A Rant on the “New” Uncharted Territory

A Goldman Sachs research paper plastered the financial media headlines today with a no-burger descriptive… “We have entered uncharted territory.” Excuse me for a moment while I take a few deep breaths of fresh, record warmth blowing up the east coast… Ok, I am back.

Do “they” think we are brainless/stupid? It is not even rational to ask that question anymore. Of course they do! It does not matter how you slice and dice any of the latest economic considerations and financial data points extracted from the Fed’s monetary policy or U.S. fiscal policy because we have been in uncharted freaking territory for at least a decade! Adding fire to the damned mess, the ghost of a Goldilocks economy has yet to exit prestitute airwaves, despite the lingering consequences of the “Great Recession.”

If you really want to be picky, a reasonable case can be made by going way back to 1971 or 1933, as well as 1913!

Let’s just cut to a more contemporary chase.

Calling clients “Muppets” and worse…

Muppets vs. Goldman Sachs…

Stock Market Muppets…

For any seasoned traders out there who want to feel exceptionally stupid, here are a couple 4th graders that beat the stock market…

Let’s take a stroll through “uncharted” history…

Uncharted**** Territory**** – When aggressive monetary policy combats a crisis_… “The current global economic downturn will probably not be as severe as the Great Depression, partly because of the vigorous response from the world’s policymakers. Eighty years ago, policymakers were initially not even convinced of the need to ease monetary conditions, and they bear a good part of the blame for the ensuing depression. This chart shows how radically policy thinking has changed since then. _

When the crisis began in mid-2007, the U.S. Federal Reserve (Fed) reacted by aggressively cutting its target for the policy interest rate—the fed funds rate, at which banks lend to each other overnight—and introducing special facilities to ensure that all parts of the financial system had access to liquidity. At the same time, too much money in the system would push the fed funds rate below target and possibly stoke inflation, so the Fed sold U.S. Treasury securities to mop up liquidity.

Following the collapse of Lehman Brothers in September 2008, financial and economic conditions worsened dramatically. The Fed cut the policy rate further, introduced yet more facilities, and now allowed its balance sheet to more than double in size over just a few months, pumping up bank reserves and thus the monetary base. Broader monetary aggregates, however, increased only modestly, given banks’ cautious behavior.

The expansion of the Fed’s balance sheet made it difficult to maintain the fed funds rate near the policy target, and in December 2008 the Fed dropped the target to a range of 0 to 25 basis points (aka NIRP). Although there is no more scope for interest rate cuts, the Fed retains the ability to conduct monetary policy through changes in the composition and size of its balance sheet. And this ability is crucial, given the threat of deflation.” – IMF, 2009

Quantitative Easing 2.0: Markets Heading Into Uncharted Territory… “It is conceivable one of these bazooka plays ‘works’ (rather appears to work), temporarily… The real inflation threat in the US is not the Fed. I think the Fed is pretty much powerless here. If quantitative easing seems to work, it will be temporary, just as happened in Japan… The Fed cannot throw money out of helicopters or give money away. Such talk is nonsense. However, Congress can give money away… Here is the essential question: If $1 trillion in fiscal stimulus did next to nothing, why would another trillion do anything?… Is another $trillion in fiscal stimulus coming? I highly doubt that… it will not spur growth or fix any structural problems… To be sure, we are in uncharted territory, not only in treasuries, but in the Fed’s response to the crisis.” – Business Insider, 2010

The Search for Growth: Central Banks in Uncharted Territory with QE3_… The European Central Bank (ECB) created a small sensation in August when it said that it was considering buying unlimited amounts of government bonds in order to cap the yields on the debts of Spain, Italy and other beleaguered euro zone states. A month later, the US Federal Reserve announced a third round of quantitative easing that it said would end only when economic conditions improved. The two announcements were widely anticipated; two years ago, they would have been unthinkable.” – The Economist, 2012

Fed’s Plosser pitches his plan for a post-crisis Fed_… “‘We are in uncharted territory in this regard and should be appropriately cautious in specifying too detailed a path that we may not be able to follow’ he said, according to prepared remarks. The Fed published its so-called ‘exit strategy’ from the extraordinary policies back in mid-2011; Fed Chairman Ben Bernanke recently said it needs a rethink.” – Reuters, 2013

Uncharted Interest Rate Territory_… “The Federal Reserve sent a clear signal about the strength of the U.S. economy on Wednesday, giving guidance suggesting it will ‘be patient in beginning to normalize the stance of monetary policy.’ It is widely expected that the Fed will initiate an increase in historically low interest rates sometime in 2015, and in doing so will test a generation of lawmakers and policymakers who have never governed during a time of rising rates. Many will refer to this rise as ‘interest rate normalization,’ or rates settling in the 5 percent range. But that phrase gives people a false idea about the historic trends for interest rates: They’ve been declining for 33 years. So rising interest rates will be abnormal or new for most lawmakers.” – U.S. News, 2014

Federal Reserve and Treasury market face uncharted territory… “The task of lifting interest rates from near-zero levels — when it finally happens — will be an unprecedented one for the US Federal Reserve. Never before has the central bank been faced with the challenge of starting to unwind such a vast amount of stimulus… Profound changes in the composition of financial markets — and in the menagerie of players operating in them — will make this a very different operation from when the Fed completed its previous interest rate tightening cycle in 2006. This week, the IMF highlighted a principal danger of the next tightening cycle: investors rushing for the exit to escape falling prices, while a senior Fed official expressed concern about bond market liquidity.” – FT, 2015

The Janet Yellen Fed: Too cautious? Yellen is in uncharted territory_… “The go slow Yellen Fed wants to avoid raising rates too fast that it spooks markets or causes a recession. But being so hesitant to act is beginning to cause other problems… Credibility, Confusion, Recession Preparedness…. Yellen has stressed repeatedly that her Fed team is ‘data dependent.’ They don’t have a pre-set course in mind for rates… Some economists think Yellen is right to be cautious given the unprecedented situation the world is in… The curse of being Fed chair is that mistakes aren’t clear until the the next recession hits. Just ask Alan Greenspan.” – CNN, 2016

UNCHARTED TERRAIN: TODAY’S GLOBAL MARKET DRIVERS_… “I think it’s a pretty dangerous recipe when you have very aggressive monetary policy and throw very aggressive fiscal policy on top of that. I think we need to be cognizant that we are in uncharted territory here.” – Franklin Templeton, 2017

Bernanke’s thoughts on fiscal policy in 2017 – Fox Business…

How Did America Go Bankrupt? Slowly, At First, Then All At Once_… “

Now this administration (like its predecessors) is intent on running large deficits, thanks to tax cuts coupled with fast increasing non-discretionary spending alongside large discretionary spending increases on infrastructure and the military. Of course, America can technically avoid going ‘bankrupt’ as it can, is, and will continue to digitally print however much ‘money’ is necessary to pay the bills. But…” – Econimica, Feb. 16, 2018

Three charts amongst many to peruse in the article…

What about that “uncharted” Goldman report that triggered my rant today?

Goldman Sachs sees red ink everywhere warns US spending could push up rates and debt levels_… “The U.S. economy won’t be able to count on the pump-priming from tax cuts for very long, Goldman Sachs said on Sunday. Federal spending, rising yields and surging debt needs are a growing worry, the firm said. Deficit spending is approaching ‘uncharted territory,’ Goldman said.” – CNBC, Feb. 19

US Fiscal Policy Will Lead To A Debt Catastrophe: Goldman_… “Then there is the biggest wildcard of all: interest expense, which is set to surge, surpassing $1 trillion in the next few years… (Exhibit 6).” – ZeroHedge, Feb. 19

US Treasury Posts Gigantic $1.16 Trillion Shortfall in Fiscal 2017, Hilariously Points out “Where We Are Headed”_ – WolfStreet, Feb.19_

_Once again, loans for education is the US Government’s #1 asset – ahead of Property, Plant, and Equipment _– @SheepleAnalytic, Feb. 20

So, what is the new Elephant in financial war rooms that presstitutes are not reporting? Here’s one.

Is the Consumer Stressing Out?… Interestingly, smaller banks (those not in the Top 100 by asset size) are experiencing far more rapid charge off rate deterioration at 7.9% (See Exhibit 3). Is this a precursor to larger banks experiencing much higher loss trends as well or just anomalous? Time will tell. Could the larger bank NCO rise be just another midcycle phenomenon pulled forward by Fed hikes such as in the mid ‘90s? It is possible, but far from certain in our view, given the current accumulation of overall leverage in the financial system expressed by Bank Credit/GDP at 63%, levels last seen in 2008. (See Exhibit 4)” – TCW, Feb. 7

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TraderStef on CrushTheStreet.com 2018-02-21

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