In about an hour the Fed will give its much-anticipated rate hike decision. Analysts will pore over every word looking for changes. And they will find them.
I expect a new word today: “extra”. We will be extra vigilant, extra-cautious, extra data-dependent. Perhaps it’s “more” vigilant, or “even more” vigilant etc., to stress the notion the Fed was vigilant when it wasn’t.
Whatever, the meaningless word change, analysts will yap about it for the next week or even month as if it matters. But it doesn’t.
Bubbles Can Only Get So Big
At some point in every Fed-sponsored asset bubble, the bubble simply cannot expand any further. It’s like a Ponzi scheme. Eventually the pool of greater fools runs out.
And consumers just stop buying. They can no longer afford houses. Perhaps they have one too many already.
Earnings estimates start to fall. Businesses don’t want to expand because consumers buy less stuff.
Rate Cuts Coming
The Fed will hike today, or not. It doesn’t matter because it is simply too late to matter. Yesterday I wrote 2019 Rate “Cuts” in Play.
That won’t matter either. It’s too late to matter.
What Does Matter?
What matters is the massive amount of financial speculation and stunning amount of junk bonds. What is widely known as the “Everything Bubble” was fueled by corporate buying for anything and everything whether or not companies could turn a profit.
Fed-Induced Bubble
The Fed helped blow this bubble the by keeping interest rates too low, too, long. By encouraging financial speculation and consumption all in the nonsensical battle to fight price deflation.
CPI Deflation Not a Problem
The BIS did a historical study and found routine deflation was not any problem at all.
“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the study.
For further discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?
Rise of the Zombies
Meanwhile, take stock of the [Rise of Zombie Corporations](Rise of the Zombie Corporations).
And take another look at the lead chart There Have Never Been So Many Bonds That Are Almost Junk.
Credit Spreads Signal Recession
Finally note that $176 billion worth of corporate bonds has fallen from ‘A’ to ‘BBB’ so far this quarter – the highest since late 2015.
Importantly, and unlike 2015, it’s not just oil-related.
Bulge of BBB-Rated Debt
The BIS Fears “Bulge of BBB Debt” and “Financial Cycle” Default Waves as it should. And on top of it, Credit Spreads Signal Recession.
People believe one extra rate hike or cut matters. Phooey. It’s far too late to matter what the Fed does now.
Mike “Mish” Shedlock
Routine deflation (an effect of a stable money supply with rising innovation) is obviously beneficial.
But what we face is a credit collapse.
Too much bullish optimism in the bond market caused it to become a vast machine absorbing savings capital and lending it to what amount to pure-consumption industries (worst is Uncle Sam underwriting medical services and welfare administration, not to mention the can’t-pass-an-audit pentagon.)
What happens when you lend $250 trillion to Popeye’s Wimpy who promises to pay you back two burgers next week if you’ll lend him a burger today? Your savings capital is now post-digested food in his large bowel. He has no capacity to actually repay you.
All roads lead to a collapse in social trust, a rise in public pessimism and rage, and the evaporation of (first) willingness to lend (credit/liquidity) and to borrow…and (next) the wealth value of a $250 trillion ocean of IOU’s.
This isn’t going to be orderly or peaceful.
From where or at what point do you establish the econ beginning of the expansion, Mish?
We are about to find out which parts of the economy were built on low interest rates. The tide is going out.
We’re about to discover what industries are utterly addicted to borrowed money.
What industries grew most rapidly during the last 30 years?
–Medical Services.
–Welfare Administration (all those “NGO’s.”)
–The Pentagram…er…Pentagon.
For almost 40 years, for each dollar borrowed and spent into the GDP economy, a second dollar was created out of thin air, a bond, and it was accounted as an asset on the bondholder’s balance sheet.
2-for-1, what wasn’t to LOVE? It was like a free-money, perpetual motion machine while it ran. I think recent market trends suggest it’s out of the manic optimism that fueled it.
Size of corporate bond market grew at a faster pace from 1996-2006 than from 2006-2017.