Rabobank: We All Know That If Stocks Slump, The Fed Will Boost QE To Push Them Back Up
By Michael Every of Rabobank
The Fed’s bi-annual Financial Stability Report is making headlines: “Prices of risky assets keep rising, making them more susceptible to perilous crashes if the economy takes a turn for the worse.” It also notes asset prices remain vulnerable to significant declines should investor risk sentiment deteriorate, or if progress on containing the virus disappoints. Presumably the latter is why the White House insists businesses proceed with its vaccine mandate despite a court ruling the process be halted: Think of the stocks, man, think of the stocks!
Except, of course, we all know that if stocks slump, the Fed will increase QE again to push them back up, because stocks are what it cares about. FOMC members themselves play the markets and would lose out personally if they let asset-prices crash. Moreover, how did asset prices get to such risky levels? Did a financialized, asset-based economy ‘just happen’? I recall Alan Greenspan warning about “excessive exuberance” once upon a time too.
Even if the Fed isn’t venal, it is political. Powell may or may not get reappointed as Chair, but today he is attending a conference presenting “research about diversity and inclusion in economics, finance, and central banking.” Is that a backdrop against which the Fed could pivot towards cracking down on financial excesses, when such hairshirt policy could be decried as running counter to demands for higher public spending and social justice? In short, it looks another reason for the Fed to stay loosey-goosey, even if this asset-based approach is actually driving massive economic inequality across all of society. Indeed, the Report notes:
“Leverage continued to be high by historical standards at life insurance companies, and hedge fund leverage remained somewhat above its historical average.” – and who regulates financial leverage?
“Structural vulnerabilities persist in some types of MMFs and other cash-management vehicles as well as in bond and bank loan mutual funds.” – and who regulates MMFs and mutual funds?
“There are also funding-risk vulnerabilities in the growing stablecoin sector.” – and, yes, it’s the SEC who seem to have acted a little on crypto….because the Fed has sat there while a $3 trillion ‘print- your-own-money’ fest has happened right under its nose. Bitcoin is now at another record high of$67,000. And IOU Chicken, man, IOU Chicken.
Only in one area do we see a fire the Fed didn’t start or watch burn, as they note: “stresses in the real estate sector in China caused in part by China’s ongoing regulatory focus on leveraged institutions, as well as a sharp tightening of global financial conditions, especially in highly indebted emerging market economies (EMEs), could pose some risks to the US financial system. If realized, the effects of near-term risks could be amplified through the financial vulnerabilities identified in this report.”
Yet can argue China’s US-style housing-bubble driven economy is the underlying problem, not its attempt to finally deal with it in a way the US would never dream of. (Prompting further ‘green’, i.e., no debt red-lines crossed, Chinese developers’ bonds to suddenly collapse in normal trading.) The Fed is thus warning other people not to firefight for it!
The Report also noted that while corporate balance sheets are sound, “the expiration of government support programs and uncertainty over the course of the pandemic may still pose significant risks to households.” Time to get back to those low-wage jobs then, rather than hold out for better pay, or to pass the $1.75 trillion Build Back Better bill? We can guess which Janet Yellen, who often speaks as if she were running both Treasury and Fed, would prefer.
The Report also warns that “difficult-to-predict” volatility like the meme-‘stonks’ frenzy could become more frequent as “social media influences trading”: that, not ludicrous liquidity, “I see no ships” regulatory oversight, and a socio-economic paradigm which does not reward work, just asset speculation. The Fed don’t appear to mention the “difficult-to-predict” volatility in bond markets after their “We are going to take away the punchbowl – ooh, look, here’s a big bottle of Absinthe, drink up!” approach to monetary policy.
In short, it’s a worrying Fed headline. But burn after reading, because the arsonists are doing the firefighting. If you don’t believe that, ask yourself what the Fed is now going to do about any of the points it has listed. Even optimists should watch the final scene from the Cohen brothers’ Burn After Reading for guidance.
And ask the markets. US stock futures were happily in the green at time of writing, and “CALM” was the Bloomberg daybreak headline, which sums it up nicely. I am not sure how many dollars, crypto, or stonks the yacht pictured on a placid sea in the accompanying Bloomberg graphics is worth, but I am sure the majority of the Bloomberg readership, and the Fed, are far better acquainted with these kinds of social niceties than I am.
Meanwhile, the arsonists are also firefighting in geopolitical terms too. On top of a long and growing global list of potentially dangerous flashpoints, Belarus is now creating a refugee border crisis with Poland, Lithuania, and Latvia, playing with fire there, like someone else is in the Balkans. Poland is already doubling the size of its army: the EU are just doubling the size of their rhetoric. Von der Leyen warns sanctions could be placed on Belarus and “third-country airlines,” but this was already threatened in mid-October by Borrell and hasn’t happened – and where was the appropriate EU response to the Belarus plane incident back in May? Hypothetically, what happens if this is soon all linked to critical Russian gas or Belarussian potash exports to the EU? Nice way to divide it even more, if so.