"I learned long ago,
never to wrestle with a pig. You get dirty, and besides, the pig likes
it."
—George Bernard Shaw (Irish,
1856-1950)
Word for the day
Matutinal (adj)
Relating to or occurring in
the morning; early.
(Source: Dictionary.com)
Malice towards none
Lord Venkateswara, Sidhi Vinayak, Sai Baba - all Gods seems to have decided
to step in to help PM Modi; with gold to begin with.
First random thought this morning
The demolition of allegedly illegal shanties on railway land in
Delhi and the events in the aftermath are significant in many ways. It
highlights the complete lack of political consensus on the approach to
urbanization and civic compliance, though in private all politicians would
agree to the need for this.
Terming it lack of administrative empathy would be inappropriate.
The malaise is much deeper. The rising economic disparities have pervaded deep
into social psyche. The conditions are ideal for a Marxist revolution. But
where is India's left?
It ain't a done deal yet
Continuing from Friday (see
here), I feel that the economic reasons for a Fed rate hike may not be as
indubitable as the non-economic ones. I believe that a material proportion of
market participants are harboring similar sentiments; and that explains the
market behavior in the past few weeks.
The markets are cautious but by no means panicked. Bond markets
are not discounting anything similar to Fed's forecast trajectory of rate hike.
Adjusted for China and Oil, commodities markets, gold and USD - nothing appears
to be under panic from Fed hike.
As suggested earlier also, I will not be surprised if US Fed
indeed decides not to hike on 16th December to have a peaceful Christmas
vacation, (see
here).
I find the following piece in Zero Hedge explaining this context
very well. Since, I cannot improve upon this, I am reproducing excerpts verbatim.
"Two weeks ago, we predicted that if the same September storm
clouds return, and if December, which is increasingly looking as shaky as
August as a result of a return of China devaluation fears, soaring dollar
concerns and - the cherry on top - the collapse in junk bonds, forcing the Fed
to have some literally last minute concerns about a rate hike, then the
Fed's official mouthpiece, Jon Hilsenrath will be very busy as he scarmbles to
realign market expectations of a rate hike "because the economy is oh
so strong", with the reality that a rate hike may just unleash
the next Lehman event of the past 8 years.
It looks like Hilsenrath indeed had a very busy weekend with his
Fed "sources", as he attempts to readjust the market consensus for a
December rate hike lower, warning that the Fed's "big worry is they'll end up right back
at zero."
For some inexplicable reason, he also adds that "Federal
Reserve officials are likely to raise their benchmark short-term interest rate
from near zero Wednesday, expecting to slowly ratchet it higher to above 3% in
three years. But that's if all goes as planned." Well, just how many
things can take place in the next 72 hours that derail the Fed's
"planning?" And just what kind of lift-off is this, if the Fed's
decision is quite literally dependent on daily market, pardon economic,
fluctuations?
It was not immediately clear what the answer to these questions
is. What Hilsenrath did answer, however, is why and how the Fed will proceed to
cut rates right back to zero. Here is Hilsy:
Any number of factors could force the Fed to reverse course and
cut rates all over again: a shock to the U.S. economy from abroad,
persistently low inflation, some new financial bubble bursting and slamming the
economy, or lost momentum in a business cycle which, at 78 months, is already
longer than 29 of the 33 expansions the U.S. economy has experienced since 1854.
Sounds an awful lot like setting the stage for an imminent, and
confidence destroying, rate cut unleashed by, drumroll, the Fed's own rate
hike. In fact, so likely is that the Fed's rate hike will be the catalyst for
the Fed's next easing cycle, that practically nobody has any doubt:
Among 65 economists surveyed by The Wall Street Journal this
month, not all of whom responded, more than half said it was somewhat or very
likely the Fed's benchmark federal-funds rate would be back near zero within
the next five years. Ten said the Fed might even push rates into negative
territory, as the European Central Bank and others in Europe have done--meaning
financial institutions have to pay to park their money with the central banks.
Traders in futures markets see lower interest rates in coming
years than the Fed projects in part because they attach some probability to a
return to zero. In December 2016, for example, the Fed projects a 1.375%
fed-funds rate. Futures markets put it at 0.76%.
Among the worries of private economists is that no other
central bank in the advanced world that has raised rates since the 2007-09
crisis has been able to sustain them at a higher level. That includes central
banks in the eurozone, Sweden, Israel, Canada, South Korea and Australia.
"They effectively have had to undo what they have
done," said Susan Sterne, president of Economic Analysis Associates, an
advisory firm specializing in tracking consumer behavior.
Here is the bigger problem: what the Fed has done
- which is very little for the actual economy - is to push the S&P
from 666 to 2100. It is the undoing of that most market participants are
terrified about, and what will be to most, very unpleasant.
The pre-emptive excuses continue:
The Fed has never started raising rates so late in a
business cycle. It has held the fed-funds rate near zero for seven
years and hasn't raised it in nearly a decade. Its decision to keep rates so
low for so long was likely a factor that helped the economy grow enough to
bring the jobless rate down to 5% last month from a recent peak of 10% in 2009.
At the same time, waiting so long might mean the Fed is starting to lift rates
at a point when the expansion itself is nearer to an end.
Ms. Sterne said the U.S. expansion is now at an advanced stage
and consumers have satisfied pent-up demand for cars and other durable goods.
She's worried it doesn't have engines for sustained growth. "I call it
late-cycle," she said.
Actually, there is one time when the Fed waited this long to
tighten conditions, in fact waited too long: the economy was already in
recession. That was back in 1936. What happened next was the second part
of the Great Depression and a 50% collapse in the Dow Jones.
Hilsenrath's odd litany of preemptive excuses continues.
Several factors have conspired to keep rates low. Inflation has
run below the Fed's 2% target for more than three years. In normal times the
Fed would push rates up as an expansion strengthens to slow growth and tame
upward pressures on consumer prices. With no signs of inflation,
officials haven't felt a need to follow that old game plan. Moreover,
officials believe the economy, in the wake of a debilitating financial crisis
and restrained by an aging population and slowing worker-productivity growth,
can't bear rates as high as before. Its equilibrium rate--a hypothetical rate
at which unemployment and inflation can be kept low and stable--has sunk below
old norms, the thinking goes.
That means rates will remain relatively low even if all goes as
planned. If a shock hits the economy and sends it back into recession,
the Fed won't have much room to cut rates to cushion the blow.
This goes to the question of what r* is, or the Equilibrium Real
Interest rate, one which as we
showed last week, is almost entirely a function of nominal US economic
growth rate (very low) and consolidated debt/GDP (at 350%, it's very high).
Under current conditions, it is either negative or just barely in the positive,
suggesting any Fed rate hike will be followed by an immediate rate cut,
something Hilsenrath just acknowledged.
The excuses continue:
Among the risks to the economy are financial booms that could
turn to busts. One is in commercial real estate. Another in junk bonds is
already fizzling. Each of the past three expansions was accompanied by an asset
price bust--residential real estate in 2007, tech stocks in 2001 and commercial
real estate in the early 1990s.
Normally in a recession the Fed cuts rates to stimulate
spending and investment. Between September 2007 and December 2008 it cut rates
5.25 percentage points. Between January 2001 and June 2003 the cut was 5.5
percentage points, while from July 1990 to September 1992 it was 5 percentage
points.
If the Fed wants to reduce rates in response to the next
shock, it will be back at zero very quickly and will have to turn to other
measures to boost growth.
Yup: such as QE4 and NIRP, which are inevitable, but which the Fed
wants to "hike" rates first just so it has the alibi to unleash even
more easing. And now even Hilsenrath is warning that this is the endgame:
Fed officials worry a great deal about the risk. The small gap
between zero and where officials see rates going "might increase the
frequency of episodes in which policy makers would not be able to reduce the federal-funds
rate enough to promote a strong economic recovery...in the aftermath of
negative shocks," they concluded at their October policy meeting,
according to minutes of the meeting.
In short, the age of unconventional monetary policy begun by
the 2007-09 financial crisis might not be ending.
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