Society General’s Albert Edwards was at the Bank Credit Analyst annual conference in New York last week.
Also in attendance were Larry Summers, Paul Volcker, and potentially the next Fed Chair, ex Fed-Governor Kevin Warsh.
Edwards’ email comments on Warsh and Summers ring a bell with me.
I was the first speaker and afterward I enjoyed listening to every other speaker at the two-day event. Most notable of the outside economics speakers were Paul Volker, Larry Summers, and most significantly for me, ex Fed-Governor Kevin Warsh. Much to my own regret, I had never familiarised myself with the views of Governor Warsh, who was at the Fed from 2006-11, and played a key role in navigating the Fed through the crisis. He got a rousing reception from the BCA audience as he talked a lot of sense – in particular on how the Yellen Fed has lost its way and current policy is deeply flawed. He explained that the Fed has been “captured” by a groupthink of academics led by the ‘Secular Stagnation’ ideas of his friend, Larry Summers. Rather than admitting they are wrong, this group, who failed to predict the current economic malaise, have constructed this theory to explain why ever more stimulus is required. In particular, Warsh warned that the Fed had become the slave of the S&P.
Summers’ relaxed view on the debt build-up, particularly visible in the corporate sector, is in sharp contrast with our own view that this looks set to wreck the US economy.
The problem with Summers’ analysis in my view is that it is the higher debt that is being used to push up asset values (via share buybacks), just as it did during the housing bubble in 2005-7. And by pushing asset values well beyond fundamentals you build debt structures on false asset values, which only become apparent when the asset bubble bursts. And am I in any way reassured that the Fed sees no bubbles? No, I am not. These dudes will never identify an asset bubble – at least before the event!
Median Leverage Ratios
Here we are once again, only this time higher.
Mike “Mish” Shedlock
Warsh= Potential game changer? Or new prisoner?
I don’t recall seeing him at Ron Paul events, to put it that way…….
Was probly attracted by the brilliance of Larry Summers…
I can’t see any Fed chairman having the guts to normalize rates. Normalizing rates means pain to the economy in the short term. Pain to the economy in the short term means people don’t get reelected. The can kicking will continue.
…and the can keeps on getting bigger, and kicking it harder and harder.
But eventually reality will catch up and it will be very, very painful indeed. The truth is the Central Banks, the FED and ECB in particular, have created one unholy mess and it is very difficult to see an easy way to unravel it all.
All unraveling it really entails, is recognizing an 80% drop across the board in the valuation of all “assets”, along with ensuing bankruptcies, is in fact an undofferentiated good thing. Stocks, bonds, houses what have you…. As ownership and control of these “assets” get ever more concentrated, the chances of that happening increases.
The indoctrination apparatus will fight it tooth and nail, ever more desperate to convince their captive drones that “the system collapsing” is some sort of a bad thing. Rather than just a different word for less harassment and a cheaper place to live. But eventually, the sheer nonsense of it all, will become too obvious to deny, even for the ostrich generations raised to serve as livestock for the “ownership society” beneficiaries.
I agree. Probably nothing changes until things collapse and a change is forced. That is one of the weaknesses of democracy. The #1 thing politicians are judged upon is the performance of the economy during the time of their reelection. Politicians are very short term focused, it is all about getting reelected. So they will not make decisions that are good for the economy and country in the long term, but might be painful in short term. They will make decisions on what gets them reelected in the short term period. Very tragic indeed that is has to work like this.
Whoever “uncaptures” the Fed will be granted an undeserved, special place in history alongside Stephen Paddock. Nobody wants that.
Churchill’s wisdom will prevail “You can always count on Americans to do the right thing – after they’ve tried everything else.”
…and the central banksters will keep on doing the wrong thing for a long, long time still until they can’t any more.
The fed knows they are captured, just as every politician is. None of them will correct this given it’s high costs. They have the power to extend this malaise indefinitely as it is still preferable to correction.
Stocks will continue upward just like Venezuela, while the economy slowly falls apart. The frog pot is on full boil and we frogs are catching on. Unfortunately the pot is surrounded by large flames so we will stay in our hot bath in hopes the flames diminish before we are fully cooked. Timing is everything, especially once you realize it’s been too late for some time now.
Yes, the Fed is hostage to the S&P 500. Right now the paid-to-play crowd have no option but to double down on all the stocks with momentum to make sure they beat their bogies by year end. If they don’t AUM will suffer which means money in their pocket.
Those like Albert Edwards while right in their concerns can’t match the herd that feels compelled to beat bogies to protect their own pay packages.
When the SNB and BoJ are buying ETFs in the tune of tens of billions what role does traditional analysis of valuations and balance sheet play? This has been a liquidity driven bull market for years.Guys like Hussman missed it and are too afraid now to get on for good reason.
For the very reason that Edwards says, the central banks cannot allow asset values to deflate too much as it will blow up the debt structures that enabled the asset price inflation. So even a small drop of 15-20% will cause them to come out in force to support asset values. Japan has shown that there is no push back by the markets even if the BoJ ramps up their balance sheet by astronomical amounts. Until the market loses complete confidence in central banks the bias in asset markets will be bullish.
Those who think that the fed “controls” asset values and that they have the power to prop them up once the market participants lose confidence in the debt Ponzi are fools. The fed contributes to perception. They are the powerless little man behind the curtain which was so well stated in The Wizard of Oz. Oz? WTF is an “Oz.”? Oh, yeah, the lights slowly come on. Oz is the abbreviation for ounce. L. Frank Baum could have made it more obvious by creating The Wizard of ozT (troy ounce) but it is the hidden double meaning that has made that story timeless. Baum knows there are no such thing as wizards but there are such things as con men. Only a con man could con an entire generation into thinking emerald green paper had power over us. Such a con man would live in an emerald city and his outward show would need to intimidate many who cannot think independently but rather rely on herding instincts as followers.
Baum’s advice? Follow the yellow brick road. As far as I know, there is only one kind of yellow brick on the planet and its value is measured in ozT.
One day the common man will realize that JP Morgan’s statement that “gold is money and everything else is credit” was absolute truth, not some kind of poem. Credit can and will be defaulted on. When people lose faith in the issuing authority of fake money, the fake money will be exposed as nearly value-less and nothing that the issuing authority (the fed) says will have any impact on the herd as it stampedes back toward real money (gold bullion). Not if but when.
That “one day” is far away in the future when automation has eliminated the need for large new generation of ignorant, uninformed workers.When we’re all smart enough to know what’s going on, then the people can be heard.
Captain Dave,
“Faith in the issuing authority of fake money” is absolutely essential to life on this planet today and it will NEVER be lost. Without it there is no convenient medium of exchange to enable the essential transactions which are essential to living. Gold is a physical commodity and can’t be used for transactions. It isn’t accepted by anyone as “Payment for all debts public (aka taxes) or private”.
“It is the international system of currency which determines the totality on this planet.”
Blockchain tech will be a huge improvement, but not before the present system collapses.
Off Topic: You may not want to post this Mish, but another sponsor has pulled out of the NFL. IMO as things continue to worsen, the fuse has been lit to a powder keg which if it blows, things could spiral out of control into a cultural upheaval with ramifications far beyond what anybody can now imagine.Trying to be as objective as I can,Trump has pushed too hard making it easier for the media to make it all about him instead of the national anthem. The commissioner of the league, who is paid 45 million a year, has been extremely weak,again imo, in the way he has handled this whole mess. The owner of the New Orleans Saints-I may not be exactly right here-has begun pulling tens of millions of dollars in subsidies that really helps the local economy. If the other owners go this route, then things are going to unravel in a hurry. Hopefully I’m being overly pessimistic here, and calmer heads will prevail. If not, Trump didn’t start this whole thing, but he may end up being the only one who can stop it.
Mish…. Edwards, like many other people, has got sucked in by Warsh’s own self promotion and twisting of the truth. He is definitely not qualified, as Sam Bell so well described:
“His service was a disaster:
-He was tasked with keeping tabs on Wall Street but instead preached about the wonders of financial innovation right up until it exploded the economy;
-He helped save the big financial institutions — including rescuing his former employer, Morgan Stanley — but was ready to pull the plug on help for the real economy before it even hit rock bottom; and
-He wrongly warned of catastrophic consequences from Fed policy but didn’t even have the confidence of his own convictions to vote against them.”
Mish don’t get duped by him as well !
I am not duped by anything
I disagreed with Edwards a bit in my last post from him.
I doubt Warsh will be any different, but I am willing to give him a chance
One of them can’t make any difference. Disaster is baked into the cake, and groupthink – or groupstink according to Ms Di Martino Booth – rules.
Bob Prechter nailed it on the head years ago. Ours is a herding species. That is what groupthink is – herd think. The worst thing that can happen to a member of a herding species is to be shunned by the herd. Some of us are wired differently. I never followed the herd if I thought the direction was bad and I got trampled by it more than once. But it’s against my nature to herd. I live in the burbs and wonder how anyone could live packed like a sardine in a big city. But they wonder how anyone can get by on their own outside of the herd. Herding is a very successful survival strategy for a species until its not and then it can get ugly real fast, lemming style.
I’m like you. Running outside the herd is riskier, but you’re free and won’t get trampled when the herd i spooked.
I will have to see it to believe that any Fed Chairman will have the gumption (I might even call it common-sense) to cut off the Fed decision-making ties with the S&P 500. Will any Fed Chairman have the humility to accept that they have been wrong in assuming interest rate cuts is a cure-all. Will he have the sense to understand and accept that lack of resources (free capital) is what makes one resourceful and keeping interest rates pegged to the ground and under will only lead to asset inflation and profligacy. Will he be able to understand that they have become meddlers beyond recognition. Will he have the gumption to do what needs to be done in the face of a diving market. I doubt it.
Also we need to have a tape plastered across all the Fed Jackasses’ mouths in between meetings otherwise you will have crackpots like Bullard coming out and saying QE is coming should the S&P fall 0.00001%
Did you read Yellen’s speeches over the last couple years? A new phrase entered her lexicon: wealth inequality. She knows like all elite know that if you con the little man too much it ends up in a pitchfork revolution. Well, the AR15 is the new pitchfork. Gerald Celente is famous for saying that when people lose everything (to the con which they do not even understand is being played against them), and they feel they have nothing left to lose, they “lose” it. As we see more random looking mass shootings in the USA Yellen and the elite will at some point realize that the mobs will be coming for them personally unless the con is shut down to give time to the Marks and Patsies to recover a bit before the next mass sheering.
Or there’ll be the “mark of the beast” and a world govt and the IMF SDR trying to control everyone and everything. That of course is impossible and will collapse. Then we humans can transition into the Age of Rattionality.
One cartoon is worth more than a thousand words.
Operative word being groupthink – or groupstink according to Ms Di Martino Booth – so the head can do nothing radical.
Criticism of Fed policy does not call for profound academic analysis. Just plain commonsense. The wonder is that Summers gets away with his stupid notions.
“Criticism of Fed policy does not call for profound academic analysis. Just plain commonsense. ”
…
Absolutely true … but they have been captured by Wall Street.
Years ago I watched an interview of Richard Armitage on C-SPAN. He was a private citizen by then and making complete sense. His best quip – by far – something along the lines of “when you leave the federal government your IQ jumps 20 points”.
I see this time and again with politicians. I used to enjoy Jeff Flake on C-SPAN’s Washington Journal (if you agree to appear … you have to agree to take calls from viewers … consequently most of the bigger pooh bahs never come on show … Chuck Grassley an exception) when he was a REPRESENTATIVE … used to talk of the horse trading for votes and unsustaianable debt … Now? As Senator? “They” must have placed a pod next to him.
In addition to the vested interests mentioned above add US government funding of increasing debt at distorted low rates.
At some point private and local govt pensions start going tits up across the board and the SS trust fund has been pissed away on neo colonial wars for half a century.
Who ever is in the hot seat will be hesitant to call a bubble. Too many forces that profit from loose money and by definition if you attempt to react to bubbles you’ll probably seek to guard against some fake ones with various actors calling you out for taking the punch bowl when there is no danger. And as far as the s&p is concerned, the president and people tend to applaud when it goes up and the news headlines create their own pressure when they go down.
Of course Fed policy should be mindful of excess speculation and not be a slave to the stock market, but this is easier said than done.
Keep it up…
DEBT is the instrumentality of SLAVERY.
“… in particular on how the Yellen Fed has lost its way and current policy is deeply flawed.”
When has that not been the case, regardless who has run the FED?
“He explained that the Fed has been “captured” by a groupthink of academics …”
Trapped in an echo chamber.
“…you build debt structures on false asset values,
which only become apparent when the asset bubble bursts.”
False asset values = financial fraud. That which goes up on the basis of financial fraud, declines on the basis of financial truth.
Boom, bust.
tick tock tick tock tick tock …
“Here we are once again, only this time higher.”
…
but but … THIS time will be different.
(haha)
Once again, the Fed ignores the destruction of the middle class, by the negative incentives of high inflation (in asset prices) and the low returns (0.01%) to savings. That means people do not have any benefit to savings other than a cushion against catastrophe, which declines in value continuously.
When the economy was growing rapidly, much of the impetus was healthy savings in the middle class which allowed them to start new businesses, provide for their own retirements and send their kids to school.
As someone said earlier on this thread, debt is slavery. Savings represent freedom and power of the individual.
Mr. Summers is an idiot.
Trump is never going to willingly appoint sound money people to any cabinet position which makes economic policy. Whoever is in charge, if the Fed is GIVEN the authority to buy “a broader range of assets” sound money policy is not going to happen.
If the Fed can buy stocks (as they do using their somewhat secret authority as the PPT,) if they have that power, implied or otherwise, they can SELL stocks, or stock futures, if it is deemed the market is getting dangerously overbought in the interest of STABILITY. That word is key. That will be the new sound money policy.
It’s a rigged market and those who are empowered to maintain a fair market are the riggers, and those they are supposed to regulate are prime beneficiaries. Rotten to the core, the communists should have hung in a little longer to watch capitalists kill the goose that been laying bitcoin eggs.
The central banksters ARE the communists who want to control absolutely everything.
Someone may have already mentioned this, that if Trump picks Warsh, the hawk, interest rates will continue to move up as will the dollar, hurting commodity prices. I think Trump believes the only way he can reduce the trade deficit and help growth, is with a weaker dollar which would seem to favor Powell.
Does Trump have any relatives or in laws who would like to try heading the Fed?
The Fed has painted itself into a corner, and they’re – or rather the economy is – damned if they do and damned if they don’t raising rates or reducing the balance sheet.