Normally there's a distinct pattern to the impact of Federal Reserve statements
on the financial markets. The tone of equities trading in particular starts
to improve as the moment of the announcement approaches; the words turn out
to be blandly positive, full of promises of easy money and upbeat forecasts;
and share prices soar for a day or two. It's been thus for most of the past
six years, leading large numbers of new investors and recently-minted analysts
and traders to see the Fed as a modern version of Plato's philosopher king,
wielding absolute power to achieve perfect justice in the form of rising asset
prices.
So it must have been a shock yesterday when the Fed released the minutes of
its last meeting -- which were full of the usual bland equivocations aimed
mostly at not upsetting anyone, though with the recently added promise of a
tiny rate increase one of these days -- and the markets tanked. As of this
writing (noon-ish on Thursday) US equities are down over 1% and the S&P
500 has turned negative for the year. Bond yields are falling, gold and silver
are rocking, and the sense of fear, confusion, and betrayal is palpable.
What happened? What inevitably had to. Liquidity-driven markets love low interest
rates and massive money creation. But those things cause imbalances that eventually
become self-negating. The bang for each dollar of newly-printed or borrowed
currency falls to zero and then turns negative.
That's happening now as the major economies continue to borrow but can't seem
to turn the proceeds into measurable growth. Japan, for instance, is running
epic deficits and monetizing the whole thing, but over the past five quarters
its economy has gotten smaller. Which is another way of saying its ratio of
debt to GDP is soaring at an accelerating rate.
The Atlanta Fed, which has been highly-accurate lately in its near-term predictions,
now has the US growing at a rate of less than 1.5% in the third quarter, far
below the 3% needed to stop the growth in debt/GDP.
Europe's growth is less than 1%, with most of that coming from Germany. And
China, well, it claims to be growing but most of the world now suspects it's
in recession -- if that's not too bland a word for the crisis unfolding there.
So, back to the Fed. The markets have been buying the promise that adult supervision
and superior judgment on the part of the monetary authorities would produce
steady growth and continued easy money. But now a bit of doubt has begun to
creep in. What if these guys are not in fact omnipotent and all-seeing? What
if the trends they've engendered are finite? And what if they don't have a
plan for avoiding the brick wall that seems to be blocking this smooth stretch
of highway? What indeed?
