As Jackson Hole Ends, Here Is The Truth
The 2017 edition of the Jackson Hole symposium is officially over, and while central bankers disappointed markets by not providing any insight into their views on monetary policy (assuming they have any) they instead focused on market stability, and patted themselves on the back for creating a fake “risk-free environment” (which they justify by the record low VIX, even if ignoring the record high cost of crash insurance).
In an amusing twist, Janet Yellen’s speech started off by highlighting that one of the key features of the $14 trillion in post-crisis central bank asset purchases, whic has resulted in central banks accounting for 40% of global GDP, is pervasive risk amnesia:
A decade has passed since the beginnings of a global financial crisis that resulted in the most severe financial panic and largest contraction in economic activity in the United States since the Great Depression. Already, for some, memories of this experience may be fading–memories of just how costly the financial crisis was and of why certain steps were taken in response.
Here, one could almost accuse the Fed of hypocrisy for doing everything in its power to “fade” the memories of the 2008 financial crash with trillions in asset purchases, and on the other to lament the short memories of market participants who get steamrolled by a new and improved QE (or jawboning threats thereof as per James Bullard) every time the market takes an even modest dip.
What is just as amusing is that for the first time, a seemingly “bipolar” Yellen – and thus the Fed – slammed its own “macroprudential” track record:
The U.S. and global financial system was in a dangerous place 10 years ago. U.S. house prices had peaked in 2006, and strains in the subprime mortgage market grew acute over the first half of 2007. By August, liquidity in money markets had deteriorated enough to require the Federal Reserve to take steps to support it. And yet the discussion here at Jackson Hole in August 2007, with a few notable exceptions, was fairly optimistic about the possible economic fallout from the stresses apparent in the financial system.
That this comes from the same person who two months ago said that she “doesn’t believe that we will see another crisis in our lifetime” is not only hypocritical, it is downright bizarre and one could say is indicative of dementia.
Or, one can simply ignore all of the above and say: this is, after all, the Fed whose only true “mandate” is to create a new and bigger bubble every time the previous bubble bursts. Unfortunately, that does not help markets and trader, who on one hand are instructed to believe the Fed that everything is ok – even as the Fed itself mocks its optimistic bias – and on the other, as we discussed earlier today, realize that something is fundamentally and permanently broken in the market.
So what is the truth?
For a much needed glimpse of reality, we go to the first paragraph of the latest note from Matt King, who gives a vastly different perspective of underlying market reality than that created by the bipolar Fed:
At an investor breakfast in Stockholm this week, when asked how many subscribed to what we call the “central bankers’ and economists’ view” that fundamentals were now strong enough to permit a very modest dialing back of central bank QE, not a single one of the 25 present raised their hand.
All subscribed to our view that it was instead likely to prove surprisingly disruptive for markets.
How on earth did we come to have such a one-sided market? And what happens to trading dynamics when markets are this one-sided?
The short answer to this rhetorical question is, of course, “the Fed.” For the more in-depth response, please read “Global QE And “ETFs Everywhere” Have Created An Unstable, One-Way Market.”