At the risk of sounding melodramatic, the noose is tightening around Wee Janet Yellen’s neck. The amount of Bric (epecially South American) debt now denominated in $US is astronomical. I watched an interview yesterday with the anchorman asking ‘if US rates rise by a quarter-point, is that really the end of the world?’ – marvelling as I did so at the financial illiteracy of the question. Worse still, the suit from some Wall Street firm or other (as you can tell, I was really paying attention) replied,
“Not in the greater scheme of things, no”. Unreal.
Keeping it simple, let’s say that as a poor risk, a Bric nation in trouble is currently paying 1.5% on fiscal debt servicing. Put that up to 1.75%, and the Bric suddenly needs to find 17% more repayment monies every month. It won’t be able to, will it? Gulp.
Nobody knows for sure what the chain reaction to that will be, because nobody can be certain what other varieties of excrement might be hurtling through the air at the time – from China, Ukraine, Japan, ClubMed, the Saudis….or a hundred other self-created trouble spots around the Globe.
But the somewhat left-field nature of Draghi’s speech last week (I liked it, but nobody else did) is a classic example of what I mean.
Let’s suppose, for example, that a large US mineco investment has been made in the mining potential of Venezuela; I mean, it has been known to happen. Or that a huge lump of dodgy lending in Venezuela is sitting as an asset in a major Spanish bank. Or of a large Portuguese bank in Brazil. Imagine a large Aussie miner – looking to diversify away from China – in the same position. Double-gulp.
But Ms Yellen isn’t going ‘gulp’: the general tone coming out of the US Fed at the minute is the warbling of a Rebel Yellen: the word is she’s out to normalise and, as one journalist put it yesterday, ‘defend the reputation of the Federal Reserve’. Most of the betting money at present is on a quarter point rise in December. I think this is no time for a pissing contest.
Yesterday, Fed notables unveiled those Dodd-Frank law amendments in full. If you really want to scare yourself to death, take a peak at how woefully lightweight they are….and in particular look closely at what will effectively disallow unlimited liquidity support during a future dry-up. That to me is a panic in the making, but then what do I know?
In the absence of anything substantive from Dodd-Frank, Janet Yellen’s job ought to be taking firm action in supporting legislators to ignore the banking lobby and make things really safe. But with a bought Congress doing what the Dimons and Blankfeins want, that isn’t in any script we’re likely to read this side of 2025.
What the Fed Chair is trying to do, in the absence of such real reform, is please all the people all the time – her colleagues, the markets, the Brics, and major US manufacturers. And so the ship will plough on through the waves….until the day it doesn’t. She is tinkering with a phial of nitroglycerine in the munitions hold.
If that too sounds a bit amdram, think on this: despite the lack of solid investments offering a return, junk bonds haven’t been in the current depth of doldrums since the near-miss of 2008. Risk-aversion is there for all to see. That suggests there is the very high likelihood that Brics struggling in the context of even a quarter point rise will accelerate the rush of investors to safe ports like the US…applying further pressure on rate reductions and an even stronger Buck.
Just under a week ago, Yellen declared that the “economic conditions are ripe [for us] to start raising rates”. I wonder what data she read in order to reach that conclusion, but mainly I worry that it might have been the last US jobs report….which doesn’t reflect anything much beyond wish fulfilment.
Little by little, the magnetic pendulum of reality is dragging the Fed towards the panic-pit. I’d be willing to bet that if she puts rates up this month – and I think she will – she’ll be a lady ripe for turning by March at the latest. But by then, it’ll be too late.
I, of course, would like universal rates to be abandoned in favour of ‘off Broadway’ lending to sound ideas with good collateral. But then that’s just me.