Albert Edwards summons the bears

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The always entertaining Albert Edwards of SocGen: 

For all the Fed’s newfound bravado and bluster, we know by now that any attempt to ‘normalise’ interest rates will end in elephantine pivots, pirouettes and ignominy.
 It’s certainly been a lively start to the year for investors as they take another look at the Fed’s tardy rediscovery of its inflation fighting zeal – prompted in part no doubt by President Biden’s slumping popularity in the polls as voters suffer from the current cost of living squeeze.
 For all the reams of verbiage written about the coming year I think the bond market has it about right. Namely that despite the Fed seeing ‘neutral’ fed funds at around 2½% they’ll struggle to get rates above 1½% before the financial markets chop them off at the knees.
 Bill White of the OECD has been one of the few mainstream economists to identify (decades ago)that the Fed and other central banks are trapped by their own actions and lack of foresight to predict the malevolent consequences of those actions. We explained a few weeks ago how their policies were driving even higher levels of inequality – and hence underconsumption – which, in their own misreading of the situation, warranted even more monetary stimulus.
 Successive debt-financed recoveries, underpinned by super-loose monetary policy, havedriven a wedge during tightening cycles between what monetary policy is necessary for the economy and what overvalued and over-leveraged financial markets can tolerate.
 Whatever the intentions of the Fed to ‘normalise’ interest rates with respect to this economic cycle (having admitted they might have got behind the curve on inflation), the financial markets will simply not allow it. To illustrate just how the Fed has lost all touch with financial market
reality, I saw that as part of the latest bout of muscle flexing, the Fed floated the idea that they should re-commence Quantitative Tightening in 2022 (auto-pilot anyone?). Simply hilarious.
 To be sure, just as in previous cycles, no-one knows how much tightening the financial markets can tolerate before breaking point is reached. I don’t know and the Fed despite its myriad economic models doesn’t know either. But it won’t take much for the wheels to fall off.
 Since the late 1990s, every debt-fuelled recovery has triggered bizarre examples of excess. We previously identified central banks inflating the mid-2000s housing bubble to ‘compensate’ the middle classes for losing out on their share of the national income pie. ‘Grade inflation’ in universities is really just another meaningless sop to the middle classes – but in this case it creates an excess supply of intellectually underemployed and hence resentful ‘elites’.

In the UK, 40% of 18-year olds go to ‘university’ and a third of those get top degrees. Nuts!

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.