The Phaserl


Humpty-Dumpty—–Teetering On The Eccles Building Wall

by David Stockman, David Stockman’s Contra Corner:

The Eccles Building trotted out Vice-Chairman Stanley Fischer this morning. Apparently his task was to explain to any headline reading algos still tracking bubblevision that things are looking up for the US economy again and that Brexit won’t hurt much on the domestic front. As he told his fawning CNBC hostess:

“First of all, the U.S. economy since the very bad data we got in May on employment has done pretty well. Most of the incoming data looked good,” Fischer said. “Now, you can’t make a whole story out of a month and a half of data, but this is looking better than a tad before.”

You might expect something that risible from Janet Yellen——she’s just plain lost in her 50-year old Keynesian time warp. But Stanley Fischer presumably knows better, and that’s the real reason to get out of the casino.

What is happening is that after dithering for 90 months on the zero bound the Fed has run out the clock. The current business cycle expansion—as tepid as is was— is now clearly rolling over. So the Fed has no option except to sit with its eyes wide shut while desperately trying to talk-up the stock market.

And that means happy talk about the US economy, no matter how implausible or incompatible with the facts on the ground. No stock market correction or sell-off of even 5% can be tolerated at this fraught juncture.

That’s because the U.S. economy is so limp that a proper correction of the massive financial bubble the Fed and other central banks have re-inflated since March 2009 would send it careening into an outright recession. And that, in turn, would blow to smithereens all of the FOMC’s demented handiwork since September 2008, and indeed since Greenspan launched the era of Bubble Finance back in October 1987.

So when Fischer used the phrase “the incoming data looked good”, he was doing his very best impersonation of Lewis Carroll’s version of Humpty Dumpty. “Good” is exactly what our monetary politburo says it is:

“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.”

The fact is, the “lesses” have it by a long shot, but the Fed cannot even whisper a word about the giant risks, challenges and threats which loom all across the horizon.

So for the third time this century, a business cycle contraction will come without warning from the Fed. Once again the Cool-Aid drinking perma-bulls, day traders and robo-machines will be bloodied as they stampede for the exist ramps. But it is the main street homegamers, who have been lured back into the casino for the third time this century, that will suffer devastating losses yet another time.

Indeed, if there were even a modicum of honesty left in the Eccles Building it would be warning about the weakening trends in the US economy, not cheerleading about fleeting and superficial signs of improvement.

Likewise, it would acknowledge the drastic over-valuation of the stock, bond, real estate and other derivative financial markets and remind investors that a healthy capitalism requires a periodic purge of such excesses in order to check mis-allocation of resources and malinvestment of capital.

Most importantly, it would flat out confess the inability of monetary policy—–even its current extraordinary accommodation variant—–to ameliorate the structural and supply-side obstacles to a more robust rate of economic growth and wealth creation in the US.

In that regard, it would especially abjure the hoary notion that an excess of monetary stimulus is warranted because fiscal policy and regulators, for example, are allegedly not holding up their side of the bargain.

In fact, monetary stimulus is not the “only game in town”, as is often asserted; it’s the wrong game. Money printing is not a second best substitute for other pro-growth policies because it’s not pro-growth at all.

At best, it shifts the incidence of economy activity in time, such as when cheap mortgage rates cause housing construction to be higher today and then lower in the future when rates normalize.

But mainly monetary stimulus causes systemic mis-pricing of financial assets. It turns money and capital markets into gambling arenas where speculators capture huge unearned windfalls while the mainstream economy is deprived of growth and productivity inducing real capital investment.

Thus, instead of dispensing sunny-side agit prop Friday morning, Fischer might have noted the startling anomaly that was occurring at the very moment of his CNBC appearance.

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