Infidi maris insidis virisque dolumque
ut vitare velint, neve ullo tempore credant
subdola cum ridet placidi pellacia ponti.
(Never trust her at any time, when the calm sea shows her false alluring smile.)
Lucretius – De Rerum Natura
We hardly know where to begin. There are so many people to laugh at and so little time. We can’t laugh at them all.
So, we’ll have to take our best laugh. And that must be a laugh at Janet Yellen. There are many reasons to laugh at Ms Yellen. But time is limited and so we will take our best shot there, too.
And since we are fair-minded, affable, and sensitive, we are quick to point out that we mean no disrespect to the Fed chairman. In fact, we are very sympathetic. We feel her pain.
Yes, at a time when most women her age are enjoying a well-earned retirement – baking cookies and preparing for a visit from the grandchildren, poor Ms Yellen carries the weight of the entire world economy on her shoulders.
But what is funny about Ms Yellen is that she has no idea what kind of burden she carries. She recognises that there “may be pockets of increased risk taking”, as a result of her policies. Those risks can be managed, she believes, by alert and responsible economists.
It has not occurred to her that the entire financial world is now gaming her – trading, betting, speculating on how far she’ll make it before the whole thing explodes. Nor does she appreciate how all the data she studies – as she keeps a wide eye on those pockets of risk taking – has been so distorted by her interventions that their information content is useless or worse.
Andy Haldane, chief economist for the Bank of England, ought to have a word with her. He recognises that central banks have been “aiding and abetting risk-taking”. And that “lots of nutty things are… happening”.
Among the nutty things is that people are lending to the government of Kenya for just 6.875%. Spain and Italy, meanwhile, sell ten-year bonds bearing a yield of less than 3%. Corporate debt is hitting record highs with record amounts committed to share buybacks.
Just today we learned that Bed, Bath, and Beyond has committed roughly two years’ worth of profits to buying its own shares. These buybacks are part of the reason the Dow broke through the 17,000 barrier last week. At these prices, dividend yields are so low it will take 50 years for an investor to get his money back. And if he lives in Baltimore or California, after taxes, it will be 100 years!
We have been chronicling these nutty things here in The Daily Reckoning for months. They come from an excess of liquidity which, like spare cash in a teenager’s pocket, quickly seems to find an inappropriate use.
The main source of this excess liquidity is – you guessed it – Janet Yellen’s Fed. It has been providing too much credit, too cheaply for many years. Here’s David Stockman with more details:
“During the seven years ending on the eve of the financial crisis in Q3 2008, total credit market debt soared from $28 trillion to $53 trillion – or at a sizzling 9.2% annual rate.
“By contrast, nominal GDP during the same period expanded at just 4.8% annually or at half the rate of credit growth. Accordingly, just during this short 7-year interval, the nation’s aggregate leverage ratio expanded from 2.7X GDP to 3.5X. In short, the booming “demand” of the Greenspan/Bernanke housing bubble was being borrowed from the future, not financed out of current production.”
But then, when the credit bubble popped in ‘08, and demand faltered, what did the Fed do? It provided even more credit on even better terms.
The credit binge noted by Mr Stockman above created the period we have learned to call, ironically, the Great Moderation. The rising tide of liquidity hid the sharp rocks and floated even the least-seaworthy barks.
Now, we have another Great Moderation, funded in the same way. According to Richard Duncan, excess liquidity reached a record $308bn in the second quarter of this year. And again, the tide has washed over the wrecks from the last period of excess credit and every tub that can hold water is riding high.
Ms Yellen, bless her heart, looks at the St Louis Fed’s Stress Index. She sees the lowest reading ever. She looks at junk bond yields – investors clearly aren’t worried about getting repaid. She is completely misled. About the markets. About the economy. About life in the universe.
Lucretius, writing about a hundred years before the birth of Christ, knew better. In De Rerum Natura, he described a world very different from the calm, orderly and controllable world of Ms Yellen and the Federal Open Market Committee.
It is a world of atoms, he said, constantly colliding with each other, like mating itself, full of huffing and puffing, sweating, a chaos of conjunction, producing surprises and new life.
Ms Yellen is in for some surprises.