Alright! Some free time off work! Whew… time to let some stuff off my chest! I was gonna write a week ago… but you know what they say: the hardest part is getting started. Aint that the truth!
Well I feel vindicated… all my previous babbling of a possible doom that I dare not predict the timing of… but still…
First of all… more currently… what? What’s all this talk about current market situations reflecting a “classic bank run”—long term assets’ inability to meet short-term liquidity needs? If only it were that easy! What about the actual quality in these long term assets? If they were actually sound investments it would be easy to restore confidence… but the fact of the matter is that nobody knows where these assets are anymore, or who the guarantors are, and what they should be priced at. All this talk about the markets gaining confidence again due to renewed liquidity injections... by the Fed, by Bank of America… ho ho ho… with all that bad debt underwritten in the past few years, do markets really think that everything can be solved by banks making a little bit of market here, and asset managers writing down just a couple billion there? The potential amount of bad money created by bad debt multiplied by bad leverage over the past couple of years is laughable! (laughable because there’s not much else to do) And for those still holding on to a glimmer of hope that not 100% of the securitized/packaged/voodooed debt will default and thus sound assets will prop up the desire and liquidity to own these things once they are cheap enough… hold fast hope, cuz it doesn’t really take a genius to figure out that some residual quality will still be worth something—but it is the sheer sell down resulting from not knowing where that residual quality is that will give us, hopefully, a great secular bear market where bitter people like me can pick up assets for cheap. Woohoo! (I really should hide my enthusiasm on wanting the markets to tank… badly tank… tanking to the historical bear markets of 15-20% earnings yield businesses… and stay there for three years to give enough time to load up the value truck HA HA HA!)
And with that, I’d like to rant some more about current developments and outlooks of the financial markets of our times
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The Contagion
You hear people talking about a financial contagion… what is it? Two contagions actually: greed and fear! That’s what it is… and its roots are in the emotions, pure and simple. Money really is just a reflection of thoughts and processes that’s, after all, only in our heads. So this contagion is more like a parasite that’s been stuck in the butt of mankind for eons—an extension of a gamut of complicated biological responses to adverse stimulation, the most basic reactions to pleasure and pain. And the two reflexively work off of one another to create a complicated web of cause and effect events that the many see as isolated and linear when they are anything but.
I think it’s funny when talking heads on CNBC start speaking about the contagion like it just crept up on us, as if it were a silent killer or a disease—none thinks about the possibility that these sort of things are unavoidable, that there is a world after the contagion has done what it is supposed to do, and that the losses suffered by the greater many will also create opportunities for a braver few. In a way, the masses will sway as they’ve always swayed—with the crowd and thus the reason for the term masses.
The great greed/fear contagion of the late 1990s to early 2000s taught us a lesson that we’re quick to forget. Of course, the greed contagions of today came in the form of cheap money and cheap loans for businesses/consumers alike wanting to make wealth out of thin air (inelastic goods speculation—say—land/houses, assets, derivatives on assets, transactional profit from writing derivatives on assets). And the fear contagion will come from not knowing the unknown… and what’s the unknown? You guessed it… complicated structured products on structured products on structured products that nobody knows how to price without a mega computer calculating a billion probability trees (and even then, it’s just a computer model… can you really trust a—computer ROBOT? *shifty eyes*) I want to show you pictures, but alas, I choose words as my medium like a true babbler! Any investment newsletter writer can bore you with charts of consumer savings (or lack thereof), house prices, subprime originations, CDO originations, aggregate money supply, inflation, risk/return spreads, implied volatility, asset wealth to income ratio (and what happens when asset wealth dissipates in a down market)… but I challenge YOU! Reader, to seek these things out yourself! The truth—or the absence of such in this random world of ours—will set you free but you must seek on your own! That, and... I’m too lazy/time constrained to copy and paste all that info. But if I was retired with a billion dollars maybe. HAHA.
And its funny to think that markets will quite possibly see two consecutive downturns in just a single decade when modern finance theory, structured products and derivatives is supposed to have made the markets permanently safer and risk premiums and earnings yield on equity investments permanently lower is… well… ironic. And what a dropkick in the face for those who think human nature and markets on an aggregate level can be tamed! Managed maybe, but tamed? Baloney! Financial contagions after a prolonged period of excess good times are very much a part of nature as—get ready for some obnoxious metaphors—(1) forest fires when too many trees are preserved in the wildlife regions of Midwestern U.S. (2) earthquakes when a period of long calm create unseen but pent up friction and pressure in the geology (3) wars after long periods of peace where populations grow to the point where resources (where productivity of use does not increase) are fought over between groups (4) any smarty-pants critical state ubiquity theory applicable. New financial innovations only give a sense of abolishing the inevitable, the inevitable of eternal recurrence (any Nietzsche fans out there?)…regression to the norm, and a whole lot of curve hugging volatility in between.
Where is the Excess Liquidity?
So back to the part where claims were being made… saying, modern financial theory and financial innovations are making markets permanently safer and liquidity readily available where necessary. In monetarist-speak, that just means: too much money is chasing too few assets, and excess leverage and velocity in the money system has been tinkering with otherwise rational risk perception! I’ve always liked them monetarists.
Economics 101 will tell you that money is created mostly from the lending system. Where banks have a certain amount of reserve from deposits, and can lend out money with that so long as there’s no “run”, and the lent out money in turn becomes deposits and reserves at another financial institution which lends out a portion of that money and the process continues.
Finance 103 will tell you that now a days, that the process of money creation can be expedited through creating avenues where banks can lend where none existed. Derivatives, asset backed securitization, receivables financing, to name a few—all to serve the purpose of driving the cost of debt lower by guaranteeing the lender that there is “something” that backs up the value of the loan just in case of borrower default. Today these things are so complicated (but if you have an hour or two on your hands you can still figure them out pretty easily…) that it’s beyond the purpose of this ramble to go into them in too much detail. All you need to know is they are based on probability theory. Every single last one of these quant valuation metrics… all probability and no pragmatism!
The lower the interest rate goes and the more financial innovations out there, the “looser” the money supply. So excess liquidity isn’t rocket science… it’s just extra money! (with or without extra value to back it up) Ever wish to yourself: man I wish I could have all the money I ever need? Well, excess liquidity is what happens when just that happens! Just on an aggregate level s’all.
But leverage works both ways. Money creation also leads to money destruction when no value is behind the paper. We learn that very early on… Finance/Econ 101! Excess liquidity can turn into excess contraction in the blink of an eye, and it can all start with writing-off of certain assets, and margin calls from brokers ect, and perfectly good assets can get sold, and perfectly bad assets will have no market and no pricing—and BAM! You get a nice big drop (which I’m still waiting patiently for but cannot help but get giddy trying to hurry it on)
Just call excess liquidity what you will… stupid money! That’s what it really is. And you know it when there’s a plethora of jobs in the finance field! The Chinese have a funny people’s anecdote. It talks about work habits in
Ponzi Finance
The term “ponzi finance” was coined by a famed 20-th century economist Hyman Minsky. You might have heard of talking-heads mention the words “Minsky moment” every once in a while—and poor Hyman Minsky died without ever knowing that his works would be famous… anyway. The ponzi finance he’s talking about is the excesses that financial worlds tend to turn into whenever a prolonged period of stability and prosperity takes shape. In a conservative period, we’d start out with “hedge finance”, which means debt is borrowed only when interest and principal obligations can be repaid in every period. Then we get a little crazy and start “speculative finance”, where debt must constantly be rolled over and refinanced and income only pays at best the interest portion of debt. Lenders usually are reluctant, but since the firm generates such a “stable and predictable stream of cash flows”, I guess they really don’t care so long as someone else could refinance this firm later in the future. “Ponzi finance” is the kraziest, with a K… and that’s when income flows of a firm or in aggregate will not cover even interest cost, and a firm must constantly be creative in order to convince lenders to keep throwing money. In modern times, Ponzi finance can be thought of as many things… and mainly cuz lenders these days don’t really give a hoot about borrower income not being able to cover interest, since they can just readily sell it to someone else through securitization and necromancy… and let me tell ya, ponzi finance is only possible when there is an excess supply of ready liquidity to chase returns.
When you think about it, the financial community really doesn’t create value—finance measures risk and return, allocates value accordingly, but doesn’t actually do the work needed to create the value, that’s the job of entrepreneurs, executive managers, politicians (NOT! I just put that there to see if you’re still paying attention. HAHA) So when there is an excess supply of “financing” available and quite a few entrepreneurs and sound companies, they’re all going to chase it like no tomorrow, and its supply/demand really—quite elementary no?
Back to Ponzi financing… so every once in a while, you will have pseudo-entrepreneurs come out during these times, and promise a certain rate of return that sounds just spectacular and makes you giddy—let’s say, subprime mortgage originators and private equity extra-extra-premium LBOs. The underlying business/asset? Pure crap. But do investors pay attention in a time of ponzi finance, that though the asset itself is worth nothing, the interest payments it seems to promise, and the potential that the investor themselves can package these loans up and sell them to someone else before anybody knows anything is wrong, now grasshopper, that is what we call a MORAL HAZARD—musical chairs, hot hands should stay in elementary schools, and that’s when society should have outgrown these ideas that you can crowd out someone else before you yourself gets hurt!
The subprime and dubious LBOs are underwritten to the public, and the bankers knew exactly what was being sold/invented/brewed-in-the-witches-pot, but they don’t care—they have the transaction fees in hand… a nice stream of income on the backs of other people’s ignorance. Arguably, an ignorance created by buying off the rating agencies (not blatantly, of course, but where do you think ratings agencies get their “revenue growth”?)
But can you really blame financiers for this… or the pseudo-entrepreneurs? In a world where money is awash, what do you do to make money unless you get creative? During excess liquidity periods—I just want to sleep all day long and complain about how nothing is cheap… cuz that’s how I roll. And people would say to me “Ming, you’re old school, think about all the productivity gains and the future”, and I reply “What… I don’t get it”. I do get it! I just don’t even wanna explain myself to someone stricken by the greed contagion, cuz there is no explaining it without getting severely rebuked by rhetorical acrobatics that only sound smart when loud and angry (and I’m a lover, not a fighter!)
Stat-arb Fund Blowups
The only hedge funds that makes headlines these days are the ones that have blown up (except Citadel, who makes headlines by buying up something that blew up), and the strategies that were employed by these funds are none other than, you know it! Statistical arbitrage funds! Whose quantitative valuation models (which all it is, is factors based on financial models, correlation, beta, momentum, ect. and a truck load of probability trees) feeds orders into a computerized trading model.
I don’t claim enough brilliance to already know what these models are (and frankly I don’t really care to know since they sure proved their worth! HAHA!), but ever since the beginning of my short and humble career as a money-shuffler I’ve been suspicious of these quantitative trading models—or just trading based on beta, correlation, and treating tickers not as underlying businesses, but as stochastic movements that somehow can quantified in math. Of course, there is a WHOLE LOT of merit to this method of making money, and I’m sure those that understand it fully could lead very fulfilling P&L books in their careers, however, there’s gotta be safer ways to make money. HAHA! It’s sort of ironic if you think about it. The more “hedged” and “neutral” you are, the less safe in a panic! And you can bet it’s the panics that make or break money managers! As can be seen in the fall of LTCM. Contrast that to the success of the likes of Warren Buffet to keep their principal even in times of turmoil. Well, it’s really not that hard—keep cash! And/or keep companies with at least >12% stable cash yield! And no leverage voodoo!
Cuz the fact of the matter is, it doesn’t matter if you make 10% gains every year for the past 10 years on 10x leverage, if you lose 61.5% on the 11th year, you will lose ALL your gains… but investors and prime brokers probably won’t wait around until that happens, anything that gets close to 20% will get you a margin call or a redemption, which forces you to sell good quality assets at bargain prices to meet withdraws—and set off a chain reaction of losses and margin calls, and that’s what happened to some of these funds, and if you lose more than 61.5%? Tough! LTCM style… but to be fair, LTCM was levered some 100x? That’s just insane… So we have all these LTCM copycats who aren’t as hardcore as LTCM, but nevertheless suffer because of indiscretion and assuming markets are efficient/rational all the time.
To put it on a more extreme example suppose you make 10% every year for ONE HUNDRED YEARS (as in, your best and brightest son from your third mistress took over the business after you died), Oh man, you’re a genius, you’ve multiplied the equity portion of investors’ money by a factor of 13780.6x, anyone that invested just 72.57 bux in your fund would have become a millionaire after 100 years (or their children… this is before inflation which makes returns actually worse). And suppose they had their families stay with your son for money management, but suppose your son got a little carried away, and instead of having leverage 5x, with 1/3 in cash as a buffer, he carried leverage to 25x, and invested all the cash reserves in market neutral strategies? And when a market sell-off came to be, none of the brilliantly structured derivatives would trade, so he’s forced to sell off high quality assets for cheap to meet margin calls. And when that wasn’t enough because you’re levered TWENTY-FIVE TIMES, The entire equity portion of the fund gets wiped out on asset write-downs when finally a market is made on the brilliantly structured derivatives, except they only now sell for 18 cents on the dollar! The billions you’ve created over your career was destroyed instantly by your third mistresses’ son. Aint that a drag! HAHA! (but I guess you don’t care since you were dead by the time this happened! HAHA)—
Of course, people don’t have an extreme time-horizon like the one mentioned above, most people just want to make money as quickly as possible, and run for the hills (who doesn’t?) And that can be seen with returns chasing in many instances over the past five years or so even after the LTCM debacle, people still look at markets as if it were alchemy, with a way to make money any time all the time, when in fact it takes much more (or less, depends on how you look at it) than probability models to correctly price something. And in five short years for many of these funds, look what happened?
Some people will tell you that these irrational events occur 1/1000000th of the time, but that’s where the hubris of science gets it wrong. Statistic lies, and often, because of the dangerous assumption that probability models reflect real life. When’s the last time anyone actually questioned the normal/log-normal curves? The only curves I care about in life are my beautiful girlfriend’s! HAHA! In all seriousness now… it actually seems that ten standard deviation events actually occur with a three standard deviation frequency. Ever read “The Masque of the Red Death” by Poe? It’s kinda like that! You can’t ever prevent that one guy that nobody paid attention to, and disaster strikes at your party more often than you can imagine!
Something Bearish This Way Comes
I give up, I can’t hide my giddiness… I don’t know why I get so worked up thinking about a huge crash—and you might ask “Ming… people are going to lose their jobs, their families are going to lose jobs, and you might not see stock market gains for ages! How is this in any way good for you?” To that, I say… I dunno! Haha, I can’t explain it. It’s not schadenfreude, if you think it is. I get very miserable reading articles about people losing their homes, and anecdotes on families shoved with mortgage papers in fine print that they could not understand but trusted their mortgage brokers to take care of them (you’d sooner trust a drug dealer!), and its heartbreaking to have to hear about people losing their jobs, and prospects of a worse time to come makes people scared, and how helplessness might be the best way to describe the state of mind in many people. And maybe it’s the little bit of sympathy left in me… or pity, whatever it is, but pity sure never helps anybody! People are hurt, but the reason why they are hurt in the first place was because of all the things I’ve been blabbing about! Speculative excess! And perhaps, one could unclog the pipes of hindsight, and ask just what it is that brought about people’s ability to purchase their homes in the first place, and what industry hath god wrought—mortgage brokers and real estate agents out to make a quick underwriting buck. I wouldn’t say the homeowners deserved it, or that all this unemployment now serves the mortgage industry right… ok ok who am I kidding… that’s exactly what I’m saying! Homeowners heard and trusted what they wanted to believe in, being able to afford a home on measly income and somehow the rest will take care of itself. Mortgagers wanted to believe that homeowners could repay the bill eventually, and that they were doing a service by giving people a home to live in (and if you could do that and write the loan to someone else, and forget that you were cheating both your clients and investors with the help of your bankers… then blessed are those who can forget).
The drawbacks of such thinking? Well, where do I start? It goes back to the problem of money creation, asset inflation, and a speculative spiral driven upwards. If you could write mortgages, sell these mortgages, use the proceeds to buy land/build houses, and write more mortgages to sell, and all the meanwhile (1) house prices go up and homeowners are eager speculators themselves (2) financial institutions love you because you give them bundled assets to sell (3) ratings agencies love financial institutions because they give them bundled products to rate (4) investment managers love these products because its free alpha, and eats these and pretty much everything else they can use leverage on (5) banks love investment managers for outperforming and give them more leverage for cheap, they also notice the general rise in the wider financial markets and starts providing financing for cheap to anyone that comes to them with a model to make money (6) everyone feels an asset inflation bliss, and assume eternally low volatility and default rates in pricing models.
Of course, that was yesterday… and it wouldn’t be strange then to walk down the street and see people happy, and all the wall street people bustling trying to make deals happen, especially since WACC is so low (because default premiums are gone, and the more debt you have, the lower your cost of acquisition, and the bigger/badder deals you can get), and business school students applying for jobs in real estate, private equity, and M&A banking, thinking “damn look at these fat bonuses”. Now people are starting to worry about the prospects of such futures. And the last panic of July 2007 sure was a really big rock tossed in the middle of lake placid, with a big splash—traders and fund managers everywhere shell shocked at just how close we all got to a complete financial meltdown. But now that the ripples have faded a bit, with the fed injecting that much needed liquidity, and confidence being restored in markets as some M&A deals continue to get announced… people might come out of their hiding holes… but they’ll probably be quick to go back in sirs! Cuz the show isn’t over yet!
Optimism remains, as it always has and always will be, and thoughts of utopia will never escape the human mind so long as it benefits rational self-interest—hope, my dear friends, that the fed will lower rates and bail out the indiscretion of financial markets… and we can blame others for such mistakes—after all, it’s not us that wrote the mortgages, it’s not us that caused the excess liquidity… or is it? The lines get blurry from here—after all, the Fed bailed out financial markets pretty hard the last time stock markets came crashing down, that gave an environment of easy money which could be argued to have caused the bubbles of today. And the rampant currency problems that we are already beginning to experience, (too many US dollars! And the foreigners are beginning to see!) and the fact that if it weren’t for the Chinese disinflation, we’d see some serious price increases in every day things. But that’s a story for another time!
Anyway, this optimism should prove short lived, and if history is any guide (and it usually is, except in the case of risk in quantitative models… HAHA) And although macroeconomic forecasting is a fool’s game, one can see the doubts and the moods manifest themselves… and whenever mood manifests themselves, there’s usually a great show. Just like how you wouldn’t see a movie that has no mood… you wouldn’t want financial market participants to be solid and sure all the time either (cuz then prices don’t vary, and people don’t panic sell!) I used to say “what’s inevitable is not always imminent”, but now, it sure is starting to get just a little bit more imminent every day—which is cool! Since everything seems to be falling into place… and what the bulls called “normal” we bears called “excess”, so now… we sure hope that the great normalization will kick in soon enough! And we just might start to see things cheap again.
The Boy Who Cried “Ease”! Inflation and Currency
But all this talk about this possible ease by the fed to bail the financial markets out is making everyone giddy with greedy eyes again. “Renewed liquidity will save us”, “Bernanke is watching the markets closely and will help us all in the end”, and my favorite “if I was the Fed, I’d sure lower them in light of what’s happening” (thank heavens you’re not! HAHA) The possibility of an ease is there, of course… any time a financial system is on the brink of collapse, the central bank must do its job and provide enough liquidity and money to at least support pricing/market making. But before we all get giddy and say “everything’s fine! Bernanke and the rest of the gang will be sure to fix this mess and we’ll be back on our feet again”, let’s take a closer look at what’s implied in loose monetary policy and bailouts of speculative excess from here on.
It’s hard being a central banker. No, it really is. Many people in the finance field don’t give these guys enough credit… and many talk with conviction and foresight as if they could do the jobs themselves… “oh look at this chart, oh look at this statistic, it only makes sense if the Fed does this”, and many would put good money on directional bets of where they think fed will take interest rates in the next meeting (my heart aches just thinking about it… I’m like Mr. Crabs from Spongebob Squarepants, why do you have to throw away a perfectly innocent little dollar?) And it’s always been my conviction that sometimes—actually, most of the time, the more you know about something, the more you think you know about it—and the more you think you know, the more you actually don’t know. All the data lying in front of you, and piece them together in some form or fashion and you can usually get something that makes sense in an abstract world but not at all in the real world. But I digress… the point is, Fed-watching is a whole lot like bird-watching… one should do it for vicarious intellectual fun, not for hairy chested, ego-on-the-line, table pounding. After all, you can’t influence how the birds will fly, and you can’t influence the way the Fed will act. But most people don’t prescribe to that philosophy, and being a central banker is tough because of just that—a whole lot of pressure from the outside people that think they know what they are talking about. It takes Bernanke a whole lot to sit there in a committee hearing, and get questions like “why do you want the value of the American people’s homes to go down?” while being shown a chart of the drastic drop in home prices (if you know what I’m talking about, then you must be an avid watcher of C-SPAN! Get a life! No… I’m just kidding, kudos to you for actually seeking the epistemology behind market noise!). Let the birds fly, I say! They know what they should do better than you!
At this point, a whole lot of people are reaching the consensus that the Fed will ease in the next meeting, and they are clamoring for it as if it is a necessity rather than a grace. Future markets, after all, are already pricing that possibility fully in the S&P futures markets. Most are foaming at the mouth at every “hurt growth”, “losses exceed the most pessimistic of forecasts”, “financial stress beyond mortgage market”, and of course “will act as needed to stem impact of market turmoil” as signs of an impending decision to lower rates. After all, if the Fed isn’t going to rescue the markets, who will? Like a knight in shining armor fighting back the dragon of bankruptcy; wielding the shield of monetary policy to block out the fires of financial meltdown… bad metaphor? You betcha! HAHA. But alas, I choose a bad metaphor for a reason, for an unrealistic literal outlook deserves nothing more! As if the Fed could stop impending disaster single-handedly! And once the crisis is over everyone can enjoy excess liquidity and stable yields again—with princesses, kings, and investment bankers and all… happily ever after? How nice… but of course, there’s always phrases like “Fed responsibility is not to protect investors” that people like to ignore… if the knight in shining armor does not fight the dragon, who will?
It wouldn’t be a stretch to say that the Fed has accommodated the markets quite a bit over the past decade or so… and has literally been the white knight that bailed out many instances of speculation gone wrong. With buying LTCM, and the tremendous easing after the tech bubble burst and September 11, all to create the liquidity necessary to prop up markets. For all those who don’t know… liquidity in this case means nationalizing bankrupt financiers, and dropping interest rates so low that people can’t help but borrow their hearts out to invest in asset markets (houses being the vehicle of choice). This has in turn rescued us from what could have potentially been an even worse bursting of the stock market bubble six-seven years back… and bulls cheered the quick recovery as sheet genius on part of Alan Greenspan, and bears jeered the bail out and mega-easing as a sign of an impending politicization of the central bank—and precedents that would bring about the doom of capitalism. Whatever one wants to believe, the reality of the situation is that the central bank is indeed political in nature, and to think that the bank can act independent of the representations of the American people is pish-posh! It just so happened that at the time, the majority of the American people actually participated in the asset markets as investors, so the central bank really could not sit back and watch the show while people were losing their retirement and life savings. Not to mention… in 1998, LTCM was a couple hundred billion dollars in the financial system, and that wasn’t exactly small change—and for that money to suddenly disappear overnight because of margin calls would have caused such a de-leverage effect that the we would have surely seen something worse.
So it’s a matter of how badly things get this time around (and from the looks of it, it could get pretty darn bad), and we bears can clamor all we want: “just let it be Bernanke!”, “the speculators deserve their pain!” The reality of the situation is that a melt-down is really no good for a well-functioning society—especially when people’s hard earned homes are involved—and the fact that it wouldn’t only be the speculators and the loud-mouthed bulls that would suffer from an impending financial doom (since leverage is everywhere!), we think twice about wasting time and wishing for impending doom… The media is already full of stories of poor American 40-50 somethings that have just bought their house, but now cannot meet interest payments because of blah blah blah, it would be unpatriotic now to not do something about a possible crash. “The Fed would only be doing their job if they bailed the markets out again—its only right because
So all this bearish talk about “artificial money” and “excessively low interest rates” being morally wrong and anti-capitalistic—don’t be surprised if it comes back again!
Oh, and keep in mind that a measely 25 bps or 50 bps ease will not change anything—if the Fed eases, it will have to be a consecutive ease like the one Greenspan undertook in the first few years of the millennium to bring sexy back to the markets!
Short-term monetary policy is nothing that one can predict. And I wanna make it clear that there is no way to call what the Fed will do in their next meeting September. But one thing is clear, whether they ease or raise, in the long-run, any decision would have its long-lasting effects in inflation and the integrity of the American dollar. While an ease might give financial markets crying “gimme a hit!” the much needed narcotic in a time of withdraw symptoms, and might even bring back a nice renewed rally—it’ll come at the expense of those that do not participate in capital investments. That’s another reason why being the Fed is hard… do you throw the bunny at the hyenas, or do you throw the bunny at the wolves? Either way, the bunny is dead… but you have to pick how it dies. So put on the gloves: currency or economy? Inflation or unemployment?
Yes… and all that money that’s being spent over there in the wars on terrorism, and all the currency account deficits that we’ve been running—that’s gonna come back to us one of these days. When China stops exporting disinflation as their currency strengthens and as European consumption and their own consumption strengthens, and when these foreigners no longer trust investments in America, we will see a flood of U.S. dollar selling, and we will have inflation-o-rama! That’s my story and I’m stickin’ to it! And if the Fed starts a series of interest rate eases, then they should know that would only exacerbate the consequences of the inevitable: dollar selling, import inflation, excess money supply. But does that mean they will choose to protect the integrity of the dollar and prevent inflation at the expense of short-term agony? Hard to say! Again, do you heed to the hyenas, or do you heed to the wolves?
And like a boy that cried “ease!”, one day the wolves (metaphorically, inflation) will actually come out—and by that time, the central bankers would not come and save the boy (the days of Paul Volcker returns), and the wolves will have their day, with a boy that has been grotesquely fattened by the rice-bowl of planned capitalism and artificial disinflation for way too long! Look at him run, with all that jiggly fat! That looks almost as bad as me when I run! HAHA!
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