Exhaustion beats panic. Phew! It’s quiet out there for the moment.
Also, if you happen to be in a pickle as bad as the Fed’s, it is miraculous to have this unusual crowd of Presidential candidates occupying each other and the media.
Markets have paused in never-never land. The S&P500 has decoupled from the economy, its ugly January not confirmed by U.S. economic data. It traded Friday at 1915. If it rises above 1940, then there’s a good chance that January was an aberration and stocks will rise from there.
On the other hand, fall below 1860, then 1830 … a lot of air below. The 10-year Treasury and mortgages have held the bottoms of their free-fall, 10s at 1.75 percent, mortgages a hair under 3.75 percent.
The U.S. stock market drop had clear origin: sympathy with global stocks in fears of global economic slowdown and reduced earnings. The drop in bond yields is the source of argument in and out of the Fed. Pulled down by frantic easing at foreign central banks? Or because investors disbelieve the Fed’s intentions to tighten, mistakenly, the Fed still coming? Or is the global drop in long-term yields a warning to the Fed that its forecasts for economic growth and inflation are mistaken (again)? Or warning that the China-led contraction in world trade will lead to widespread debt default?
A lot of people think the central banks are the cause of all of this upset, and if they would just step aside, then markets would fix themselves, rates rising in a healthy way. The contrary view: Central banks have been holding open economic breathing room against contractionary pressure. If they stopped assistance, economies would be exposed at crush-depth, rates falling far lower. The cardinal sign: Yields on most secure sovereign debt falling while other yields rise. We see that now, spreads widening.
Just as the Fed’s predicament has worsened, its competence more in doubt than any time since the 1970s, Congress will be occupied by a competition to pack the Supreme Court. Chair Yellen’s command inside and out of the Fed is in doubt.
The Chair’s top job: to articulate a reasonable concept of the economy, and defend it, necessarily always the smartest person in the room. Arguing in public with Volcker or Greenspan or Bernanke was futile and embarrassing. Last week Yellen was asked in Congressional testimony about the prospect for negative interest rates. She was not prepared.
This week Bernanke and prior vice-Chair Donald Kohn posted at Brookings an unprecedented emeritus defense of a sitting Chair unable to defend herself.
The minutes of the Fed’s January meeting centered on this gem: “Members generally agreed that the implications of the available information were not sufficiently clear to allow members to assess the balance of risks to the economic outlook.”
Great. We have no idea what we’re doing, and just had to say so. The staff portion of the minutes is always most important. After two party-line upward-and-onward paragraphs supporting growth and inflation, the follow-on paragraph says the risks to every single component of the forecast are tilted to the downside (page 13).
Speeches by regional-Fed presidents cloud the scene. Neel Kashkari, newly appointed at the Minneapolis Fed gave his rookie address. A gratuitous, over-long, and self-serving demand to break up big banks. Kashkari is only 43. He began at Goldman (didn’t everyone?); flipped to Treasury as manager of hated TARP, unable to explain its genuine benefits; escaped to PIMCO as a money-manager; and then ran for governor of California, crushed 60 percent to 40 percent. The Fed’s game is confidence. Grant high position and a microphone to a serial-failure vagabond like this, and you’ll demolish confidence.
The Fed’s job and risks have never been greater. All good wishes to Yellen. To restore confidence she and colleagues must articulate better understanding of the impact of the outside world on the US and vice-versa, and more compelling forecasts.
Begin by acknowledging data like this: In January China’s exports fell for the seventh-straight month, but its imports fell more than twice as fast, by 19 percent. A lot of debt accustomed to China imports is beached above a receding water line, while China’s exports still crowd the others in shrinking external import markets.
Ten-year T-note in the last five years. Break below current levels and we’ll try the all-time low.
Ten-year T-note in the last 90 days, the drop in yield far more significant than the stock market. A straight-line drop like this should “retrace” one-third. That is has not done so (yet) says there is something powerful going on.
The Fed-sensitive two-year T-note in the last two years. The people and institutions buying these notes are neither foolish nor blind. For the Fed to ignore them is both.
The ECRI has a long and fine record, only one false-call for recession — in 2011, which might have been correct if it were not for QE3. Its index is sliding, but has been close to current level many times without a recession following.
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.
