'..Central bankers should incorporate a broad mosaic of indicators of financial conditions. These would include money and Credit growth, securities market risk premiums, debt issuance and asset market trends, along with indications of speculative leveraging, destabilizing flows, risk embracement, aggressive risk intermediation and other excesses.'<blockquote>'To be sure, global central bankers have brought new meaning to the phrase “behind the curve.” Expectations have the ECB taking a gradualist approach to winding down bond purchases. Who knows if rates will ever be returned to a semblance of a reasonable level. Here at home, despite a 3.0% GDP print and a 4.4% unemployment rate, the market sees the Fed likely done raising rates for 2017 (36% odds of rate hike before year-end). And there’s still no end in sight for the Bank of Japan’s incredible securities purchase program.
The stronger the global economy the more fixated central banks are on CPI. They define “price stability” as a steady 2% rise in an aggregate of consumer prices – even though it’s obvious that relatively stable CPI is not reflective of financial stability or overall pricing dynamics throughout the financial markets and economy. Somehow it’s gotten to the point where central bankers are determined to prolong a radical experiment in monetary inflation, with slightly below target CPI as justification.
The focus should instead be on the stability of prices more generally, certainly including securities and asset prices. It seems rather inarguable. Central bankers should incorporate a broad mosaic of indicators of financial conditions. These would include money and Credit growth, securities market risk premiums, debt issuance and asset market trends, along with indications of speculative leveraging, destabilizing flows, risk embracement, aggressive risk intermediation and other excesses.
..
Things turn crazy late in Bubble episodes – especially, as we’re witnessing, in the “Granddaddy of All Bubbles.”
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..It’s interesting to ponder how the world might change when investors turn sour on corporate Credit and fixed-income more generally. It may not these days be the most conspicuous of Bubbles – but it’s surely among the biggest and with the most far-reaching consequences.'
- Doug Noland,
Strong Data and Conspicuous Bubble Excess, September 2, 2017</blockquote>
'..Policy makers ultimately papered over the problem by changing accounting rule FAS 157 in March 2009, and have since filled the hole in the banking system by depriving savers of interest, while encouraging even greater expansion of leveraged loans and low-grade covenant-lite debt..'<blockquote>'The problem in the period since 2009 was two-fold: First, the yield-seeking speculation encouraged by the Federal Reserve during the mortgage bubble led us to correctly anticipate the 2007-2009 collapse, but not the policy errors that ultimately brought the U.S. economy to the brink of another Depression. Policy makers ultimately papered over the problem by changing accounting rule
FAS 157 in March 2009, and have since filled the hole in the banking system by depriving savers of interest, while encouraging even greater expansion of leveraged loans and low-grade covenant-lite debt. In hindsight, I made the error of insisting that our methods be robust to Depression-era data (though those efforts may prove valuable in future crises). In the interim, solving that “two data sets” problem led us to miss a recovery that neither our pre-2009 methods nor our current methods would have missed.'
- John P. Hussman, Ph.D.,
Valuations, Sufficient Statistics, and Breathtaking Risks, September 4, 2017</blockquote>
Context<blockquote>
'..remember also that the global financial crisis was the result, not the origin, of the Fed's activism..'</blockquote>