SocGen super-bear Albert Edwards with the note:
The global reflation trade was already in retreat before the Fed lobbed in their surprisingly hawkish statement of intent last week. That retreat quickly turned into a rout across many asset classes. Whilst not in the league of the 2013 Bernanke ‘TaperTantrum’ it demonstrates the market’s sensitivity to the Fed’s intentions. To the surprise of many, the long end of the bond market rallied-in contrast to the sharp sell-off in 2013. Maybe it now realises that a Fed tightening cycle is nigh on impossible?
In May 2013, Fed Chair Bernanke adopted a more hawkish tone, causing major convulsions in the markets (known as the Taper Tantrum)–most particularly in the long end of the bond markets–which saw yields surge to 3% from under 2%. In contrast to 2013, the Fed’s recent hawkish turn last week catalysed a surprisingly strong rally at the long end.
Jon Hilsenrath at the WSJ thinks that there are two explanations. First, the Fed has done a better job communicating its intentions this time round (personally I think not).
Secondly and more worryingly, Hilsenrath writes that the markets could be too complacent. Former Fed Governor during the 2013 tantrum, Jeremy Stein thinks the markets shouldn’t take a benign view of the extent of potential tightening as “The Fed cannot support markets if there’s an inflation surprise. ”He said that Fed Chair Powell, his former colleague, has been adept at shifting his stance when needed. Despite the market’s tranquillity today, he said, Mr. Powell may need that nimbleness in the months ahead. Indeed,Mr. Powell said in a June 16 news conference“ We will do what we can to avoid a market reaction. But ultimately, when we achieve our macroeconomic goal, we will taper as appropriate”.
When I read those sorts of statements, I really do literally laugh out loud. Is this the same Jerome Powell who at the end of 2018, after talking tough for months about the unwinding of theFed balance sheet being on “auto-pilot” did a 180 degree about turn when markets began to swoon at the end of that year? He is indeed nimble–in retreat!
In my opinion the bond market rallied because they know that Fed easy money comes at a heavy price. Central banks have become slaves tothe bubbles that they blow–the markets quickly forcing a reversal of any tightening.
This time around will be no different. Congratulations: OECD Central Banks have blown yet another stupendous housing bubble
Although the Fed caught the markets out last week, investors had actually expected more tightening a couple of months back–all that is happening is its timing is shifting into 2022. Three-month Eurodollar futures (%tightening expected by market by end 2022 and in 2023)Source: DatastreamI believe the bond market just doesn’t believe the Fed can follow through on its tougher talk. Why? Because having created another huge, real-terms house price bubble, they are trapped. Rise in US median house prices and core CPI (% yoy)Source: DatastreamBut when it comes to blowing house price bubbles, Bloomberg Economics believes there isn’t even room for the Fed on the medal podium. This is now a global property bubble of epic proportions never before seen by man or beast and it has entrapped more CBs than just the Fed. Other central banks have blown even bigger residential property price bubbles than the US-which is only 7th in the OECD league.
Talking of bubbles of epic proportions has anyone noticed that US corporate profits as measured by the government (BEA) actually FELL in Q1–in very stark contrast to ‘stockmarket’ profits rising25% (chart below)? BEA profits are barely higher than end-2014! Wow, what’s going on? Official US government data show profits going sideways in contrast to stockmarket profits.
There are various key differences in the two series above which we have discussed previously. But in comparing the charts on the right and left below, it is that clear reported profits are inflated by huge inventory profits (IVA is inventory valuation adjustment). US national pre-and post-tax profits with adjustments ($bn) US national pre-and post-tax profits as reported ($bn).
To the extent that the BEA data measures all companies in the US economy, including unquoted ones, at one level it is rather unsurprising that stockmarket profits, dominated as they are by the FAANGs are doing much better. On another level though it is extremely concerning because certainly in the past these divergences usually prove temporary and are resolved in a market collapse. Dr Fed may have created one too many Frankenstein monsters! Tightening anyone?