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By Gary Tanashian We have been talking about how there had been no bubble in US stocks and how the economy is doing just fine. We have also been talking about how the bubble is in policy and that the economy and stock bull market have been created yes, like Frankensteins monster once again out of this policy bubble. Enter economist Joseph LaVorgna of Deutche Bank
Fed needs to start raising rates, top forecaster says. Will wonders never cease? As you may know, I read the financial MSM to get a feel for what the casual market participant is reading, what the majority is being told is the truth. Usually it is some combo of self-promoters and agenda (sometimes political) driven bulls and bears. The economy is improving much faster than the Fed is willing to acknowledge, LaVorgna said in an interview. At the current rate of hiring, more jobs will be created this year than in any year since 1999. Exactly, and still they inflate. He correctly puts the focus on the financial (and national) disgrace called ZIRP as opposed to the theater surrounding QEs long term bond purchases. In six months, the unemployment rate will be below 6% and the core inflation rate will be at 2%, he said. We are way ahead of schedule. Were going to get to 5.2% or 5.4% a year ahead of schedule. The Fed is behind the proverbial curve, he said. The Fed should be raising rates. Its all that this corner of the interwebs has been hammering on for over a year now. If the economy is at all real, get rid of QE and end ZIRP. I would have raised rates years ago, just enough to get the federal funds rate off zero after the emergency passed, he added. He argued that ultra-low rates may not be doing anything positive for the economy, anyway. Its not about the cost of money; its about the provision of credit, he said. It is about that provision (or better yet, attempted force feeding) and to this credit, which goes right into the pockets of asset owners there is also a debit, right out of the pockets of the dying breed that used to be a majority, savers. You know who savers used to be, right? They would be the ones who used to deploy capital at appropriate times, investing in opportunities provided by the economys natural up and down cycles. Today there is one cycle; the BOOM/BUST cycle. Right now we are on a BOOM. But the funny thing about cycles is
they cycle! Hes not worried that quicker-than-expected rate hikes will choke off the recovery. The level of interest rates is more important than the change in interest rates, he said. If the Fed raises rates because the economy is better, that is a good thing. Yes yes yes. This refusal to even entertain a rate hike until some shady day out there in 2015 begs us to ask the question what are they afraid of?. Well,what are they afraid of? The economy is fine on the surface of things. Hes encouraged that Fed officials are at least talking about the risks of financial instability, but hes worried that the Fed is too focused on its main goals of maximum employment and price stability to pay attention to financial markets. The Fed can continue to put the pedal to the metal because gold is in a bear market and the outward signs of inflation are muted. This is the same Fed that did not see the credit bubble, the housing bubble, the tech stock bubble, the commodity bubble in anything resembling foresight. As for this price stability thing, since it is a system of Inflation onDemand, what they are saying is that declining prices is a bad thing because it would errr, undo the system. If the system is undone, they are undone (cue Sgt. Barnes
if the machine breaks down, WE break down). So inflation it is. LaVorgna hesitates to identify potential trouble spots in the financial markets. We dont know for sure where the bubbles are, but hes confident that the stresses will reveal themselves once rates start to rise. Now is the time to prick those emerging bubbles before they get any bigger. The answer is right in front of you. The bubble, as we have been writing for too long now, is in policy. Why, just look at this
Yes, its this chart again with its stark reminder of why the Fed keeps the pedal to the metal. Now, as certain financial assets (read: stocks) start to threaten bubble-like behavior, the 5.5 year long ZIRP (green line above scuttling along the floor) is put into context, very disturbing context, against the backdrop of robust employment and economic acceleration. Here we reference the increasing Cost component in the monthly ISM manufacturing reports. Unfortunately, I dont think there is a manageable way for them to back away from ZIRP. Sure, if it were to go as it usually does the market could continue to rise for a short time in the face of ZIRPs withdrawal, but an end to ZIRP would mark the beginning of the end for the bubble economy. The policy bubble is going to need to pop either sooner or later and I dont know about you but I find the one-way aspect of this situation pretty scary. The economy itself doesnt exhibit any major imbalances right now, he said. Inventories and sales are well-balanced, banks have recapitalized, and consumers havent taken on excessive debts. Which is exactly where the bears (both economic and stock market) have gotten it wrong. Conventional analysts who were bearish on the economy were just not paying attention or did not look in the right areas (ref: our highlight of the Semiconductor sector in January of 2013, ratios like a rising palladium vs. gold as but one example). The stock market as well has presented technical targets to the upside since the big breakout in 2013. The article goes on to glad hand Mr. LaVorgna on his forecasting prowess among a host of other establishment gurus. I wont bore you with it. But nothing, absolutely nothing has changed in our analysis that sees the last refugees of the Great Recession (handy nickname isnt it, with its implication of something that is well in the past?) being sucked back in by the seemingly endless run of ZIRP. The process is completing. Or as the poor pre-retirement couples in a disgusting John Hancock commercial put it
We felt better holding onto our money
Her: But waiting? Him: Hmmm, we shouldnt wait anymore. Him: So here we are. Her: I mean, we need to invest again. We just need to find the right thing to do. The look on the guys face is classic. So here they are
finding the exact wrong thing to do as instigated by policy making. Biiwii.com | Notes From the Rabbit Hole | Free eLetter | Twitter
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