By the time she finally said something yesterday, Janet Yellen’s options were between a pointy rock and a very crinkly hard place. So as expected, she sat on the fence.
After all the flat hours of trading before she spoke, western markets zapped up then down then back to slightly below where they started. It’s fair to say, I think, that the net result was relief rather than belief. Both the Dow and the FTSE fell again. Rising above the spin, there isn’t much confidence out there.
Regular Sloggers will by now know my views on both QE tapering and rate rises: the world is never going to be ready for them, because the world is in a slump: take QE out of the GDP calculation, and that is very obviously the case. It’s in a slump because the key elements in the preferred neoliberal system – globalism, credit, high repurchase rates to retain growth, repression of mass consumer PDI and fractional reserve banking – are all dysfunctional concepts. And muttering away somewhere in the background is a sorcerer called Shadow Banking that could easily destroy the entire global financial construct.
Last July, I asked ‘…is this the end of QE withdrawal, and in fact a long overdue acceptance by the Fed that – without permanent QE – the world’s largest economy is a walking-undead Zombie? The one thing emanating from Yellen that suggested the latter might well be the case was her use of the phrase “continuing loose monetary policy for the foreseeable future”….’
That Slogpost was headlined, ‘Has Janet Yellen put her foot in it?’, and I think that, for some people, she definitely had. ‘The forseeable future’ is not, after all, two months is it? But in fact, within weeks Yellen was regrouping to explain her mis-speaking, saying the signs were looking good and tighter money was on the way. Because, um, if the economy is recovering Janet, well hey – you have to tighten, right?
She was wrong to let herself be pressured by the hawks – because they’re wrong about the economy, and now she’s been forced to backtrack. There’s a thing called Wall Street that wants QE back to keep stock confidence high; and there’s a thing called Congress and the business community that wants signals saying we don’t need QE, because there’s a recovery. Then there’s a thing to the South called South America for whom even this much tightening means death; and there’s a thing to the west called China which has lost confidence in both its economy, property and stock markets because its exports show no evidence at all that Western consumption is increasing thanks to a ‘recovery’.
A somewhat dishevelled and smelly cat is now out of a bag: there is no real recovery – it’s a confection created by bogus signs, dodgy data, and ignoring the devils in the detail. We can now say this with a high level of confidence because the stimulus hasn’t produced any of the responses one would expect.
For example, we’re told that jobs are coming back: that the unemployment rate has fallen to 5.1%. Inflation should by now be rising but it isn’t: inflation is a mere 0.2%, and in August consumer prices fell. When the economy is winding itself back up as the precursor to normality, prices do not fall.
It simply won’t do for neoliberal hacks to say the Fed was “fully justified” in keeping rates at zero yesterday. It kept rates at zero because their neoliberal theories and assertions aren’t adding up.
On Wednesday, Gregg Robb at Marketwatch similarly wrote, ‘…the world has turned a bit upside down. Stocks slumped around the world on signs China’s economy was worsening. The dollar rose sharply against emerging market currencies and commodity prices dropped. The big question is how these factors may impact on growth and inflation in the U.S. and how they are factored into monetary policy.’
This seems to me a quite extraordinary attempt to suggest that things have happened ‘in other places’ and now the US must react. China’s economy weakened and then other markets were knocked on by that because western consumption has slumped. Commodities are cheap because demand for the key ones like timber and copper have fallen….and oil is cheap because the US is trying to punish Russia.
Things aren’t happening like they should because first, much of QE and Zirp has been about protecting banks and generating false confidence; and as a consequence of that, the promised theory of both policies doesn’t turn into reality. We can see this now in euroland, where Draghi has blasted ahead with another QE Big Bang, despite its failure to achieve economic results anywhere after 17 attempts so far across the planet.
In this JP Morgan chart below, we can see odd things at work:
The Bank of England, the Fed Reserve and the ECB have all collected assets worth 20% of GDP. The ECB is about to up this to nearer 35%; and the Bank of Japan is at an insane 60% and rising. Not only do none of the GDP data being used take account of this widespread use of very expensive crutches, as this next chart shows, the results are pretty risible:
Spookily enough, both the UK and US are showing nominal growth in the seven years since 2008 at 20%….the exact amount of assets (ie, junk) purchased over that time. But during that same period, wage levels have been eroded in real terms by circa 9%….hence the lack of any of the recovery symptoms one would expect to see: people are worse off, and growth is little more than stimulation.
Without any stimulation to record, the eurozone is dead flat. And with massive QE since 2013, Japanese GDP has climbed…but is still 3% below where it was in 2008.
Bottom line: the only things hiding the serious slump around the world, and maintaining the high stock market levels, are selective data, crazily interpreted data, and loose money – cheap credit/Zirp + QE. Remove those things, and the edifice collapses.
The US is just about holding its own having tapered off QE…if it really has been tapered, upon which these data cast doubt. Britain is still at it, and in net terms getting nowhere. So far the eurozone has seen no effect from QE, and in Japan and China the decline has deepened.
Now Ms Yellen has run out of options: others would dispute this, but I fail to see how they can. If Yellen doesn’t raise rates by the end of the year, the US market sentiment will change from slightly reduced anxiety to the realisation that the mismatch between stock prices and economic performance is unbridgeable. I suspect, in fact, it might even turn to panic before the next fence-sit occurs.
What we’ve seen so far is a small market correction, one of several more pre-quake rumbles to come.
The Fed’s job, to a large extent, is the management of expectations. It has failed in that job. And now there’s no way to get smelly-cat back in the bag.