The Fed's Baseball Tips
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The ever-readable Doug Noland, writing for 'The Credit Bubble Bulletin', this week surpasses himself. In an article wryly entitled 'This time it is different' a whole sequence of 2005's investment market conventional wisdoms gets neatly skewered.
"The global marketplace for financial assets - especially bonds and interest-rates - has become circus-like, recalling the fateful exuberance so prominent during the climax of the technology Bubble. And while Richard Fisher may be no Henry Blodget, the new President of the Dallas Fed embodies the current audacious and imprudent environment. Whether it is playing a simple game of basketball, trading securities, or managing monetary policy, blissful complacency welcomes a lack of focus and attendant blunders that will seem almost incomprehensible at that point when the expected positive outcome is seen to have needlessly slipped away. Hopefully, the Fed is not as complacent today as they were in early 1999 - with 4.75% Fed funds and ultra-easy "money" providing ample fuel for the building tech blow-off."
Noland is not alone in questioning Dallas Fed President Fisher's blase stance on rates. Fisher, who told CNBC last week that
"We're clearly in the eighth inning of a tightening cycle - we have the ninth inning coming up at the end of June.. There is room to tighten a little bit further. Then we will see how we are standing against inflation"
He has effortlessly solved what Fed Chairman Alan Greenspan called the bond market "conundrum": 10 year Treasury yields (at the time of writing, 3.95%) are simply "an expression of confidence in the way the FOMC has conducted its policy". Perhaps so, in the same way that Nasdaq at 5,000 was an expression of confidence in the sustainability of share price growth for technology companies. Any Fed President who blithely parrots his country's growth statistics ("A $12 trillion economy growing at between 3 and 4%.. Where (else) are people going to put their money?") in the face of perplexing bond market price discovery is setting himself up for a sizeable lesson in hubris.
We know little about baseball and care even less, but as Barron's Alan Abelson points out,
"Is Mr. Fisher aware that unlike, oh, boxing, baseball does not rigidly limit how long a contest can go on, and it's possible that, so far as the Fed's "measured" rate increases go, we might end up with a 16-inning game?"
Doug Noland also addresses Richard Fisher's predilection for sporting metaphors:
"..perhaps the Fed is ready to declare quick victory, pack their briefcases and cheekily celebrate after nine effortless little baby-step innings. Yet little do they appreciate that it is a best-of-seven games series, and their wily opponent has been happy to spot them game one. The current interest rate, liquidity, speculation, economic and global backdrops are conducive to only greater Monetary Disorder and unwieldy imbalances - both at home and abroad. Would $70 crude, spiking commodities prices and a long, hot summer housing mania catch the Fed's attention?"
In a detailed analysis of modern credit bubble conditions and economic distortions, Noland nicely queries the lazy assumptions of what he calls New Paradigmism: a permanent plateau of low interest rates (is Richard Fisher related to Professor Irving Fisher?), an excess of global savings, abundant liquidity in financial markets, benign inflation, general financial stability. Given that a new consensus has lately formed (including Morgan Stanley's Stephen Roach, Pimco's Bill Gross (surprise, surprise), Investec's Gabe Borenstein, and Merrill Lynch's David Rosenberg) that Treasury yields are likely to go much much lower during this credit cycle, one feels honour-bound to challenge "conventional" wisdom. As noted fixed income investor George S. Patton once observed, if everyone is thinking alike, then somebody isn't thinking. What looks like considered rationalisation of a bull market in bonds could turn out to be little more than a flimsy justification for momentum investing.
In the face of what is admittedly a blurred investment landscape, Noland is "sticking with the view that the Fed will be forced to step up and play ball. And it is when times get tough - when unstable markets turn uncooperative - that everyone will be reminded as to why it is so important for a central bank not to fall so far behind the curve. This Time it is Different: In an extraordinarily uncertain and problematic environment, the Fed somehow telegraphed to an extremely leveraged and speculative marketplace that there was nothing to worry about."
How ironic it would be if the most overrated Fed chairman in history, admittedly ably assisted by a venal financial services sector, were to be ultimately responsible for bubbles in stocks, bonds and real estate. To trigger unsustainable booms in any one asset class looks like misfortune, but to trigger booms and busts in all three. Sometimes even the mightily diverse English language just isn't up to the task.
Tim PricSenior Investment StrategisAnsbacher & Co Ltd
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