Infidi maris insidis virisque dolumque
ut vitare velint, neve ullo tempore credant
subdola cum ridet placidi pellacia ponti.
(Never trust her at any time, when the calm sea shows her false alluring smile.)
– Lucretius, “De Rerum Natura”
Dear Diary,
We hardly know where to begin. There are so many people to laugh at… and so little time.
We can’t laugh at them all. So, we’ll have to take our best laugh. And that must be a laugh at Janet Yellen.
There are many reasons to laugh at poor Ms. Yellen. But time is limited, and so we will take our best shot there, too.
Since we are fair-minded, affable and sensitive, we are quick to point out that we mean no disrespect to the new Fed chief. In fact, we are sympathetic. We feel her pain.
“Lots of Nutty Things”
Yes – at a time when most women her age are enjoying a well-earned retirement, baking cookies and preparing for a visit from the grandchildren, Yellen carries the weight of the entire world economy on her soft shoulders.
But what is so funny about Yellen is that she has no idea what kind of burden she carries. She recognizes there “may be pockets of increased risk taking,” as a result of her expansionary monetary policies. But those risks can be managed, she believes, by alert and responsible economists.
It has not occurred to her that the entire financial world is now gaming her: trading, betting, speculating on how far she’ll make it before the whole thing explodes.
Nor does she appreciate how all the data she studies – as she keeps a wide eye on those pockets of risk taking – has been so distorted by her interventions that their information content is useless… or worse than useless.
Andy Haldane, chief economist for the Bank of England, ought to have a word with her. He recognizes that central banks have been “aiding and abetting risk-taking.” And that “lots of nutty things are still happening.”
Among the nutty things is that people are lending to the government of Kenya for an annual interest rate of 6.875%. Spain and Italy, meanwhile, sell 10-year bonds bearing a yield of less than 3%.
Corporate debt is also hitting record highs with record amounts committed to share buybacks.
Just today we learned that Bed, Bath & Beyond Inc. (NASDAQ:BBBY) has committed roughly two years of profits to buying its own shares. Buybacks are part of the reason the Dow Industrials broke through the 17,000 barrier last week.
At these prices, dividend yields are so low it will take 50 years for an investor to get his money back. And if he lives in Baltimore or California… after taxes… it will be 100 years!
Too Much Credit
We have been chronicling these nutty things here in the Diary for months. They come from an excess of liquidity which, like spare cash in a teenager’s pocket, quickly seems to find an inappropriate use.
The main source of this excess liquidity is… you guessed it… the Yellen Fed. It has been providing too much credit, too cheaply for many years. Here’s former Reagan budget advisor David Stockman with more details:
During the seven years ending on the eve of the financial crisis, in Q3 2008, total credit market debt soared from $28 trillion to $53 trillion – a sizzling 9.2% annual rate.
By contrast, nominal GDP over the same time expanded at a 4.8% annual rate or at half the rate of credit growth. Accordingly, during this short seven-year interval, the nation’s aggregate leverage ratio expanded to 3.5 times from 2.7 times GDP.
In short, the booming “demand” of the Greenspan-Bernanke housing bubble was being borrowed from the future, not financed out of current production.
But when the credit bubble popped in 2008, and demand faltered, what did the Fed do?
It provided even more credit on even easier terms.
The credit binge created a period we have, ironically, learned to call the Great Moderation. The rising tide of liquidity hid the sharp rocks and floated even the least-seaworthy barks.
Now, we have another Great Moderation, funded in the same way.
According to former World Bank economist and author Richard Duncan, excess liquidity reached a record $308 billion in the second quarter of this year.
And again, the tide has washed over the wrecks from the last period of excess credit… and every tub that can hold water is riding high.
Yellen, bless her heart, looks at the St. Louis Fed’s Stress Index. She sees the lowest reading ever. She looks at junk-bond yields; investors clearly aren’t worried about getting repaid.
She is completely misled. About the markets. About the economy. About life in the universe.
Lucretius, writing about a hundred years before the birth of Christ, knew better. In “De Rerum Natura” he described a world very different from the calm, orderly and controllable world of Yellen and the FOMC.
It is a world of atoms, he said, constantly colliding with each other. It is like mating – full of huffing, puffing, sweating… a chaos of conjunction… producing surprises… and new life.
Yellen is in for some surprises.
Regards,
Bill
Further Reading: Bonner & Partners senior analyst Braden Copeland believes that investors are far too complacent about stocks. That’s why he’s put together a special report called “Open in Case of Emergency.” Braden not only details exactly what to do right now to make sure you don’t lose your shirt in the next downturn, he also names six “bulletproof” stocks to buy when everyone else is panicking. You can find Braden’s full report here.
