Age of Wisdom, Age of Foolishness (11)
Age of Wisdom, Age of Foolishness (10) “The American Jury is Out, But the European Jury Has Voted”[i] reported on the unfolding courtroom dramas, on both sides of the Atlantic, in relation to the verdict on the economic recovery. Last week, the American Jury was still deliberating.
The Bankers on Jury Duty cast their vote in favour of the Plaintiff, by continuing to contract loan growth[ii]. Jurors from the venerable houses of JP Morgan, Bank of America[iii] and Wells Fargo based their esteemed opinions upon their own pecuniary experience of their recent earnings reports, rather than the material evidence provided in the courtroom. Personal experience showed that home-loan financing business volume and profitability was down[iv]. Discussion of the evidence provided by the Defence’s witness, from the Department of Housing and Urban Development (HUD), was contentious and inconclusive. This evidence, in the form of the exhibit entitled “The December Scorecard”, showed that even though some house prices were back at early 2005 levels Federal modification programmes (affectionately termed “Acronyms”) were still being heavily relied upon to prevent further delinquencies[v]. The whole list of “Acronyms” was highlighted by the Prosecution to emphasize just how fragile the recovery was; these included Making Homes Affordable (MHA), the Second Lien Modification Programme (2MP), Home Affordable Foreclosure Alternative (HAFA), the Forbearance Programme (FP) and the Principal Reduction Activity (PRA). The new testimony by Moody’s, which warned on Second Lien Loans, underscored the doubts in the Jurors’ minds[vi]. The expert witness testimony, from the aptly named “Black Knight”, only added to the confusion[vii]. The “Black Knight”, formerly known as the Lender Processing Services Analytics Division, swore under oath that leverage, in the form of credit lines, was increasing as home-equity was rising. The uncertainty in Jurors’ minds was reflected in the testimony of the Fed’s Lockhart, who remained equivocally data dependent under examination from both sides[viii]. Adopting Lockhart’s perspective, many Jurors were thrown into total disarray when examining the evidence of the last Unemployment Report; which the Plaintiffs framed as further evidence of a weak recovery. The Jurors’ dilemma was neatly characterized in the testimony of RealtyTrac[ix].
“On the one hand………On the other hand…..”
“…. And also”
RealtyTrac testified that on the one hand foreclosures are falling in general, but on the other hand they are also rising in some areas especially in the Judicial States.
This testimony was underlined by that of Freddie Mac[x]. Freddie’s balanced scorecard is not yet balanced in favour of a strong recovery, despite showing signs of improvement in delinquencies and sales. Loan applications have yet to show strength, even though payment-income ratios suggest that housing is now more affordable.
A controversy surrounding Jury Tampering, by the Plaintiffs, arose when the Defence Counsel revealed that the Volcker II Rule, in relation to capital requirements for Collateral Debt Obligations (CDOs), would be diluted[xi]. Further controversy arose, when the Defendant’s expert witness, Richard Fisher, opined that some members of the Jury were drunk; and were viewing the evidence through the Plaintiff’s provided “beer goggles”[xii]. Fisher speculated that a stronger sentence of an extra $10 billion a month, in “Taper” hard labour, was needed. The Plaintiffs objected and were sustained.
Some clarity was brought to the Jury by the testimony of Defence witness Charles Plosser. Acknowledging that the recent Unemployment Report was weak, he saw no reason not to draw the verdict that the economy was recovering and in need of a custodial “Taper” sentence[xiii]. Further clarity, of this kind, was obfuscated by the testimony of Charles Evans; who testified to witnessing lower inflation and hence the room for a more lenient sentence. His testimony was echoed and embellished upon by that of Narayana Kocherlakota[xiv]. Kocherlakota has become a very useful Plaintiff witness, because of the apparent zeal with which he embraces the threat of Deflation and the need for more monetary accommodation.
Across the Atlantic in France, the last bastion of fidelity in relation to European Socialism, its President performed a second spectacular act of infidelity on “campaign promises”; and sentenced the current (and obsolete) national economic model to death in favour of a new younger model[xv].
In the global courts of economic and social justice, verdicts and edicts were being pronounced. The head of the self-styled ultimate global authority, namely the IMF, passed a new verdict on the state of the global economy. Allegedly there is an “Ogre” called Deflation that needs executing; and the economic recovery that he threatens is “feeble”[xvi]. As the IMF was positioning, President Obama was also repositioning another “Ogre” at the Fed for life after Bernanke.
The “Ogre”, known as Stanley Fischer, was first observed in Terminal Velocity 7 “Horses for Courses”; when successors for Bernanke were under discussion after he had been given the hemlock by the President[xvii]. At the time it was said that:
One of the more amusing distractions, in the next Fed Chairman debate, is the issue of Stanley Fischer[iv]. Having been a key player in the creation of the bubble and systemic problems which the Fed is now addressing, during his leadership at Citigroup, his credibility has bizarrely remained strong. Perhaps this has more to do with his survival skills, which allowed him to move from poacher to gamekeeper, at a time when his insider’s view showed that his credibility bubble was just about to burst. His insider’s instincts have not left him; as he is now positioning the Bank of Israel, like a hedge fund, to be long Equities and short Treasuries as the “Helicopter” approaches[v].
One should not rush to discount Fischer however, since his candidacy is a classic example of the new political thinking behind “independent” central bank appointments. Developed Market central banks have become politicized, as a consequence of the Credit Crunch and their QE response. They are supposed to be independent however. To give a thin veneer of independence, that fools nobody, politicians have come up with the great optic of hiring head central bankers who are outsiders[vi]. The more unconventional and unorthodox the policy response contemplated, then the more “external” the appointment; the ultimate outsider being a foreigner. Politicians can thus claim that they are taking a more balanced view. In practice, they are changing the current parochial groupthink, inside the central bank, for an emerging parochial groupthink of an even smaller but more disparately connected elite. The global economy appears to get larger, as the group controlling it gets smaller.
He was then spotted again in Terminal Velocity 14 “Goldilocks Economy and the Three Bear Markets”[xviii] when it was observed that:
Policy makers in Developed Markets have been opining the need to balance the Global Economy since the crisis started. So far nothing has happened on the rebalancing issue; and there has been a tendency towards national protectionist solutions that hint at Trade Wars. Clearly, rebalancing is not going to happen; because there is no global consensus. Policy makers in the Developed Markets are therefore going to act unilaterally. It was amusing to hear Stanley Fischer, himself a candidate for the fed Chair, spin the positive outcome of this scenario.
According to his sophistry, rising US real interest rates and the rising US Dollar will prevent the currency wars that will destabilize the global economy. In practice however, Emerging Economies will have to raise interest rates to stem capital outflows. Since they have higher inflation rates than Developed Markets, they will have to raise interest rates by more than the Fed. Brazil is a classic case study of this issue; it is now raising interest rates because it has inflation and a currency crisis[xix]. “Beggar thy Neighbour” currency manipulation is now replaced with “Beggar thy Neighbour tightening”[xx]. Deflation is baked in globally. Many commentators are saying that the American market is at a point similar to 1994, when a sharp uptick in interest rates triggered a large sell-off. Other commentators are saying that the Emerging Markets look like 1998 again. Stanley Fischer has eloquently combined the two scenarios, with a speech that is supposed to restore calm to both. He seems to be a job candidate for the Fed Chair, cut from the same cloth as Alan Greenspan. Greenspan’s signature was the use of sophistry to eloquently disguise inherently unstable situations.
This time around Fischer is being nominated for the Vice Chair position at the Fed. The current analysis of this nomination should therefore be looked at in the context of his previous two appearances in our analysis. Clearly volatility in global markets associated with the “Taper” has motivated his current nomination. His previous career history and experience allegedly qualifies him to steer the Fed and the global economy through this phase of the crisis. As we observed however, he was one of the primary causes of the crisis whilst with Robert Rubin at Citibank; but at least this experience may qualify him to understand the current conditions. Clearly also, Janet Yellen and the Fed have “something” even more unorthodox, in terms of monetary policy, in the tool-box ready to be launched after this next phase of global instability. We suspect that this “something” is so unorthodox that it requires its legitimacy to be conferred by the aura of an alleged global central banking giant. With the greatest respect to Janet Yellen, she is unproven so far. Mario Draghi and Mr. Kuroda are still earning their credibility (and their helicopter pilot’s wings), although they have been much enhanced of late. It therefore falls to the spiritual (and intellectual) father of Bernanke to fill the void in global central bank thought; and to burnish the legend (helicopter pilot’s wings) to go with the unorthodox policy. Christine Lagarde has now occupied the tower in global central bank air traffic control to make sure that they all don’t crash and burn.