'When this Bubble bursts, there will be no new source of "money" sufficient to fuel the next round of reflation. It's sovereign debt and central bank Credit for the duration. In the meantime, loose monetary policy will continue to accommodate an unprecedented expansion of government borrowings. As EM is now recognizing, the market mechanism for disciplining profligate borrowers doesn't function until it's too late. While the global Bubble falters at the periphery (Brazilian real down 4.7% this week!), boom-time excesses run unabated at the core.''The bursting of the nineties "tech" and corporate debt Bubbles spurred the Greenspan Fed to cut rates to 1% by June 2003. At that time, double-digit mortgage Credit was already fueling self-reinforcing home price inflation. Short rates were then "baby stepped" upward until June 2004 and remained below 4% all the way into late-2005. The lesson not learned from that episode was that small, gradual telegraphed rate increases are ineffective in the face of an inflating Bubble. Such a policy course ensured a progressive loosening of financial conditions when tightening was clearly required from a risk management perspective.
Accommodating the nineties Bubble basically ensured the Greenspan Fed would later adopt even more aggressive post-Bubble accommodation. Indeed, the Fed specifically targeted mortgage finance as the source of reflationary Credit. This greatly compounded the fateful error from earlier in the Greenspan era: nurturing market-based Credit and financial speculation in response to banking system impairment following the collapse of late-eighties ("decade of greed") Bubbles.
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The nineties were on my mind throughout the week. An odd coincidence that Powell's Jackson Hole speech harkened back to Alan Greenspan and the nineties. In what is being called "the longest bull market in history," the duration of the current bull run this week surpassed the previous record, October 1990 through March 2000.
One person's record bull is another's greatest Bubble. GSE Credit and corporate debt were key sources of fuel for the nineties Bubble. And each bursting Bubble is to be reflated by a more formidable Bubble inflation. The post-nineties reflation was led by booming mortgage finance, much of it of the (money-like) "AAA" GSE and Wall Street structured finance ilk. The 2008 collapse of this much grander Bubble provoked unprecedented reflationary measures. This historic reflation went to the very foundation of global finance, sovereign debt and central bank Credit. It has corrupted the very heart of contemporary "money."
The problem with "money" is that it enjoys insatiable demand, creating the potential for extraordinarily dangerous Bubbles. "Whatever it takes" has deeply perverted market structure across the globe. Myriad risks have been inflated and totally distorted. Today's market view holds that central bankers will not tolerate a crisis. Perceived risk remains extraordinarily low, as illustrated by Friday's closing VIX price of 11.99. But true underlying risk is sky high and rising - market, economic, policy, political and geopolitical. Market structure and global imbalances, among others, are accidents in the making.
When this Bubble bursts, there will be no new source of "money" sufficient to fuel the next round of reflation. It's sovereign debt and central bank Credit for the duration. In the meantime, loose monetary policy will continue to accommodate an unprecedented expansion of government borrowings. As EM is now recognizing, the market mechanism for disciplining profligate borrowers doesn't function until it's too late. While the global Bubble falters at the periphery (Brazilian real down 4.7% this week!), boom-time excesses run unabated at the core.
Powell: "Whatever the cause, in the run-up to the past two recessions, destabilizing excesses appeared mainly in financial markets rather than in inflation. Thus, risk management suggests looking beyond inflation for signs of excesses."
A risk management approach would be working to extricate extreme central bank "activism" from the markets. Financial markets should stand on their own; the market mechanism needs to be operable. But rates, once again, remain too accommodative. Moreover, this is no time to be reminiscing about Alan Greenspan or trumpeting "whatever it takes." A missed opportunity Chairman Powell - and an important one at that.'
- Doug Noland,
Powell, Greenspan and Whatever it Takes, August 25, 2018
Context'Eurozone countries face massive amounts of debt coming due in the 2018–2020 period..''..China's historic mortgage finance and apartment Bubbles maintain powerful momentum..''..this extends to corporate bonds, equities and real estate prices. It is a global ‘everything bubble’.'So Bloody Predictable: Sydney Ground Zero in Interest-Only Mortgage Implosion. August 24, 2018