It can't get any worse than this. Jerome Powell is
a Wall Street-coddling Keynesian and Washington lifer who passes
for a Janet Yellen replica---that is, save for his tie and
trousers and his as yet underdeveloped capacity to whine
pedantically.
During his years on the Fed since
May 2012, Powell has voted approximately 44 times to drastically falsify
interest rates and to recklessly and fraudulently monetize trillions
of the public debt. That is, Powell has been all-in for a destructive
central banking regime that is literally asphyxiating capitalist prosperity in
America.
We will get to the latter in more
detail momentarily, but just consider the plight of bank
account savers during the 65 months "Jay" has served
on the Federal Reserve Board. They have been continuously
savaged by negative real interest rates averaging -1.8% per year.
That cumulates to a 9%
confiscation of
inflation-adjusted principal during that five and
one-half year period, but this purported Republican dissented not a
single time.
And now he is being appointed Fed
Chairman by a purported Republican President!
At
this point, therefore, it can be well and truly said that
Wall Street owns the nation's central bank and that the Republican
party has morphed into a gang of dutiful handmaidens. Any semblance
of fidelity to sound money and free market capitalism----of the type, for
instance, so brilliantly articulated by Treasury Secretary Bill Simon during
Ford's time and George Humphreys during the Eisenhower era---has been lost in
the fog of history.
Not only did Republican presidents
appoint the scourges of Greenspan and Bernanke, but the GOP standard
bearers thereafter have essentially embraced more of the same monetary central
planning. During the 2008 campaign, for example, Senator McCain's chief
economic advisory was Mark Zandi of Moody's----a Fed sycophant and
Keynesian "stimulus" devotee if there ever was one. And Mitt Romney's
top economic advisor in 2012 was professor R. Glenn Hubbard of Columbia,
who averred at the time that Bernanke was doing a swell job.
Yes, we know that the Donald came
to the Oval Office with a giant disability on the matter of sound money.
To wit, he claims to be a
billionaire and perhaps is. But if so, it wasn't owing to the genius and
business acumen domiciled in Trump Tower; it was solely and
completely due to the fact that the Donald's 40-year career as a leveraged
real estate developer was flattered beyond measure by the cheap debt and
serial bubbles that have been the essence of central bank policy since Volcker
was fired in 1987.
So we did take his campaign
attack on the Fed's "big, fat, ugly bubble" with several grains of
salt, and knew that his self-characterization as a "low interest
man" did not bode well for his approach to filling the raft of vacancies
at the Fed.
Still, the choice of Powell is a
shocker. This guy is so deep in the tank for the speculative classes and such a
mechanical Keynesian that there is really no hope at all that the era of Bubble
Finance will end-----that is, voluntarily and without a thundering financial
crash.
Indeed, Powell is so mired in Fed
group think with respect to the ridiculous fixation on 2.00%inflation and
the utterly discredited Phillips Curve and DSGE (dynamic stochastic general
equilibrium) models that you might well think he was Charlie McCarthy to
Janet Yellen's Edgar Bergen.
Thus, in almost identical words to
Yellen's blathering at her last presser, Powell has been mystified by an
alleged inflation shortfall and gums at will about too much slack in his
bathtub model of the US economy:
“Inflation is a little bit below
target, and it’s kind of a mystery,” he told CNBC in August. “You would have
expected, given that we’re getting tighter labor markets, that we’d have a
little higher inflation. I think that what that gives us is the ability to be
patient.”
The relationship between slack and
inflation has weakened substantially over the years," Powell said in June
2016. “In addition, inflation depends importantly on the inflation expectations
of workers and firms. A widely shared view among economists today is that,
unlike during the 1970s, expectations are no longer heavily influenced by
fluctuations in inflation, but are fairly constant, or anchored. For both these
reasons, inflation has become less responsive to cyclical changes in the
economy.”
“While inflation expectations seem
to me to remain reasonably well anchored, it is essential that they remain so,”
he said. “The only way to assure that anchoring is to achieve actual inflation
of 2 percent, and I am strongly committed to that objective.”
Folks, that's just the group think
voodoo economics that has metastasized in the Eccles Building for the last
several decades. Indeed, the latter now sits at ground zero in the Swamp,
and the Donald didn't even bother to look beyond its walls to fill a job that
in many ways is more crucial and powerful than his own.
As the Donald would tweet it,
SHAME!
Nevertheless, there can be no
doubt that Powell was the #1, #2, and 3# pick of the Vampire Squid after its
own nominee, Gary Cohn, stepped in some deep dodoo during the
Charlottesville contretemps. The tip-off is Powell's above reiteration of the
2% inflation goal.
The latter has absolutely nothing
to do with genuine economic growth and main street prosperity. It
is merely a ritual incantation used to justify the Fed's plenary intrusion
in the financial markets and relentless manipulation of the most important
prices in all of capitalism: That is, the price of money, debt, the shape of
the yield curve and the valuation of equities and other risk assets.
As we said on Fox Business last
night (video below), after 100 months of s0-called business expansion---the
third longest on record----the idea that the money market rate should still
be 1.13% is
preposterous because in real terms in still negative. It is a massive open
invitation to Wall Street speculators to buy any financial asset with a yield
or prospect of short-term appreciation and fund them with free overnight carry
administered, enforced and guaranteed by the central bank.
Indeed, Powell is so clueless on
this matter that he actually describes the Fed's fundamental policy tool as an
exercise in administering prices in the money and debt markets, thereby
implying that the 12 members of the FOMC know better than the millions of
traders, investors and arbitrageurs who inhabit the casino, and that through
the frail instrument of interest rate pegging can command the performance of a
$19 trillion economy.
Moreover, rather than arguing for
pegging as a one-time, extraordinary response to a putative 500-year flood type
of financial crisis, Powell argues that it constitutes a permanent regime of
control. That is, capitalism is allegedly so fragile, unstable and disaster
prone that it requires permanent guard rails and balancing wheels supplied by
the FOMC in it purported infinite wisdom:
Powell seems to be in agreement
stating in June of this year that "To affect financial conditions, the
Federal Reserve has therefore used administered rates, including the interest
rate paid on excess reserves (IOER) and, more recently, the offering rate of
the overnight reverse repurchase agreement (ON RRP) facility. This approach,
sometimes referred to as a "floor system," is simple to operate and
has provided good control over the federal funds rate. In November 2016, when
the Committee discussed using a floor system as part of its longer-run
framework, I was among those who saw such an approach as "likely to be
relatively simple and efficient to administer, relatively straightforward to
communicate, and effective in enabling interest rate control across a wide
range of circumstances."
The above hogwash is stunning
proof that Greenspan-Bernanke-Yellen-Powell style monetary central
planning is a clear and present danger to capitalist prosperity. It
amounts to a clueless confession of willful incompetence, and evidence that
Powell and the rest of the FOMC----are so mesmerized by
Keynesian academic models that they can't see the real world starring them
in the face.
What's right in front of their collective
noses, of course, is a domestic and global financial system
that is everywhere booby-trapped with massive and incendiary
financial bubbles, unsustainable leverage in both overt and covert forms (i.e.
options), and relentless, liquidity-fueled speculation that infects the
very warp and woof of most financial markets.
Even the core blue-chip
10-year UST market is a speculators' haven where on the margin pricing is
driven by complex, leveraged arbitrages, not the bid of trust
department managers in behalf of widows and orphans.
Indeed, the evidence of an
impending financial blow-up is palpable and plenary.
There is no other way to
describe European junk bond yields at 2% and therefore below the
U.S. Treasury; or the Russell 2000 trading at 95X earnings in
an economic backdrop where most activity measures---from auto sales
ex-hurricane replacement, to housing, restaurant sales, manufacturing
production, business investment, exports, construction spending---are clearly
rolling over.
Likewise, there is the
insanity in the momo precincts of the stock market where the likes of Amazon
and Netflix trade at
280X and 200X net income,
respectively; or where the giant fake auto company, Tesla, trades at an
infinite PE multiple after 10 years of cumulative losses totaling $4.5 billion and which, at a market
cap of $50 billion,
is valued the same as Ford and nearly equal to GM. Between them, the
latter sold 10 million cars last year ----125 times more than Tesla---and
booked $7.5 billion of profits or well more than the latter's
total loss-making sales.
You only need read the
latest Fed minutes---which Powell fully subscribed to---in order to
realize that the Fed's scribe hit the "delete" key when the
discussion turned to financial bubbles. Then again, perhaps the myopic
lenses of their Keynesian beer goggles filtered out entirely the above
evidence of today's raging mania in risk asset markets, thereby
ensuring that our monetary central planners will be taken by
"surprise" for the third time this century.
The screaming disconnect implicit
in Fed policy is evident when you compare Powell's
group-think complacency with the FOMC's fastidious
pre-occupation with its preferred short-term inflation measures. That is,
both the CPI and the PCE deflator have been in the 1.4% to 2.2% corridor for several months now,
but the FOMC remains pre-occupied with "low readings".
Yet there is not a shred of
evidence that 50 basis points of difference in a generic market
basket of prices (which no one actually buys) makes any difference whatsoever
to economic function in the main street economy. Well, except
for pensioners, savers and most workers, whose purchasing power will fall
further behind the closer the Fed gets to its magic 2.00% inflation
reading.
We choose to express the Fed's
inflation goal to the second decimal point to highlight the lunacy of the
entire inflation targeting regime. In fact, there is a breath-taking
mismatch between the Fed's inability to see a $200-300 billion
bubble of bottled air at Amazon, which enables it to ignore profits and
investment returns in order to pursue a scorched earth policy of predation and
destruction across the American retail landscape, and the fact that Fed heads
like Powell spend countless hours down on their hands and
knees with magnifying glass parsing utterly trivial differences in the PCE
deflator readings.
Some members stressed the
importance of underscoring the Committee's commitment to its
(2%) inflation objective. These members emphasized that, in considering
the timing of further adjustments in the federal funds rate, they would be
evaluating incoming information to assess the likelihood that recent low
readings on inflation were transitory and that inflation was again on a
trajectory consistent with achieving the Committee's 2 percent objective over
the medium term.
In short, this is a case of
missing the forest for the trees like no other, and exposes the screaming
contradiction at the heart of our rotten regime of monetary central
planning.
Today's Keynesian central
bankers-----and Powell is surely one straight from central casting--- are
always aiming to enhance, uplift and stimulate the main street economy but to
do so they must detour through the canyons of Wall Street because that's
where their instruments of control reside.
As we indicated above, the
Fed seeks to transmit its
stimulus policies through the money markets by pegging overnight
funding rates including Fed funds and through the fixed income
and other securities markets, where its open markets desk drives the
level and shape of the fixed income yield curve through bond purchases with
fiat credits.
In this context, it is important
to note that Janet Yellen, Jerome Powell and their ilk are
playing a totally different game than their Keynesian grandfathers such
as professors James Tobin, Walter Heller and Paul Samuelson. The
latter were primarily fiscalists, which
meant that if they wanted more housing production, for example, they
would turn to builder subsidies or tax credits.
Likewise, if they felt the main
street economy would have more zip with higher consumer spending,
they would peddle tax rebates or increased entitlement benefits. And
the same approach prevailed if more business investment was deemed to be
helpful---as in Walter Heller's (Kennedy's chief economist) invention of
the investment tax credit in 1962.
In a word, these grandfatherly
Keynesians could do considerable long-run damage to capitalist prosperity and
growth by causing resources to be channeled to sectors of the economy and
purposes that deviated from market outcomes, and would thereby inevitably
result in inefficiency, malinvestments and waste.
But the saving grace was
transparency, targetability and limited collateral effects. Back in the 1970s,
for example, the homebuilders and S&L industry were always looking to help
the national economic good by offering first time buyer credits for new
homes or rent subsidies to induce apartment construction. But you could measure
the budget expense, debate the social cost/benefit equation and be reasonably
sure that the subventions involved did not go into speculative schemes on Wall
Street.
Yet here
is exactly where Alan Greenspan and his successors and assigns---of whom Powell
is the latest---- committed the economic sin of the century.
Greenspan was actually an anti-Keynesian in the old fashioned fiscalist sense
and was a frequent comrade-in-arms with your editor in the budget battles of
the early 1980s. Indeed, he helped us defeat every single Keynesian fiscal stimulus scheme that was floated
on the Washington Swamp waters during the 1982-83 recession.
But
apparently no good deed goes unpunished---especially when like Alan
Greenspan you are always being too clever by half. That is, when he got to the
Fed and soon had his hands all over the control dials on its printing presses,
he had the epiphany that fiscal Keynesianism could be defeated permanently
by seconding the job to the Fed.
Thus, if you wanted more housing
starts, twist the interest rate dial to cheaper mortgages; or if you want more
business investment, ginger the corporate stock and bond markets; or if you
want more consumer spending, drive mortgage rates lower and housing prices
higher so that households could supplement their earned incomes with MEW
(mortgage equity withdrawal).
But as we said, this was way too
clever by half. That's because Greenspan's backdoor
Keynesianism unleashed the PhDs, bankers and policy apparatchiks that get
appointed to the Fed to descend into the canyons of Wall Street en masse
and continuously. So doing, it gave them license to fiddle and falsify all the
financial asset prices that percolated through what had otherwise been the
price discovery process of the free market.
From our vantage point 30-years
later it is evident that this was a colossal mistake---the equivalent of inviting
the Huns into Rome. And now, Jerome Powell is apparently the latest monetary
Attila.
The fact is, the financial markets
are the very heart of capitalism and constitute the delicate mainspring
from which all else flows. Money, debt and other forms of capital most be
priced efficiently, accurately and by the unfettered operation
of the auction process for balancing supply and demand. That's the
only way you get allocative efficiency, financial discipline and rewards for
true economic innovation, invention and entrepreneurial creativity all at the
same time.
Accordingly,
policy-making agents of the state should never, ever be allowed into the free
market of finance. In fact, a policy regime that is
explicitly posited on altering and falsifying financial asset prices
is the mortal enemy of vibrant capitalism and true gains in living standards
and wealth.
As we approach the third bubble
crash of this century, the reason should be finally evident.
Namely, financial repression massively incentivizes speculation,
leveraged arbitrage, rent-seeking churning in the secondary markets and the
diversion of real capital from the corporate sector and main street economy
into financial engineering schemes which fuel even more speculation on Wall
Street.
Thus, notwithstanding a tripling
of business debt outstanding since the turn of the century, real net investment
in productive business investment is 35% lower than it was in the year 2000.
Instead, the price falsification
policies of the Fed have turned Wall Street into a gambling casino and the
C-suites of Corporate America into financial engineering outfits. Accordingly,
upwards of $15
trillion has
been cycled back into Wall Street during the last decade in the form of
stock buybacks, unearned dividends, M&A deals and LBOs and recaps that
fueled stock market inflation, not real investment, growth and jobs.
There is a saying that if your
only tool is a hammer everything looks like a nail. So with still another
clueless Keynesian taking the helm at the Fed---and in complete
denial about the monumental bubbles and financial stability risks all
around---- it can also be well and truly said that if your only
policy tool is to falsify financial assets prices you will repeatedly end up
inflating bubbles until they eventually crash---and never see them coming, to
boot.
So if the state must give
capitalism the "help" it doesn't need----then at least bring back our
Keynesian grandfathers to the fiscal arena. With $31 trillion of public debt already
built in through 2027, they will get nowhere as the GOP tax-cutters are about
to prove.
At least the fiscalists did
not practice "trickle-up" economics by inflating bubbles
that pleasure the 1%, but do nothing for the main street economy.
That's the real irony. Modern
central banking has not brought they ballyhooed Great Moderation, but a
perverse cycle of periodic bubble collapses, which, in turn,
induce corporate C-suites to attempt to protect their stock prices and
options by throwing workers, assets and business infrastructure overboard
in a desperate effort to appease the trading machines and gamblers on
Wall Street.
So forget the Fed's inflation
targeting and its bathtub economics gibberish. Yellen, Powell
and the rest of the Eccles Building posse are hopelessly Bubble Blind
because inflating bubbles is the essence of what they do.
Then
again, it is likely that Powell will be the last of the bubble blowers. Like
Yellen he is so blind to the incendiary devices implanted throughout the
financial system that he will likely continue her campaign to reload the Fed's
dry powder in order to combat the next recession somewhere down the road.
To that end, Powell has indicated
he will pursue monetary policy normalization and balance sheet shrinkage until
the Fed's footings are rolled back to the $2.5 trillion neighborhood.
That means a year from now the Fed
will be selling bonds at a $600
billion annual
rate per its announced schedule and that will come atop a new borrowing
requirement at the Treasury in the $1
trillion + annualized range. And since the law of supply
and demand has not been repealed----that bond selling tsunami will surely
cause a traumatic rise of bond yields across the entire spectrum.
In a word,
"Janet Yellen Powell" has drawn the short straw. On his watch, the
whole misbegotten enterprise of 30 years will blow sky high.
To that extent, the Great
Disrupter once again today lived up to his historic mandate. But not in what
the boys and girls and robo-machines on Wall Street would perceive as a
"good way".
To the contrary, they will
learn the hard way about the end of Bubble Finance in the very near
future.
http://davidstockmanscontracorner.com/janet-yellen-powell-puts-on-some-pants-and-a-tie/