President Trump: The NEW one and only politics thread

Stan Druckenmiller who wrote that op ed, was saying at least as far as back as 2010 that the quantitative easing the Fed was doing would cause asset price inflation and what they were passing off as economic growth was really being fueled on the back of a debt explosion. It wasn't real. He was right then, of course. Nobody listened then, but suddenly they want to grasp onto him now?

The problem with the op ed is that it is too little, too late. Jay Powell is the poor schmuck who walked into the party as the keg was down to its dregs. He has two choices now, and both amount to him being trapped -- and having to helplessly watch a disaster play out that was sown long before he was dumb enough to step into the role. His choices haven't been made easier by the dolt in the oval office, either.

If he reverses course, as Druckenmiller and Warsh suggested, it will 1) look like Trump was able to bully him into backing off, and that pours water on the notion of the central bank's independence. That in itself is problematic to the aura they try to surround their bullshit with. But more importantly, 2) the whole reason they have been trying to tighten in the first place is that they needed the fed funds rate hundreds of basis points higher by now to be able to CUT rates when recession hits. Or else they are standing there naked. They kept their foot on the gas for so long, and created a credit bubble so enormous, that they are finally figuring out how trapped they are -- it took their backs being against the wall to acknowledge the reality staring at them. Make no mistake, their own stupidity caused the problem, in the first place. And it was all avoidable. We went nearly a decade with real interest rates negative, which blew credit levels through the roof. It has fucked up our economy at the consumer, corporate and sovereign level, so it's not just about the stock market bubble they blew. But they did blow asset bubbles all around us and created a phony economy that is dependent on escalating levels of leverage and credit to hold off collapse. That is what they passed off as a good economy -- essentially, a stock market bubble, a runaway government reliant on bigger deficits, consumers loaded up with student debt, big car loans, and credit card balances, and a ton of zombie companies that have balance sheets loaded up with debt that they couldn't service if a market was determining the price of money instead of the appointed czars who think they are so much smarter than that market. That was the insidiousness of $4.5 trillion of quantitative easing in the first place paired with the Fed Funds rate pinned at zero for 8 years.

With rates having risen just a little at this point (and they are headed much higher before we have a healthy economy), the Fed is actually already insolvent already on a mark to market basis. They created money out of thin air with the press of a button, and they bought up debt at ridiculously inflated prices, basically telling people to front run them to collect their free money. They always think they can just inflate their way out of it by pressing buttons and printing more money, but history has taught us how that always ends -- whether it is with their bond buying desk in New York or if it was a Roman emperor debasing a gold coin with a base metal. This is what brings great civilizations down.

In the short term, though, now they are staring at fears about the next recession (if we are not already in it), and it has dawned on them how badly they fucked up. Although plenty of sober, and mature, voices were warning along the way. If they keep trying to tighten to have slack to cut into the recession. ... they know they are bringing on the credit crisis they caused (and the recession) more quickly. If they don't keep tightening, they know that they are going to be standing there naked with an empty toolbox to try to fight it. ... and a credit crisis anyhow. And they are in an absolute panic about it. They have never been this loose heading into a slowdown. But that is what people wanted -- a giant party beyond all reason. And now comes the clean up. The day of reckoning. I posted a lot as they were creating that catch-22 trying to spell it out on here. Powell is trapped. Ben Bernanke and Janet Yellen, who mostly created the disaster will wash their hands of it, and Powell will be the fall guy. As will Trump, who moronically kept tying himself to a stock market bubble he walked into. But Christ, people have no clue what they are talking about at this point. Real interest rates are STILL at. ... zero, even with another measly 25 basis point hike if it happens on Wednesday. And the suggestion is that our economy, which they keep telling us is so strong, can't handle. ... free money. Conditions looser than they have ever been prior to the previous 10 years. It's one or the other, though, and they can't have it both ways. Either things have been really shitty all along necessitating (as they wanted you to believe) them destroying our credit markets to flood the world with insane amounts of leverage and flood our markets with liquidity to blow up asset prices. ... or the economy was strong enough where they were just being reckless 2-year-olds selling a fantasy as long as they could keep putting off paying the price for the credit binge.

With all the phony leverage they spend a decade creating by punishing savers and rewarding debtors, they incentivized riskier and riskier behavior -- by robbing savers of the risk free rate of a return they would earn if a market were setting the price of money, not them artificially making it eternally cheap beyond anything we have ever seen in modern history. That pushed people into reaching for yield, gambling on equities, and as prices grinded higher on the back of their manipulation it lulled people in a false sense of complacency. People start to believe that equity prices only go up (look at some of the threads on here), and most people were not sophisticated enough to see how divorced from the fundamentals related to actual earnings the prices of most equities got. But that is the nature of the monetary inflation they create and the bubbles they spawn -- they created manias, in everything from bitcoin to high-yield bonds to equities to artwork. The stock market is not the economy, but they passed off their asset bubbles as the economy, in large part using a few stock market indexes as a gauge of economic health (it actually creates wealth disparity because anyone who can afford to gamble on risk assets has gotten richer on paper, while the other 90 percent of people have been dealing with a depression). And made people think those indexes absolutely have to go up, even when valuations get divorced from earnings. When in reality it was just simple monetary inflation -- they essentially created a lot of leverage, which got used to gamble -- blow up prices to manic levels. The stock market has a very long way down from here. You all ain't seen nothing yet. And a 25 basis point hike in the Fed Funds rate on Wednesday, if it still happens, is beside the point. It doesn't make a difference. To an actually healthy economy that would be nothing. In real terms (not nominal terms) we are still sitting at zero percent lending rates -- by any historical comparison, monetary conditions are ridiculously loose, and the fragile economy they have saddled us with can't even handle that.

The time to have had this conversation was in 2009 when we needed a serious deleveraging after the housing crisis (on the back of the leverage they had already created up until that point with their stupidity). Instead, they did the cowardly thing and answered a debt crisis with a mountain more of debt to prop it up. I know I was trying to have that conversation with anyone who had a clue. Stan Druckenmiller was too, so I guess he hasn't forfeited the right to write that op ed -- even if I think what he is suggesting isn't helpful. There was always a price to pay. The longer it goes on, and the more leverage they can get away with creating, the BIGGER the price. So why even try? The whole reason we are where we are is that there will always be a politician who will find a reason to pressure them to kick the can down the road and price fix the cost of money at lower and lower levels. It allows them to spend and run deficits. We are at the point now, though, where I think that isn't possible much longer even if they try. Jay Powell knows it, too, which is why they are acting like they know they are fubared. I suspect this will ultimately end with a panicked attempt by them (same as always), but that doesn't mean holding off on tiny rate hikes every quarter. They are going to see their bubbles pop, and because it will require even more drastic measures to try to reflate their mess, they'll do even more radical things -- negative interest rates probably, they'll press some buttons and debase the currency even more, and find some more schemes to price fix the credit markets so they are the only buyer left and they can conjure money out of thin air and drive up prices and drive down rates. It gets much harder to do, though, as they go along and they are going to have trouble. They may even step in and buy equities outright to inflate stock prices, the way Japan did. If all of that does happen. ... we will go the way of Japan, stagnating endlessly like a command economy that has been destroyed by price administrators. This ultimately ends with either a permanent economic depression or a serious deleveraging. I'd personally rather see the pain of the deleveraging so we can get back to health. You insure way less suffering that way, but good luck getting them to act like adults.