Dream On Herr Hatzius: You Dwell In A Giant Collapsing Bubble

How ever-loving stupid do they think we really are?

Goldman's plenipotentiary at the New York Fed, William Dudley or B-Dud, has been running around pointedly emitting a new word signal called "patient" rather than "considerable time" to describe the Fed's interest raising plan. Then right on cue, his alter ego back at Goldman central, Herr Hatzius, yesterday dug out and circulated to the clientele an identical 10-year ago audible from when the Fed last changed its password in 2004:

In the 2003-2004 playbook, “considerable period” gave way to “patient” as a signal that the hikes were drawing closer, and it is interesting that the words “patient” or “patience” have shown up quite frequently in recent Fed speeches.

Finally, like clockwork at 6:30 PM last night, the Fed's official out-sourced spokesman, Jon Hilsenramp, delivered the definitive message to the casino players through Rupert Murdoch's drop box.

Federal Reserve officials are seriously considering an important shift in tone at their policy meeting next week: dropping an assurance that short-term interest rates will stay near zero for a “considerable time”.......

Mr.. Dudley—a part of Ms. Yellen’s inner circle of advisers—has suggested recently that the Fed could replace the assurance of low rates for a considerable time by stating more vaguely that it expects to be patient before moving....... The Fed took this approach the last time it was trying to engineer a liftoff from low rates, in 2004....(when it)dropped an assurance rates would stay low for a “considerable period” and said it would be patient before raising rates.

Yes, as its struggles to screw up the courage to allow money market rates off the zero bound some time vaguely next year, the Fed will give fair warning by featuring the letter "P" in its December post-meeting statement. It's double secret password, in fact, will now be "patient", meaning that the rounding error cost of carry for speculators may rise microscopically--- to say 25bps six months down the road. No sooner.

Do I mock these clowns and juvenile delinquents? Yes, I do.

The inconsistencies and stupidities are mind-boggling. Right now the market is trading its the highest Q ratio in 100 years other than a brief few months at the peak of the dotcom madness. Yet according to one of the Fed's always quotable empty suits, Dennis Lockhart of Atlanta, it may be too early to change the password at the December meeting.  Lockhart recently told reporters at an event Monday that,

.....he was “not in a rush to drop” the “considerable time” phrase. He wants to be more certain the economy is strong enough to bear rate increases before moving.

What? Under the six month rule, the first smidgeon of a rate increase would be July 2015. That's exactly 78 months after the Fed first body-slammed the policy rate down to the zero bound. Too soon? C'mon.

According to another department of Goldman Inc., the S&P 500 will be approaching 2350 shortly thereafter. Does the regime really mean to say that even though the stock market will have catapulted 4X during that endless era of ZIRP----- the economy is still too weak to bear a 25 bps blip on the short rate?

When the Goldman/Fed gang's reluctance to allow even two bits of interest to be paid on the rental of gambling chips is juxtaposed with the two charts below, the contrast is simply mind-boggling. These people are so deep in the bubble that they have no clue about reality.


Click to View

Well, perhaps they do. But like Jim Carrey in the Truman Show, the reality that they parse, gauge and project is all inside the big tent---the worldwide financial bubble that has been fueled be central banks for nearly two decades now. Accordingly, their assessment of what's occurring now and what's in-store down the road is a function of an absolute and frightening confidence in the mad money printers running the world's central banks.

Stated differently, "risk asset" salesmen like Herr Hatzius do not actually analyze or forecast; they simply goal-seek their so-called economic models to justify an ever rising stock market. After all, that's what the bubble looks like from the inside.

Thus, in alerting his clients to the impending password change, Hatzius trotted out Wall Street's timeless version of a goldilocks economy, implying earnings and stock prices will endlessly rise----notwithstanding the impending switch to only semi-free money in the casino:

We read the acceleration in US growth in 2014 as preliminary evidence against the notion that the weakness in economic growth post 2007 was "secular” and in favor of our view that it was due to a lengthy but ultimately temporary hangover associated with the bursting of the housing and credit bubble. This hangover was the reason why it has taken us 5 years to get to a point in the business expansion that is typically reached in 1-2 years. But the flip side of the slow initial progress is that the expansion—and the rate hike cycle that will ultimately accompany it—still has a long way to go.......(So) our forward-looking view remains GDP growth of about 3%, not just in 2015 but also in 2016-2017.

Let's see. During the last 14 years, US real final sales have grown at a 1.6% annual rate; and during the last 7 years at barely a 1.0% CAGR.  And that's the right metric----even Herr Hatzius knows that the inventory element of GDP is erratic in the short-run but washes out over time.

Quite possibly, he might also acknowledge that there have been some rip-snorting tailwinds propelling the US and global economy over the last 15 years, and these forces may have added some octane to even the limpid CAGRs actually recorded----growth rates which represent a fraction of his 3%.

Stated differently, it is virtually impossible to argue that the 1.6% US growth rate since 2000 has not been flattered by some pretty big one-timers. Ask Caterpillar, IBM, Exxon-Mobil, Macy's or all the rest of the gang which benefited from booming markets abroad, vast earnings translation gains and debt-fueled spending at home.

That is what I mean by tailwinds. A massive worldwide monetary and fiscal expansion during this century did, in fact, fuel the most spectacular era of credit expansion and debt-financed growth that the planet has ever known. Say in the case of China, where credit market debt rose from $1 trillion to $25 trillion during the period; or even the US where outstanding public and private debt powered upward from $26 trillion to $60 trillion; or Japan where it stands at $25 trillion on the back of an imploding old age colony.

Or if you prefer a sector approach, look at the explosion of CapEx in the iron ore pits; or bulk and container carriers and shipyards,; or steel and aluminum mills; or the oil, gas and energy industries; or the cement and construction machinery suppliers; and the office and commercial real estate from Shanghai to Istanbul and Sao Paulo.

It's just possible that those tailwinds might not persist. After all, the capital investment boom described above was not organic-----the result of the world's peoples suddenly becoming more energetic, ambitious and entrepreneurial. No, it was almost wholly artificial------a temporary crack-up boom owing to the relentless expansion of fiat credit engineered by the central banks.

But now that their combined balance sheets have exploded from approximately $2 trillion at the turn of the century to in excess of $16 trillion today there are some unmistakable signs of a hard-stop emerging just around the corner. Tamping down the raging credit bubble is what the beleaguered comrades of red capitalism in Beijing are doing--- as they underscored again last night. That's what the German "nein" is all about as Draghi faces his impending day of reckoning at the ECB.

In its tepid and halting manner, that's also what the Fed heads are intimating by their feeble plan to change the password. And, as for Japan, the BOJ is  still red-hot. That is, as in the concept of "melt-down". That means that when the Yen finally tumbles into free-fall----something possible any day now----its printing press will  likely succumb to its own desperate melt-down.

So one might not count on the tailwinds. Better still, the possibility exists that beneficent monetary tailwinds of the last 15 years might actually morph into vicious headwinds; and the "decoupling" myth implicit in Goldman's 3% dream scenario might be crushed by the global blowback of bursting bubbles and exploding financial time bombs.

Upwards of $9 trillion, for example, has been raised in the off-shore dollar debt markets by EM corporate and sovereign borrowers. One way or another, much of the EM world is an economic colony of China. What happens when the Chinese house of cards continues to unravel---as portended by last months shocking decline in imports---while the USD continues to climb, as the massively dollar-short global markets scrambles for funding?

There will be a conflagration in the EM debt market, that's what. The latter is surely the sub-prime of the present era. The overwhelming share of these borrowings went into one-time industrial and infrastructure investments that will not be money-good during an era of global cooling, and that will become vaporizing collateral as surely as did the tract housing of Scottsdale AZ last time around.

Do the goal-seekers at Goldman really believe their house propaganda about the miracle growth story of the BRICs? And that the vast pile of unsustainable debt and pointless construction which comprises the Chinese economy can actually be safely walked back to earth by the self-evidently desperate comrades in Beijing?

Likewise, what happens when the yen goes into free-fall and all of East Asia succumbs to a firestorm of competitive currency depreciation. How do the German machinery, capital goods and luxury car exporters-----the one thing keeping the Eurozone above water---fare under that scenario? And when the  visibly stumbling German export machine really hits the skids owing to the collapse of demand from Russia and the China complex, what happens to the Euro, and all the fast money speculators who plowed into the sure thing of Greek and Italian debt?

Is there not at least a possibility that the Italian 10-year bond, recently traded at the absurd yield of 1.95%, is a giant meltdown waiting to happen. And that when the Wall Street slicksters sell their Italian bonds and euros----- that the dollar short will uncoil even more violently than it has in recent months or during the last crisis in 2008?

Indeed, the possibility of a massive scramble for dollars alone refutes the decoupling myth, and the implicit closed economy model offered by Herr Hatzius and the rest of his Wall Street fellow travelers. The reason they are still saying buy on the dip and that its 3% full-steam ahead is that their models are nothing more than a goal-seeked projection that always ends up at Keynesian full employment three years ahead. World without end.

But maybe a soaring dollar, a cooling global economy and $50 oil price will come ricocheting back into the US economy. If it does, the shale miracle is over and upwards of $500 billion of oil and gas patch leveraged debt goes into a meltdown every bit as violent as the mortgage CDO crash 7 years ago.

And what happens to the rate of business CapEx in that scenario----given that a huge portion of the tepid recovery after the 2008 crisis was accounted for by the energy and shale boom?

Or what about the robust export pick-up implicit in the 3% growth dream. As shown below, since 2007 US exports have only expanded at a 2.2% nominal rate, and that was on the back of a weakfish dollar and boom in the export of commodity based raw and processed materials and chemicals. Indeed, the latter have expanded at 2X the rate of overall exports, but a cooling global economy and a hot dollar means the jig is up.

Yes, and try something even so prosaic as travel and tourism, theme parks and luxury and aspirational retail. In the face of a far stronger dollar, the tourism trade which grew at a 12% annual rate since the 2009 bottom is likely to become considerably less "aspirational".

Decoupling? Hardly.

Yes, life inside the bubble is all good. Would that it were real.




David Stockman's Contra Corner is the only place where mainstream delusions and cant about the Warfare State, the Bailout State, Bubble Finance and Beltway Banditry are ripped, refuted and rebuked. Subscribe now to receive David Stockman’s latest posts by email each day as well as his model portfolio, Lee Adler’s Daily Data Dive and David’s personally curated insights and analysis from leading contrarian thinkers.

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