In compiling today’s newsletter, two themes stick out like sore thumbs. First, the world seems to be getting the message that current policy is having less and less impact, and the side effects of such policy may be worse than the disease itself. Meanwhile, asset prices keep lurching forward, and there is little to no fear in this market.
Case in point: with each data release these days, the time at which the Federal Reserve may begin scaling back its bond-buying program gets pushed further and further down the line. While the previous excuse for the delay had been lingering employment woes, today’s reasons are the desire for a smooth transition to a new Fed chair and a concern that consumer prices are not inflating to the desired level.
Such concern should lead to an uptick in fear, right? Wrong. The equity market makes a new high every day. The VIX has been chopping around the bottom for months. Yields on junk bonds continue to compress. Optimism is at an all-time high, as evidenced in part by a new high in margin buying on the NYSE. Even real estate prices have rebounded and, in some markets, surged anew.
This lack of fear terrifies me.
What scares me most is the view beyond the U.S. borders in the Eurozone, the U.K and Australia. The European mainland has stopped expanding and, in some places is experiencing deflation. Meanwhile, Australia’s export sector is in retreat amid currency appreciation, but lowering interest rates would threaten to blow the lid off its property market, which is arguably in a bubble. Great Britain, too, is concerned about having fueled a real estate frenzy.
Once again it comes down to concurrent inflation and deflation fears. Things consumers buy – medical services, education, housing, investments – are inflating. Things consumers sell – the value of their labor in the workforce, the use of their money in fixed income markets – are stagnant or deflating. What, then, can a central bank do to stoke aggregate demand? Their chief instruments of stimulus have been a boon to the investor class and to borrowers, but have not helped consumers or savers. At the end of the day, I see very little central bank policy that will lead to long-term economic stability. Fear that.