Rabobank: You Only See How Stable A System Really Is By Pushing It To Its Limits
By Michael Every of Rabobank
“Stonks” and “Burneds”
We are, it is now being widely decried, in the middle of a “stonk” bubble. The Financial Times(!) is carrying an article calling on the Federal Reserve to stop its easy money; and Bloomberg(!) has strategy advice that: “…your best bet has been to buy the biggest pile of steaming rubbish you can find on an income statement,” which overlaps with the pattern of behavior 18 months before the bursting of the 1999 tech bubble…before then concluding this is nonetheless the only thing fund managers can ‘rationally’ do.
Against that backdrop, regulators in D.C. are looking at the ‘Reddolution’ of earlier this month, where “stonks” of firms were being manipulated by the public to try to teach hedgefunds a lesson. They will no doubt harrumph on cue with all due seriousness –like those surrounding Governor Lepetomane in ‘Blazing Saddles’– without asking awkward questions about the roots of our stonking great problem that end up being redirected towards the Fed. This only underlines that they are far behind whatever remains of a curve.
There is recognition even in financial media that central banks are institutional “stonk”-bubble blowers. There is matching recognition that the solution for reflation lies with fiscal, not monetary policy (though many of the recent converts to this view apparently couldn’t see it as true until it was already happening – “Harrumph for the governor!”). Yes, we *are* likely to see a *major* short-term fiscal boost –in the US alone– with suggestions the White House’s stimulus package could be worth many thousands of dollars for the average US family – for a year. Then the old crunch comes back again unless US labor has magically gained power over global capital. How, exactly?
Yet against that backdrop, and now that commodities are also being traded like “stonks” due to our central-banks, headline inflation will surely rise ahead. With short-end rates not going to [and please continue reading this in the voice of South Park’s Eric Cartman] – if you don’t hold “stonks” then you are going to hold “burneds”: that’s the central-bank skeewl of thought. So risk is being deliberately suppressed by sane people, creating insane results. They won’t say that in D.C. though.
Yet risk can never be removed: like energy, it just shifts form. For just some examples:
- How do higher commodity prices hit the 95% of global citizens who aren’t getting US stimulus cheques? How did the last surge play out in the Arab World post 2008?;
- What does the financial world look like when pension funds are stuck with trillions of “burneds” that they had to buy during our “burned” bubble? How much higher do “stonks” have to rise to compensate for that portfolio loss?;
- Are governments going to try to fund themselves at the short-end forever? Yes, governments (and firms, and households!) would love negative real borrowing rates near term: but is that how free-market capitalism is supposed to work? With a steeper yield curve, banks are happier: and are they going to lend for productive investment or just follow “stonks”? and;
- Somehow this all just resets painlessly when US fiscal stimulus wears off, and/or when rates “normalise”?
There *are* ways to use fiscal and monetary policy in unison to get a more balanced recovery – we relied on them for decades post-WW2. But they involve a structural reworking of our whole economy and financial system, not just endless QE, or ad hoc bouts of under-the-counter MMT.
Meanwhile, however, even as the system finally starts to shift, millions who have grown up with the media lionising “stonks” while their own incomes have often not even matched those of “burneds” are voting with their feet. I was sent a terrifying chart yesterday: US equity volume on all exchanges plus OTC and OTCBB trading volume is *rocketing*, akin to China’s stock trend before the 2015 bubble and subsequent crash there. The anecdote attached was that the blue-collar US population now sees its financial Great and Good as William J Lepetomanes: they will take a stimulus check if offered, but they are still going to join the “stonk” mania full time too from now on.
Which brings us to another point I have made before – you only see how stable a system really is by logically pushing it to its limits, which we are doing on multiple fronts. Ours ‘works’ if a certain percentage of the population (0.1%, 1%, or maybe 10%, etc.) enjoys the “stonk” benefits, with QE up to a certain threshold of de facto plutocratic seignorage. How will it work if 50% of people decide to day-trade central-bank liquidity for a free ride to prosperity? What if it goes viral and everyone does? How does that kind of economy really function?!
Obviously someone needs to cook and deliver pizzas to those day traders! So how do we decide who gets to earn minimum wage plus tips, and who gets to retire young by clicking a mouse and “buying the steaming rubbish”? Could someone in the Eccles Building explain the underlying ethos of such a society? The fact one can’t at a time when just such discussions are being had surely points to the unsustainability of the proposition. Yet our D.C. harrumphers may be close to missing this tipping point, which argues for far more volatility, or far more of a structural shift in the economy and markets in various different potential directions.
Meanwhile, one other tipping point is also perhaps close to being missed, and another one driven by the same central-bank-and-now-belated-fiscal-policy dynamic:
Bitcoin soared even higher yesterday as some vanilla institutions ignored another salvo of harrumphs from central-bankers and pledged to start using it. I repeat my view that states prepared to print money, crush the price discovery of the yield curve, and fund huge national security, defence, and policing arms are unlikely to just roll over to a libertarian cryptocurrency when they can instead make it illegal, as the Fed did with gold in the 1930’s crisis. However, if too many firms put too much crypto on their balance sheets, then acting against Bitcoin might mean blowing up “stonks”: and is that allowed?
Happy Friday: now go harrumph, or buy some steaming rubbish.
Fri, 02/12/2021 – 10:22