In a RealVision interview aired Monday former Kansas City Fed chief Thomas Hoenig expressed his support for the methods his former employer is resorting to in the midst of what will be the greatest recession since the Great Depression. While at the same time he voiced his concerns about the ultimate exit strategy, and the unfortunate precedent it all sets. I share his concerns!
In terms of exit strategy; the challenge, and it will be enormous, will be how to wean the economy off of life support when it looks like it’s finding its way back to health.
Make no mistake, the task will be monumental, and will require a tremendous amount of integrity and fortitude to buck the political pressure, and, more so, the pressure from the financial markets — as they’ve grown accustomed to getting the stimulus they feel they need the minute real economic forces apply a little pressure.
As for the here and now, Hoenig believes, rightly so, that over the next “couple of years” we’ll see round after round of government stimulus that the Fed will unhesitatingly fund to the fullest. I.e., the treasury will issue debt by the trillions that the Fed will essentially gobble up while suppressing interest rates the whole time. He estimates a $10 trillion dollar Fed balance sheet before its all said and done. I say that’s a conservative estimate…
So what does that portend for the financial markets. Well, clearly, many stock market actors view it bullishly. There are few Wall Street adages more heeded than “don’t fight the Fed”.
Yep, while there’s the technical bear market profile that says the first big selloff sees at least a 50% retracement (we’re seeing that now), clearly the present rally is being bolstered by this Fed narrative, and, not to mention, by a lot of short covering as I’ve been illustrating of late.
The (at least) $10 trillion dollar questions of course are, will it “work”? And what would “work” actually look like?
Well, I don’t know if it’ll work. But I do know what “work” would look like to the Fed:
You see, while the Fedheads can talk about the good of the consumer all day long, success to them would be to keep stocks from their third consecutive -50% bear-market hit (while successfully bailing out egregious big-monied risk-takers [whose lobbyists swooped onto Washington the moment they smelled stimulus]). Clearly, their actions — in the junk bond space (yes a complete collapse there would do the trick for the stock bear market, and would demolish their egregious friends’ junk debt portfolios) — thus far virtually prove it.
Historically-speaking, this chart of the past experience (the “Great Financial Crisis”) — featuring all of the stimulus thrown at it along the way — says maybe it won’t “work”:
Perhaps not, but this time around the Fed is boldly going where no Fed has gone before.
But, you say, that was the case last time. True, but this time the Fed is pretty much saying there’s virtually nowhere they won’t go to avert 2008-style pain. Last time (2008) they at least ostensibly imposed some limits.
So, really, the right question to ask is; can the Fed save us from the real-economy phase — or what some call “the insolvency phase” — of a truly great recession?
And if it does, what would the world look like thereafter? What will economic life be like when companies whose financial states coming in would not have had them surviving any recession (regardless of catalyst) in a true market economy? I.e., what will life be like when zombie companies roam what was once the world’s poster child of market economies?
Don’t know at this point, but I’m not at all crazy about the prospects…
Allianz’s Chief Economist Mohamed El-Erian also worries about the risk of zombie companies, and of zombie markets as well:
“What if it’s not just the risk of “zombie companies” eroding the productivity and dynamism of the economy…but also zombie markets mis-pricing risk/mis-allocating capital due to heavy official intervention?”
Thanks for reading!