Are Central Banks Ready To Break Their Codependency?

Breaking our radio silence as we couldn’t help ourselves after reading former NY Fed President William Dudley’s piece imploring the Fed to stop enabling Trump’s  trade war.

It sounds like central bankers are starting to realize they are, and have been, enabling the bad behavior of the politicos, who do not have the backbone to make the politically tough choices to fix their economies through the difficult but necessary structural reforms.  The central banks have been the only game in town.   Maybe not so much anymore.

Nevertheless,  it was “spooky at a distance”  reading Dudley’s piece this morning (thanks to CK for forwarding) as it seemed he was channeling our July 16th, Codependent Central Bankers, reposted below, or, if you like, we were channeling Dudley’s future post a month earlier.  Though he didn’t call for a “sex strike” it was like there was some mysterious communication channel.   So quantum.

Markets

All is noise until the markets get clarity and certainty about whether the September 1st tariffs are implemented or diverted.

If Trump caves, all bargaining power goes to China and the negotiators will most likely cut a Potemkin deal.  We expect a huuuuge rally.

Trump’s China Trade Deal Ray Of Hope Expires Sept. 1

The big question: Will Trump do what it takes to make China trade talks viable? That likely would require a humbling retreat.  – IBD, August 27th

If the tariffs go ahead,  almost zero chance of a deal and more escalation.  We expect a big sell-off.

Back to vacation.

…what if the Fed’s accommodation encourages the president to escalate the trade war further, increasing the risk of a recession? The central bank’s efforts to cushion the blow might not be merely ineffectual. They might actually make things worse.

…Officials could state explicitly that the central bank won’t bail out an administration that keeps making bad choices on trade policy, making it abundantly clear that Trump will own the consequences of his actions.

…Central bank officials face a choice: enable the Trump administration to continue down a disastrous path of trade war escalation, or send a clear signal that if the administration does so, the president, not the Fed, will bear the risks — including the risk of losing the next election.   – Bill Dudley, Bloomberg, Aug 27th

Money quotes from our July 16th post

Can the Fed and ECB arrest the decline in the international liberal economic order, which may plunging the global economy into a deep recession, with more quantitative easing?  

We believe it would behoove central bankers to stop enabling the politicians and go on something similar to  a “sex strike,” forcing governments to implement the painful but necessary structural reforms to put their economies on more stable and sustainable trajectories.  – GMM,  July 16th

Full repost

Codependent Central Bankers

Codependency is characterized by a person belonging to a dysfunctional, one-sided relationship where one person relies on the other for meeting nearly all of their emotional and self-esteem needs. It also describes a relationship that enables another person to maintain their irresponsible, addictive, or underachieving behavior. — Pysch Central

Preface

Let us preface this post by first stating, thank goodness the central banks, especially the Fed, for their bold and decisive actions during the Great Financial Crisis (GFC).  Their behavior prior to, and after the GFC is more suspect but we know how close the global markets came to a total collapse, not just once but many times during the crisis.  This comes from our sources at the highest levels of policymaking. 

Collapse, not as in the S&P500 falling another 20 percent, but a complete meltdown of the global payments system, rendering trade in goods and services in the marketplace almost impossible.   The hijacking of Safeway trucks and martial law probably only a few days later.   

Maybe the Fed could have done things different, more effective, more efficient, and more sustainable but act they did and kept most of us from living under a freeway and eating bark for the rest of our lives.    

Stay with us if you disagree for the rest of the post. We are willing to listen to your arguments if you have better information. We are very confident in ours. 

One of our twitter mates, who resides in the home country (led by a man named Justin) of the team that stole the NBA championship from our Warriors, tweeted out the WSJ article with the above headline.

We immediately replied with something close to the following but with much fewer characters,

When will the central bankers learn?  That they can’t solve structural economic problems with their limited cyclical toolbox — no matter how large, no matter how expanded.   

Trying to do so only exasperates the unintended consequences, such as political stress and the blowback caused by the increasing wealth inequality.  Not to mention the growing blackhole of negative yielding debt in the global bond market.  We suspect the consequences of negative yields will not, let’s just say, be optimal in the long run.    

Can the Fed and ECB arrest the decline in the international liberal economic order, which may plunging the global economy into a deep recession, with more quantitative easing?  

We believe it would behoove central bankers to stop enabling the politicians and go on something similar to  a “sex strike,” forcing governments to implement the painful but necessary structural reforms to put their economies on more stable and sustainable trajectories. 

Govenments don’t like to make the tough choices, especially given the current state of the western democracies, and this would take some major stones by central bankers as bullying from political leaders would become intense.    

Do you think Chairman Powell would/has passed that test?   

The codendency of the monetary authorities, coupled with the addictive behavior of most governments to debt and deficits is a very toxic brew.   We don’t think it ends well. 

Here are some data on the unintended consequences of quantitative easing.

Wealth Ratio of Top One Percenters To Bottom Fiddy Skyrockets

(Note not all of the wealth inequality is due to asset inflation but a large portion is.)

Negative Yielding Debt Spikes

EM Corporates Now With Negative Yields – Are You Kidding Me?

It’s time for the global central bankers to kick that Bear Off The Balcony At Bretton Woods and meet in New Hampshire to construct a plan to force their governments to act on structural reform.

By the way,  the Raptors are a class act. Sorry to see their star leave for the Clips.  Wonder if Microsoft stock was affected?