, you would make the rational assumption that interest rates
are going to rise by 2% or more in the next two years. The chart below shows
their expected rate increases four months ago: In June,
by a margin of two to one, FOMC members were expecting at least two rate
increases, if not more, this
year.
Has
the economy changed much since then? Not really, but somehow, afraid of their
own shadow, FOMC members are now projecting by a three to one margin that
there will be only one rate increase this year, of 25 basis points or less.
Here is the plot from the September
meeting:
This
constant rethink is not just a recent phenomenon. We have seen it ever since
the FOMC began to give us their forecasts for interest rate hikes. Less than
two years ago they were expecting rates to be around 3% today and to reach 4%
by the end of 2018!
Each subsequent quarterly plot is revised downward, but
the pattern always remains the same. Rates are going to “normalize” in a time
frame that is always just around the corner but never seems to arrive. The
chart below, from Business Insider, shows the paths of their rate
predictions, and the dotted line down at the bottom shows what has actually
happened.
This
reveals an interesting dichotomy. The Fed determines what interest rates will
be. So what they are doing is predicting what their own decisions will be.
And while Federal Reserve economists have basically gone “0-fer” with all
their predictions for the growth of the economy – a predictive task that is
orders of magnitude more difficult than predicting what they will decide on
interest rates – they have also gone 0 for 11 quarters with their predictions
for their own monetary policy!
While
I have been known to change my mind now and then, the FOMC members have been
thinking seriously about interest rates every quarter for as long as there
has been an FOMC. They know they have to make forecasts. They meet regularly,
and I am sure they have phone calls and private dinner meetings and conferences,
just like any other board of directors would. The easiest prediction in the
world should be to tell me what they are going to do with policy rates.
The
dot plot tells us what they think should happen, but between the time their
forecasts are made and the time they actually have to make a decision,
something always happens to keep them from pulling the trigger. I think that
something is Yellen and her inside crowd of ultra-doves in the leadership of
the Fed.
Dr.
Stanley Fischer, vice chairman of the Fed, when asked his views on negative
rates, said:
Well,
clearly there are different responses to negative rates. If you’re a saver, they’re very
difficult to deal with and to accept, although typically they go along with
quite decent equity prices. But we consider all that,
and we have to make trade-offs in economics all the time, and the idea is,
the lower the interest rate the better it is for investors.
Stanley
Fischer is the intellectual leader of today’s Federal Reserve. He is one of
the most respected members of the “policy community.” During the last crisis,
when he was head of the Bank of Israel, in pursuing his quantitative easing
he bought literally anything in Israel that was not nailed down. So when he
says that he must put the interests of investors in the stock market ahead of
the interests of savers and retirees because he thinks that is best for the
overall economy, you have to realize that this is the dogma being whispered
into the ears of every FOMC member.
And
while there is a growing drumbeat from banks and serious members of the
“policy community” in Europe and Japan that negative interest rates are
damaging the system, you are not hearing that from Stanley Fischer and Janet
Yellen and the other leaders of this Federal Reserve. Yves Mersch of the ECB
talked about the problems banks are having and said, “The longer [rates]
remain low, the more pronounced the side effects will be.” Deutsche Bank and
other major European bank economists are starting to sound semi-apocalyptic
as they bemoan the policies of the ECB. Here at Mauldin Economics, we are
doing some in-depth research based on a few small reports about how desperate
the European insurance community is. Understand that European insurance funds
are several multiples the size of their banking community.
Low
interest rates have traumatized US pension funds and basically made it
impossible for funds to meet their investment targets. And the consultants to
whom the funds pay large fees are still showing them models (based on gods
know what assumptions) that say it is okay to project 7% to 7.5% compound
returns for the future.
So
here we are, in a weak recovery that grows longer in the tooth with each
passing month. I have discussed the assorted potential crises that could set
off the next recession. You know the list: China, Japan, Italy, Germany (99%
of investors do not understand how vulnerable Germany is), our own elections
here in the US, or just a gradual slowdown as consumers lose the will or
ability to spend. Something will happen to set off another shock, and it will
probably happen in the next year or two. Then what?
This
brings us to perhaps the biggest danger of all: People are losing faith in
the Federal Reserve. Not without reason, either. Ben Hunt says the Fed is “losing
the narrative.” By that he means that most Americans are skeptical of the
Fed’s happy talk and no longer believe that Fed policies will result in the
economic growth projected.
Sadly,
that group of “most Americans” does not include Federal Reserve governors and
bank presidents. All evidence suggests they believe their policies are
working out swell. Unemployment is down, so Janet Yellen is happy. Stocks are
up, so Stanley Fischer is happy. They invited all their friends to Jackson
Hole to plan the next party, in which they will spin the bottle on negative
rates and try to get Congress to eliminate $100 bills. They think it will be
fun. Many in the economics profession want to party with them.
We
will have another financial crisis and/or recession, probably soon, and we
can’t trust the Fed to respond correctly. We’ll be lucky if whatever comes
out of their Frankenstein lab is only
ineffective. There’s a very real risk they will make the situation far worse.
The masses of unprotected people are in no mood to swallow more monetary
policy medicine, much less any additional remedies that globalist plutocrats
may try to shove down their throats.
In
an ideal world we might be glad to see the Fed stand aside and let markets
adjust themselves. The problem is that said adjustment will now be extremely
painful for a large part of the population. So the Fed may be damned if it
does and damned if it doesn’t.
I
have no idea how the election will turn out. It seems to me that Donald Trump
now needs a very good debate Sunday night. But win or lose, Trump is a huge
canary in the political coal mine, and the political and monetary-policy
elite should listen up.
Brexit was a warning, and Austria and Italy and
Germany – indeed all of Europe – are sending a similar warning. The
Unprotected are beginning to push back, and not just at the edges.
The center
is not holding. A new center is going to be created, one that the elites may
not appreciate.
The
Protected elites of both major US political parties may genuinely think they
are acting in the best interests of the country. But middle- and lower-class
Americans are learning that politics and economics as usual mean diminished
lifestyles and futures, not only for them but for their children.
The
best-laid schemes o' Mice an' Men
Gang aft agley…
Winter
is coming. You need to have a plan. Over the next few months I will be
talking about how I intend to get through the coming economic winter. If my
plan does not work for you, then you need to come up with your own. Hope is
not a strategy, my fellow Baby Boomers.
Dallas, Planning, and Writing
I
will be speaking at the MoneyShow
Dallas, which will take place October 19–21. I will be speaking three
times on Thursday, October 20. The first presentation will be a midmorning
panel with Steve Moore and Mark Skousen on how the presidential election will
affect your portfolio. The second one will take place shortly thereafter: I
will share my thoughts on how the Federal Reserve will react in the
macroeconomic environment that is unfolding. Then that afternoon I will make
my first presentation to the public on how I think portfolios should actually
be structured to meet the upcoming challenges, and I will be going into some
detail.
Click on the link above and register. You can see the rest of the
speakers and the agenda there, too. There are some very good speakers at this
conference (including friends Steve Forbes and Jeff Saut), and I am looking
forward to interacting with as many of them as I can. Attendance is free, and
I will actually have a booth in the exhibit hall where I will spend time
meeting and talking with attendees.
I am
speaking for my friends at the Commerce Street Bank at their annual Investment
Conference on Thursday, October 27, at the George W. Bush Library here in
Dallas.
Longtime
readers have probably noticed that there is not a lot of travel in my
upcoming schedule. That is on purpose. I feel like I have been planning the
Normandy Invasion. I have developed a rather straightforward new approach to
constructing a core portfolio for what I think is likely to be our economic
future. But the logistics of making that approach a reality I can share with
you – of attending to the regulatory complexities in a world where every i must be dotted and t must be crossed, and
helping a score of new players get to know each other and learn to work
together – is somewhat daunting. That said, I feel like I have rounded the
final turn and can see the finish line in front of me. We will be announcing
the new Mauldin Solutions Smart Core Portfolios in the not-too-distant
future.
Not
to mention that I am still working on my book about what the next 20 years
will look like. I have rough drafts of eight chapters (out of a planned 25 or
so); and as soon as we have finished the groundwork for Mauldin Solutions, I
will pivot the bulk of my writing time to finishing the book. I will be glad
to get both projects done. When that happens, I have promised Shane that we
can take off for a few weeks on a real vacation. We can go anywhere she wants
as long as there is wi-fi, a real gym, and a reasonable variety of foods to
eat. But I must admit that I am not booking hotel rooms yet.
Some
25 years ago (where does the time go?) I took daughter Tiffani to a Dallas
Mavericks basketball game (I have been a season ticket holder for some 34
years, although back then my tickets were up in nosebleed territory).
Afterwards we took the elevator to the top of “the Ball” (Reunion Tower),
which is still a Dallas skyline highlight.
She had a virgin daiquiri and saw
all of Dallas at night. It evidently made an impression on her, because
tonight she wants to relive that experience and take her almost 7-year-old
daughter, Lively, along to sit in the ball and watch Dallas go by as it
revolves, while I think about how fast 25 years goes by. And realize that in
25 years from now it might be a great granddaughter. (It’s hard to get your
head around that.)
You
have a great week. I am hoping to finish a number of projects that are all so
very close to being done, so that the real work can get started.
Your
reading too many legal agreements analyst,
John Mauldin |
Home
»
Depression
»
FOMC
»
Investment Strategies
»
Monetary Policy
»
The Fed
»
U.S. Economic And Political
» FEDERAL REPRESSION SYSTEM / JOHN MAULDIN´S WEEKLY NEWSLETTER
lunes, 24 de octubre de 2016
Suscribirse a:
Enviar comentarios (Atom)
0 comments:
Publicar un comentario