“Non possiamo più aiutarvi”.

Sono finiti così 18 mesi di follia: 18 mesi di continuo “pompaggio” dell’euforia collettiva.

La pagliacciata è finita: l’inflazione non è più transitoria, la Borsa non sale sempre, non saremo tutti infinitamente ricchi.

Era, appunto, una pagliacciata: ed è finita a metà dicembre 2021.

Chi, come la Banca JP Morgan, aveva pubblicato a inizio dicembre il proprio annuale Outlook, tutto improntato all’ottimismo ed all’euforia, come vedete proprio qui sotto nella tabella, oggi è costretto (a distanza di soli 15 giorni) a riscrivere tutto.

Perché tutti i numeri che vedete qui sotto sono, semplicemente, senza senso alla luce di ciò che è appena successo. Il 2022 sarà un anno senza QE e con i tassi di interesse che salgono.

O almeno, così ci è stato raccontato nell’ultima settimana.

I mercati come hanno reagito nelle prime ore? Come se non ci credessero.

La reazione dei mercati finanziari è stata del tipo: “non ce la faranno mai”. La reazione dei mercati è stata: “l’economia reale cede prima ancora che loro riescano ad alzare i tassi di interesse”.

Recce’d è d’accordo: e lo abbiamo scritto da oltre un anno. Non è l’inflazione, oggi, il problema. E tanto meno lo sono i tassi ufficiali di interesse.

Il problema è l’economia reale.

Parliamo in modo semplice: la grande manovra, il GO BIG di Janet Yellen nel 2020, non funziona e non funzionerà. L’economia reale non è in ripresa: i consumatori hanno speso i soldi dello “stimolo”, e dopo che quelli sono finiti l’economia sta peggio di prima.

Il che ovviamente crea problemi reali: il prezzo del combustibile per riscaldamento che sale dell’80%, oppure la popolarità del Presidente USA Joe Biden che è crollata, oppure lo sciopero generale in Italia.

Come un anno fa nel Blog Recce’d ha scritto che “le probabilità che le cose vadano come dice la Fed e la BCE sono pari a zero”, oggi Recce’d vi dice che “le probabilità che le cose vadano come scrive Goldman Sachs nell’immagine qui sotto sono pari a zero”.

E questo, ovviamente, determina il rendimento di tutti gli asset finanziari in futuro.

Abbiamo più volte anticipato questa situazione, quella che tutti vedete oggi, proprio qui nel nostro Blog.

Approfondimenti sono stati pubblicati nel nostro The Morning Brief ed in altre sedi. Altri approfondimenti saranno pubblicati la prossima settimana.

Per chi tra i nostri lettori vuole comprendere meglio per quale ragione oggi Recce’d vi anticipa che il problema è l’economia reale, pubblichiamo di seguito qui un ottimo articolo che spiega che è necessario guardare al lato dell’offerta, e non a quello della domanda.

Lato dell’offerta, lo ripetiamo ancora una volta, a proposito del quale né i Governi né le Banche Centrali possono fare nulla.

La fase della stupidità è finita. e si torna quindi alla realtà. La lettura di questo articolo vi sarà utile per capire dove si va adesso, illustrando con dettaglio dove stanno oggi i problemi che ci portano alla stagflazione.

The Revenge of Supply, at Project Syndicate

Surging inflation, skyrocketing energy prices, production bottlenecks, shortages, plumbers who won’t return your calls – economic orthodoxy has just run smack into a wall of reality called “supply.” 

Demand matters too, of course. If people wanted to buy half as much as they do, today’s bottlenecks and shortages would not be happening. But the US Federal Reserve and Treasury have printed trillions of new dollars and sent checks to just about every American. Inflation should not have been terribly hard to foresee; and yet it has caught the Fed completely by surprise. 

The Fed’s excuse is that the supply shocks are transient symptoms of pent-up demand. But the Fed’s job is – or at least should be – to calibrate how much supply the economy can offer, and then adjust demand to that level and no more. Being surprised by a supply issue is like the Army being surprised by an invasion. 

The current crunch should change ideas. Renewed respect may come to the real-business-cycle school, which focuses precisely on supply constraints and warns against death by a thousand cuts from supply inefficiencies. Arthur Laffer, whose eponymous curve announced that lower marginal tax rates stimulate growth, ought to be chuckling at the record-breaking revenues that corporate taxes are bringing in this year. 

Equally, one hopes that we will hear no more from Modern Monetary Theory, whose proponents advocate that the government print money and send it to people. They proclaimed that inflation would not follow, because, as Stephanie Kelton puts it in The Deficit Myth, “there is always slack” in our economy. It is hard to ask for a clearer test. 

But the US shouldn’t be in a supply crunch. Real (inflation-adjusted) per capita US GDP just barely passed its pre-pandemic level this last quarter, and overall employment is still five million below its previous peak. Why is the supply capacity of the US economy so low? Evidently, there is a lot of sand in the gears. Consequently, the economic-policy task has been upended – or, rather, reoriented to where it should have been all along: focused on reducing supply-side inefficiencies. 

One underlying problem today is the intersection of labor shortages and Americans who are not even looking for jobs. Although there are more than ten million listed job openings – three million more than the pre-pandemic peak – only six million people are looking for work. All told, the number of people working or looking for work has fallen by three million, from a steady 63% of the working-age population to just 61.6%. 

We know two things about human behavior: First, if people have more money, they work less. Lottery winners tend to quit their jobs. Second, if the rewards of working are greater, people work more. Our current policies offer a double whammy: more money, but much of it will be taken away if one works. Last summer, it became clear to everyone that people receiving more benefits while unemployed than they would earn from working would not return to the labor market. That problem remains with us and is getting worse. 

Remember when commentators warned a few years ago that we would need to send basic-income checks to truck drivers whose jobs would soon be eliminated by artificial intelligence? Well, we started sending people checks, and now we are surprised to find that there is a truck driver shortage. 

Practically every policy on the current agenda compounds this disincentive, adding to the supply constraints. Consider childcare as one tiny example among thousands. Childcare costs have been proclaimed the latest “crisis,” and the “Build Back Better” bill proposes a new open-ended entitlement. Yes, entitlement: “every family who applies for assistance … shall be offered child care assistance” no matter the cost. 

The bill explodes costs and disincentives. It stipulates that childcare workers must be paid at least as much as elementary school teachers ($63,930), rather than the current average ($25,510). Providers must be licensed. Families pay a fixed and rising fraction of family income. If families earn more money, benefits are reduced. If a couple marries, they pay a higher rate, based on combined income. With payments proclaimed as a fraction of income and the government picking up the rest, either prices will explode or price controls must swiftly follow. Adding to the absurdity, the proposed legislation requires states to implement a “tiered system” of “quality,” but grants everyone the right to a top-tier placement. And this is just one tiny element of a huge bill. 

Or consider climate policy, which is heading for a rude awakening this winter. This, too, was foreseeable. The current policy focus is on killing off fossil-fuel supply before reliable alternatives are ready at scale. Quiz: If you reduce supply, do prices go up or go down? Europeans facing surging energy prices this fall have just found out. 

In the United States, policymakers have devised a “whole-of-government” approach to strangle fossil fuels, while repeating the mantra that “climate risk” is threatening fossil-fuel companies with bankruptcy due to low prices. We shall see if the facts shame anyone here. Pleading for OPEC and Russia to open the spigots that we have closed will only go so far. 

Last week, the International Energy Agency declared that current climate pledges will “create” 13 million new jobs, and that this figure would double in a “Net-Zero Scenario.” But we’re in a labor shortage. If you can’t hire truckers to unload ships, where are these 13 million new workers going to come from, and who is going to do the jobs that they were previously doing? Sooner or later, we have to realize it’s not 1933 anymore, and using more workers to provide the same energy is a cost, not a benefit. 

It is time to unlock the supply shackles that our governments have created. Government policy prevents people from building more housing. Occupational licenses reduce supply. Labor legislation reduces supply and opportunity, for example, laws requiring that Uber drivers be categorized as employees rather than independent contractors. The infrastructure problem is not money, it is that law and regulation have made infrastructure absurdly expensive, if it can be built at all. Subways now cost more than a billion dollars per mile. Contracting rules, mandates to pay union wages, “buy American” provisions, and suits filed under environmental pretexts gum up the works and reduce supply. We bemoan a labor shortage, yet thousands of would-be immigrants are desperate to come to our shores to work, pay taxes, and get our economy going. 

A supply crunch with inflation is a great wake-up call. Supply, and efficiency, must now top our economic-policy priorities.

*********

Update: I am vaguely aware of many regulations causing port bottlenecks, including union work rules, rules against trucks parking and idling, overtime rules, and so on. But it turns out a crucial bottleneck in the port of LA is... Zoning laws! By zoning law you're not allowed to stack empty containers more than two high, so there is nowhere to leave them but on the truck, which then can't take a full container. The tweet thread is really interesting for suggesting the ports are at a standstill, bottled up FUBARed and SNAFUed, not running full steam but just can't handle the goods. 

Disclaimer: To my economist friends, yes, using the word "supply" here is not really accurate. "Aggregate supply" is different from the supply of an individual good. Supply of one good increases when its price rises relative to other prices. "Aggregate supply" is the supply of all goods when prices and wages rise together, a much trickier and different concept. What I mean, of course, is something like "the amount produced by the general equilibrium functioning of the economy, supply and demand, in the absence of whatever frictions we call low 'aggregate demand', but as reduced by taxes, regulations, and other market distortions." That being too much of a mouthful, and popular writing using the word "supply" and "supply-side" for this concept, I did not try to bend language towards something more accurate. 

In molte occasioni, Recce’d negli ultimi 18 mesi vi ha menzionato gli Anni Settanta. E ancora più di frequente vi ha scritto di stagflazione.

Ora che ci siamo, ora che avete i dati sotto gli occhi, dovete solo chiedervi se vi siete già preparati, se avete adattato i vostri investimenti a questo scenario.

Che non è una sorpresa: assolutamente. Si tratta di uno scenario già ben visibile da oltre un anno. Ai meno attenti, ed ai più creduloni, è stato fatto credere che le cose stavano diversamente.

Chi ci ha seguiti, adesso forse è pronto. Tutti gli altri devono invece correre.

Può essere utile rileggere oggi quello che uno dei più noti ed esperti economisti al Mondo, John H. Cochrane, scriveva qualche settimana fa, prima della Festa del Thanksgiving negli USA, a proposito dell’inflazione e del comportamento dei consumatori.

John H. Cochrane

Nov 26

Black Friday begins tonight, and Americans, after emerging from our collective turkey coma, will dive into our sacred, national ritual: shopping. 

Those who haven’t shopped lately are in for a rude awakening: Many items will be out of stock, delayed or cost a lot more than they used to. Welcome to inflation, back from the 1970s!  

As you look for a deal on a Peloton to work off your pandemic paunch, here is a brief explanation about what’s going on with our economy, why so many things are becoming more expensive, why this hurts all of us, and why the government can’t spend its way out of this mess.

Why are prices rising? 

The news is full of “supply chain” problems. Shipping containers can’t get through our ports. Car-makers can’t get chips to make cars. Railroads look like the 405 at rush hour. 

What’s underlying many of these problems is the fact that businesses can’t find enough workers. There aren’t enough truck drivers, airline pilots, construction workers and warehouse workers in the “supply chain.” Restaurants can’t find waiters and cooks. There are 10 million job openings and only seven million people looking for work. About three million people who were working in March 2020 are no longer working or looking for work.

But supply chains wouldn’t be clogged if people weren’t trying to buy a lot. The fundamental issue is that demand is outstripping supply.

Strawberry prices go up in the fall because the supply is lower; apples are cheap, because they are abundant. Prices of one good relative to another change, and induce us to shop effectively. 

That’s normal.

Inflation is different. Inflation describes all prices and wages going up at the same time, straining supply throughout the economy. That’s the situation right now. Even the Dollar Tree stores just became the buck and a quarter stores, raising all prices 25%.

What’s driving current inflation?

Widespread inflation always comes from people wanting to buy more of everything than the economy can supply. Where did all that demand come from? In its response to the pandemic, the U.S. government created about 2.5 trillion new dollars, and sent checks to people and businesses. It borrowed another $2.5 trillion, and sent more checks to people and businesses. Relative to a $22 trillion economy, and $17 trillion of existing (2020) federal debt, that’s a lot of money. 

People are now spending this money, the economy can’t keep up, and prices are rising. Milton Friedman once joked that the government could easily create inflation by dropping money from helicopters. That’s pretty much what our government did.

(I do not here argue the wisdom of this policy. The government helped a lot of people and businesses to get through the lockdowns. One can quibble that money could have been distributed more thoughtfully, but we’re here to think about inflation, not Covid policy.) 

 What’s wrong with inflation?

Prices and wages all rising at the same rate doesn’t sound so bad. But it’s never that simple. Inflation is chaotic! Some prices go up faster than others. You can’t get things you need. Neither can businesses. And wages tend to lag behind prices, so workers lose in real terms, as do those on fixed incomes. 

What was the Fed’s role in all of this?

The Federal Reserve failed at its most basic job: to figure out how much the economy can produce, and to bring demand up to, but not beyond, that supply. To that end, the Fed controls interest rates. If people get a higher interest rate on money in the bank, they will leave it there rather than spend it. But the Fed failed to see inflation coming, and kept interest rates at zero, where they remain. The Fed says it is keeping interest rates low to improve “labor market conditions,” despite the widespread worker shortages and the eruption of inflation.

Will inflation continue? 

It’s hard to say. If the Federal Reserve’s immense staff of economists can be caught off guard, so can you and I. 

That said, there is some momentum to inflation, so further price increases are likely. Higher property prices will feed into higher rents; rising input costs and wages will lead to higher prices; trillions of those extra savings are still waiting to be spent. 

Where inflation goes after that depends on how much more our government continues to print or borrow to send people checks and expand social programs. This doesn’t seem likely to end soon. And if people believe that monetary policy will never return to controlling inflation, and taxes and spending will never come into line so the government can start to repay mounting debts, inflation spirals out of control.

The good news is that long-term interest rates—the kind you pay to borrow for a mortgage or car—have not yet risen, as they tend to do when bond markets expect inflation. Bond markets think inflation will quickly subside. It’s still very cheap to borrow, a bright light for consumers. And low rates make it easier for the government to slow inflation. 

Okay, so what can Washington do about it?

Simple: It has to stop printing and borrowing money. And it has to reassure people who hold our debt that there really is a plan for paying it off. And the Fed has to return to the unglamorous job of curbing inflation, rather than endless “stimulus” and “accommodation.” 

To ease supply constraints, our government has to remove the sand in the gears. The ports are clogged because of countless regulations—like zoning laws that forbid stacking empty containers. Multiply anecdotes like this by tens of thousands throughout the economy and you’ll begin to get a picture of where we are. We need a long-overdue Marie-Kondoing of public affairs.

If inflation is as simple as you say it is, why are politicians singing another tune?

Politicians hate inflation because it means they can’t keep spreading money around. Supply constraints reverse political rhetoric. When a politician says a new program will “create millions of jobs,” those jobs are now a cost, not a benefit, because there aren’t any available workers.

So they offer a string of excuses, just as they did in the 1970s—including lots of talk about “supply shocks” and “bottlenecks” and “transitory” inflation —while hoping it all goes away. 

The Biden administration, having just cancelled the Keystone pipeline, is now begging the Saudis and Russians to turn on the pumps, just as Richard Nixon pleaded with OPEC. The White House is accusing oil companies of colluding to raise prices. They will likely pressure other companies to limit price increases, as presidents from Kennedy to Ford did. This shouldn’t come as a surprise: Every past inflation has sparked a witch hunt for “speculators,” “hoarders,” “middlemen,” “price-gougers,” and other phantasms. Let’s hope the government doesn’t try price controls, as Nixon did, precipitating gas lines and shortages of everything. 

Meanwhile, the administration is re-messaging its spending plans as inflation-fighters. It won’t work. Consider the childcare plan, to take just one example, which they say will lower costs. The government will subsidize childcare while mandating higher wages for staff, more licensing requirements and inspections. Childcare costs will inevitably rise for the country as a whole. One can believe that it’s a good policy, and that it’s worth the cost, but it will make costs higher, not lower. 

Politicians don’t want to face the hard reality that inflation brings, but inflation has a way of forcing change, as it did in 1980. 

So, should I try to buy things on Black Friday and Cyber Monday? 

Only if you really need it. Prices are the neurons that transmit information in the economy. High prices tell you to wait and to let someone who values that Peloton more than you do have it. Most Americans should take this golden opportunity to build up some savings, look for a job or a better job, and enjoy those leftovers.

E’ sufficiente spendere meno, dice qui sopra nell’articolo John H. Cochrane: non sappiamo come la pensano i nostri lettori, alle prese con le spese di carburante aumentate del 80%.

Ma ciò che qui è importante è proprio quel suggerimento: spendere meno. Come abbiamo già scritto oggi in un altro Post, il punto centrale del nuovo scenario è proprio questo: la crescita dell’economia.

Nell’immagine che segue, Recce’d vi ricorda che:

• l’errore fatto dalle Banche Centrali (e riconosciuto proprio questa settimana) è un errore di proporzioni epiche, mai visto prima nella Storia; e poi che

• Banche Centrali e Governi possono fare nulla per risolvere i problemi dal lato dell’offerta

A tutti voi lettori, i private bankers, i promotori finanziari, i wealth managers e i robot advisor hanno spiegato che non c’è da preoccuparsi, che non fa nulla, che va tutto bene, che l’inflazione tornerà al 2%, che il Mondo va benissimo.

Come avete già visto, e come vedrete nei prossimi mesi, queste sono semplicemente frasi pronunciate in modo leggero, superficiale, spregiudicato allo scopo di inzuccherare, confondere ed illudere; hanno nulla a che vedere con la realtà

Il vostro private banker, il vostro wealth manager, il vostro promotore finanziario, il vostro robot advisor a voi ha raccontato quello che Goldman Sachs gli diceva di raccontarvi: e quello che vi ha raccontato lo potete rileggere qui sotto nell’immagine.

Goldman Sachs aveva nel mese di aprile una previsione per il tasso di inflazione a dicembre 2021 del 2,77% ancora in aprile, ovvero otto mesi fa. Il tasso di inflazione oggi sta al 7%.

.Si tratta soltanto di un errore grossolano ai limiti dell’incredibile, oppure Goldman Sachs ed il vostro private banker non ne capiscono assolutamente nulla?

Oppure (terza possibilità) sono riusciti a fregarvi, facendovi tutti fessi?

Visto che tutti voi lettori siete dotati di un’ottima capacità di giudizio e discernimento, per il futuro fareste bene a NON fidarvi: fareste bene a ragionare usando la vostra testa, informandovi, ed usando le vostre capacità critiche insieme ad un pizzico di scetticismo.

Noi vogliamo aiutarvi, e per questa ragione ci trovate sempre disponibili contattandoci attraverso il nostro sito. In aggiunta, vi aiutiamo attraverso questo Blog, gratuitamente: ad esempio, mettendovi a disposizione qui sotto un secondo articolo.

Perché questo articolo vi può essere utile, da un punto di vista pratico? Perché si tratta di un articolo scritto nel mese di settembre, e quindi tre mesi fa.. Può essere molto utile, per tutti voi, confrontarsi con quello che si scriveva e leggeva tre mesi fa.

In questo caso, chi scrive è autorevole, una mente brillante capace di ragionare in modo critico, evitando in questo modo di cadere nella trappola di Goldman Sachs e dei promotori finanziari. L’articolo che leggete di seguito fu scritto in settembre, eppure c’era già scritto ciò che leggete stamattina sui quotidiani.

Ma attenzione: ci trovate scritto anche ciò che leggerete tra tre e sei mesi.

Questo è un contributo utile, per la gestione dei vostri investimenti sui mercati finanziari: l’articolo è molto, molto chiaro nello spiegare ciò che i mercati dovranno affrontare (“political and economic pain”) quasi altrettanto chiaro quanto era chiaro, 12 mesi fa, che la “inflazione transitoria” era soltanto una stupidaggine.

Come abbiamo scritto oggi in un altro Post, la fase della stupidità è finita. Auguriamoci che non si arrivi alla “crisi della fiducia” della quale, in questo Post, scrivemmo qualche mese fa.

Today’s inflation is transitory, our central bankers assure us. It will go away on its own. But what if it does not? Central banks will have “the tools” to deal with inflation, they tell us. But just what are those tools? Do central banks have the will to use them, and will governments allow them to do so?

Should inflation continue to surge, central banks’ main tool is to raise interest rates sharply, and keep them high for several years, even if that causes a painful recession, as it did in the early 1980s. How much pain, and how deep of a dip, would it take? The well-respected Taylor rule (named after my Hoover Institution colleague John B. Taylor) recommends that interest rates rise one and a half times as much as inflation. So, if inflation rises from 2% to 5%, interest rates should rise by 4.5 percentage points. Add a baseline of 2% for the inflation target and 1% for the long-run real rate of interest, and the rule recommends a central-bank rate of 7.5%. If inflation accelerates further before central banks act, reining it in could require the 15% interest rates of the early 1980s.

Would central banks do that? If they did, would high interest rates control inflation in today’s economy? There are many reasons for worry.

The shadow of debt

Monetary policy lives in the shadow of debt. US federal debt held by the public was about 25% of GDP in 1980, when US Federal Reserve Board Chair Paul Volcker started raising rates to tame inflation. Now, it is 100% of GDP and rising quickly, with no end in sight. When the Fed raises interest rates one percentage point, it raises the interest costs on debt by one percentage point, and, at 100% debt-to-GDP, 1% of GDP is around $227 billion. A 7.5% interest rate therefore creates interest costs of 7.5% of GDP, or $1.7 trillion.

Where will those trillions of dollars come from? Congress could drastically cut spending or find ways to increase tax revenues. Alternatively, the US Treasury could try to borrow additional trillions. But for that option to work, bond buyers must be convinced that a future Congress will cut spending or raise tax revenues by the same trillions of dollars, plus interest. Even if investors seem confident at the moment, we cannot assume that they will remain so indefinitely, especially if additional borrowing serves only to pay higher interest on existing debt. Even for the United States, there is a point at which bond investors see the end coming, and demand even higher interest rates as a risk premium, thereby raising debt costs even more, in a spiral that leads to a debt crisis or to a sharp and uncontrollable surge of inflation. If the US government could borrow arbitrary amounts and never worry about repayment, it could send its citizens checks forever and nobody would have to work or pay taxes again. Alas, we do not live in that fanciful world.

In sum, for higher interest rates to reduce inflation, higher interest rates must be accompanied by credible and persistent fiscal tightening, now or later. If the fiscal tightening does not come, the monetary policy will eventually fail to contain inflation.

This is a perfectly standard proposition, though it is often overlooked when discussing the US and Europe. It is embodied in the models used by the Fed and other central banks. [Previous post here on just what that means.] It was standard IMF advice for decades.

Successful inflation and currency stabilization almost always includes monetary and fiscal reform, and usually microeconomic reform. The role of fiscal and microeconomic reform is to generate sustainably higher tax revenues by boosting economic growth and broadening the tax base, rather than with sharply higher and growth-reducing marginal tax rates. Many attempts at monetary stabilization have fallen apart because the fiscal or microeconomic reforms failed. Latin-American economic history is full of such episodes.

Even the US experience in the 1980s conforms to this pattern. The high interest rates of the early 1980s raised interest costs on the US national debt, contributing to most of the then-large annual “Reagan deficits.” Even after inflation declined, interest rates remained high, arguably because markets were worried that inflation would come surging back.

So, why did the US inflation-stabilization effort succeed in the1980s, after failing twice before in the 1970s, and countless times in other countries? In addition to the Fed remaining steadfast and the Reagan administration supporting it through two bruising recessions, the US undertook a series of important tax and microeconomic reforms, most notably the 1982 and 1986 tax reforms, which sharply lowered marginal rates, and market-oriented regulatory reforms starting with the Carter-era deregulation of trucking, air transport, and finance.

The US experienced a two-decade economic boom. A larger GDP boosted tax revenues, enabling debt repayment despite high real-interest rates. By the late 1990s, strange as it sounds now, economists were actually worrying about how financial markets would work once all US Treasury debt had been paid off. The boom was arguably a result of these monetary, fiscal, and microeconomic reforms, though we do not need to argue the cause and effect of this history. Even if the economic boom that produced fiscal surpluses was coincidental with tax and regulatory reform, the fact remains that the US government successfully paid off its debt, including debt incurred from the high interest costs of the early 1980s. Had it not done so, inflation would have returned.

The Borrower Ducks

But would that kind of successful stabilization happen now, with the US national debt four times larger and still rising, and with interest costs for a given level of interest rates four times larger than the contentious Reagan deficits? Would Congress really abandon its ambitious spending plans, or raise tax revenues by trillions, all to pay a windfall of interest payments to largely wealthy and foreign bondholders?

Arguably, it would not. If interest costs on the debt were to spiral upward, Congress would likely demand a reversal of the high interest-rate policy. The last time the US debt-to-GDP ratio was 100%, at the end of World War II, the Fed was explicitly instructed to hold down interest costs on US debt, until inflation erupted in the 1950s.

The unraveling can be slow or fast. It takes time for higher interest rates to raise interest costs, as debt is rolled over. The government can borrow as long as people believe that the fiscal reckoning will come in the future. But when people lose that faith, things can unravel quickly and unpredictably.

Will and Politics

Fiscal policy constraints are only the beginning of the Fed’s difficulties. Will the Fed act promptly, before inflation gets out of control? Or will it continue to treat every increase of inflation as “transitory,” to be blamed on whichever price is going up most that month, as it did in the early 1970s?

It is never easy for the Fed to cause a recession, and to stick with its policy through the pain. Nor is it easy for an administration to support the central bank through that kind of long fight. But tolerating a lasting rise in unemployment – concentrated as usual among the disadvantaged – seems especially difficult in today’s political climate, with the Fed loudly pursuing solutions to inequality and inequity in its interpretation of its mandate to pursue “maximum employment.”

Moreover, the ensuing recession would likely be more severe. Inflation can be stabilized with little recession if people really believe the policy will be seen through. But if they think it is a fleeting attempt that may be reversed, the associated downturn will be worse.

One might think this debate can be postponed until we see if inflation really is transitory or not. But the issue matters now. Fighting inflation is much easier if inflation expectations do not rise. Our central banks insist that inflation expectations are “anchored.” But by what mechanism? Well, by the faith that those same central banks would, if necessary, reapply the harsh Volcker medicine of the 1980s to contain inflation. How long will that faith last? When does the anchor become a sail?

A military or foreign-policy analogy is helpful. Fighting inflation is like deterring an enemy. If you just say you have “the tools,” that’s not very scary. If you tell the enemy what the tools are, show that they all are in shiny working order, and demonstrate that you have the will to use them no matter the pain inflicted on yourself, deterrence is much more likely.

Yet the Fed has been remarkably silent on just what the “tools” are, and just how ready it is to deploy those tools, no matter how painful doing so may be. There has been no parading of materiel. The Fed continues to follow the opposite strategy: a determined effort to stimulate the economy and to raise inflation and inflation expectations, by promising no-matter-what stimulus. The Fed is still trying to deter deflation, and says it will let inflation run above target for a while in an attempt to reduce unemployment, as it did in the 1970s. It has also precommitted not to raise interest rates for a fixed period of time, rather than for as long as required economic conditions remain, which has the same counterproductive result as announcing military withdrawals on specific dates. Like much of the US government, the Fed is consumed with race, inequality, and climate change, and thus is distracted from deterring its traditional enemies.

Buy some insurance! 

An amazing opportunity to avoid this conundrum beckons, but it won’t beckon forever. The US government is like a homeowner who steps outside, smells smoke, and is greeted by a salesman offering fire insurance. So far, the government has declined the offer because it doesn’t want to pay the premium. There is still time to reconsider that choice.

Higher interest rates raise interest costs only because the US has financed its debts largely by rolling over short-term debt, rather than by issuing long-term bonds. The Fed has compounded this problem by buying up large quantities of long-term debt and issuing overnight debt – reserves – in return.

The US government is like any homeowner in this regard. It can choose the adjustable-rate mortgage, which offers a low initial rate, but will lead to sharply higher payments if interest rates rise. Or it can choose the 30-year (or longer) fixed-rate mortgage, which requires a larger initial rate but offers 30 years of protection against interest-rate increases.

Right now, the one-year Treasury rate is 0.07%, the ten-year rate is 1.3%, and the 30-year rate is 1.9%. Each one-year bond saves the US government about two percentage points of interest cost as long as rates stay where they are. But 2% is still negative in real terms. Two percentage points is the insurance premium for eliminating the chance of a debt crisis for 30 years, and for making sure the Fed can fight inflation if it needs to do so. I am not alone in thinking that this seems like inexpensive insurance. Even former US Secretary of the Treasury Lawrence H. Summers has changed his previous view to argue that the US should move swiftly to long-term debt.

But it’s a limited-time opportunity. Countries that start to encounter debt problems generally face higher long-term interest rates, which forces them to borrow short-term and expose themselves to the attendant dangers. When the house down the street is on fire, the insurance salesman disappears, or charges an exorbitant rate.

Bottom line

Will the current inflation surge turn out to be transitory, or will it continue? The answer depends on our central banks and our governments. If people believe that fiscal and monetary authorities are ready to do what it takes to contain breakout inflation, inflation will remain subdued.

Doing what it takes means joint monetary and fiscal stabilization, with growth-oriented microeconomic reforms. It means sticking to that policy through the inevitable political and economic pain. And it means postponing or abandoning grand plans that depend on the exact opposite policies.

If people and markets lose faith that governments will respond to inflation with such policies in the future, inflation will erupt now. And in the shadow of debt and slow economic growth, central banks cannot control inflation on their own.

In numerose occasioni, le pubblicità di IKEA hanno avuto la capacità di fotografare in modo efficace qualche aspetto della realtà che ci circonda.

Come scriviamo oggi in altri due Post, stiamo tutti affrontando un passaggio delicatissimo: uno di quei momenti che si potrebbero definire “epocali”.

La fase della euforia economica artificiale, avviata (ed è paradossale e cinico) grazie allo spazio creato dalla pandemia, è finita.

Al tempo stesso, si assiste anche ad altri cambiamenti che si possono definire “epocali”: in Europa, l’uscita di scena di Angela Merkel.

Sempre in Europa, e sempre in Germania l’inflazione sopra il 5%.

I cambiamenti epocali si riflettono sui mercati finanziari, per il momento mettendoli in uno stato di allerta, di confusione, e di mancanza di direzione. Nel grafico qui sotto, potete vedere che l’indice della Borsa tedesca si trova oggi al medesimo livello del mese di aprile 2021, ovvero di otto mesi fa. Nonostante il fatto che l’acquisto di obbligazioni da parte della BCE (e quindi l’immissione di liquidità da parte della BCE) fino ad oggi è continuato senza sosta (la linea bianca del grafico).

Questi cambiamenti epocali mettono l’Europa in una situazione di fragilità che è superiore a quella in cui si trovano oggi gli Stati Uniti, per una lunga serie di ragioni di cui scriveremo nel nostro The Morning Brief riservato ai nostri Clienti.

Per aiutare il lettore, oggi pubblichiamo un articolo dedicato proprio alla situazione in cui si trova oggi la BCE, articolo che mette inevidenza anche il ruolo particolare dell’Italia nella situazione attuale. Notevole il collegamento che viene fatto, in chiusura dell’articolo, tra il “whatever it takes” di Mario Draghi quando era a capo della BCE, delle finalità di quella iniziativa quando fu presa, e la situazione dell’Italia oggi.

I have been emphasizing the Fed's dilemma: If it raises interest rates, that raises the U.S. debt-service costs. 100% debt to GDP means that 5% interest rates translate to 5% of GDP extra deficit, $1 trillion for every year of high interest rates. If the government does not tighten by that amount, either immediately or credibly in the future, then the higher interest rates must ultimately raise, rather than lower, inflation. 

Jesper Rangvid points out that the problem is worse for the ECB. Recall there was a euro crisis in which Italy appeared that it might not be able to roll over its debt and default. Mario Draghi pledged to do "whatever it takes" including buying Italian debt to stop it and did so. But Italian debt is now 160% of GDP, and the ECB is still buying Italian bonds. What happens if the ECB raises interest rates to try to slow down inflation? Well, Italian debt service skyrockets. 5% interest rates mean 8% of GDP to debt service. 

Central banks first stop bond buying and then raise interest rates. Whether U.S. bond buying programs actually lower treasury yields is debatable. But there is no question that the ECB's bond buying keeps down Italy's interest rate, by keeping down the risk/default premium in that rate. If the ECB stops buying, or removes the commitment to "whatever it takes" purchases, debt service costs will rise again precipitating the doom loop. 

Jesper: 

The ECB is caught in a dilemma. 

The ECB knows that very expansionary monetary policy, combined with already high inflation and strong economic growth, creates a serious risk that inflation and inflation expectations run wild. 

The ECB also knows, however, that if it tightens monetary policy, i.e. stop asset purchases and raise rates, debt-burdened Eurozone countries will face severe challenges. 

Take Italy as an example. At the end of last year, Italian public debt corresponded to 160% of Italian GDP. This is a lot of debt. ...

Low interest rates have been kind:

... in spite of a 50% higher debt burden, debt-servicing costs for Italy has been cut by a third from 2007 to 2020. The reason is of course low interest rates.

...In addition to the global fall in rates, though, the ECB has been buying Eurozone government debt in massive amounts, significantly reducing rates even further. ...

Figure 11. ECB holdings of Italian debt securities. Millions of euros.
Source: Datastream via Refinitiv.

The ECB has bought a lot of debt. First, in relation to the Public Sector Purchase Program (PSPP), launched after the Eurozone debt crisis, and, second, in relation to the Pandemic Emergency Purchases Program (PEPP), the program launched to battle the corona crisis. Under the PSPP, ECB amassed Italian debt worth EUR 400bn. Under the PEPP, it amassed EUR 300bn. In total, the ECB holds Italian debt worth EUR 700bn, see Figure 11. The ECB owns close to 25% of all outstanding Italian public debt....

Figure 12. Yields on long-dated Eurozone government bonds.
Source: Datastream via Refinitiv

Many of us remember the Eurozone crisis in 2010-2013. Italian yields reached more than seven percent in 2012, see Figure 12. Yields only came down after Mario Draghi’s famous “we will do whatever it takes” speech in 2012 (link). ECB saved Italy, thereby saving the Eurozone.

This is an important reminder that it can happen. For the U.S. a large default/inflation premium to real interest rates is a theoretical possibility, and perhaps a memory of the early 1980s if one interprets that episode as a fear of return to inflation, or otherwise a memory of the 1790s. For Europe this happened, and only 10 years ago. 

Jesper does not mention the interesting question, what happens to all these bonds on the ECB balance sheet, or the bonds it will surely acquire if Italian spreads widen again, in the event of default. 

Jesper also does not mention one small piece of good news. I gather Italian debt is somewhat longer-term than U.S. debt, though I don't have a good number handy. That fact means that higher real interest rates (including default premium) only spread into interest costs slowly. 

In sum, 

 the ECB is stuck in a corner. Whether one fears this round of inflation will persist or not, the fact that the ECB is constrained by fiscal considerations is problematic. If the ECB one day needs to raise rates, it will face the dilemma described above.

What to do? 

What is the solution? This will take us too far in this blog, but it lies in the old discussion of macroeconomic reforms in certain European member states, directing fiscal policy to a healthy path, improving productivity and competitiveness, and in the end generate higher growth. This is easier said than done.

Draghi was quite clear, that "do whatever it takes" was a temporary expedient, to give Italy room for structural and fiscal reforms. Those (predictably?) did not happen so here we are again. Is it too late?  Italy will surely not reform before a crisis looms, so the case has to be that a crisis is severe enough to finally provoke growth-oriented economics. 

The ECB, however, remains stuck between a rock and a hard place. As the Fed will be if it tries to substantially raise interest rates. 

In questo Blog, alcuni mesi fa, abbiamo già introdotto la figura di Paul Singer, il gestore a capo del gruppo Elliot Management.

Vi abbiamo segnalato questa figura, di grande competenza ed esperienza, e vi abbiamo suggerito di seguirne il pensiero, le analisi e le pubblicazioni.

Se a qualche nostro lettore fosse sfuggito, noi riportiamo qui sotto il contributo di Paul Singer al Financial Times di questa settimana, contributo che più in basso noi riprendiamo e colleghiamo ad altre considerazioni.

The writer is the founder and co-CEO of Elliott Management

Despite recent jitters over the Omicron variant, global stock market prices remain at or near their highest valuations in history. Bond prices reflect the lowest interest rates in history. And is it any surprise that inflation has broken out of the boundaries of the last 20 years, given the stated goal of policymakers to create more of it?

Across the market landscape, risks are building, many of them hidden from view. Yet, in a surprising twist, a growing number of the largest investors in the world — including socially important institutions such as pension funds, university endowments, charitable foundations and the like — are currently lining up to take on more risk, which could have catastrophic implications for these investors, their clients’ capital and the stability of broader public markets.

What is driving this behaviour? In the main, it is driven by the radically expansionary monetary and fiscal policies undertaken by developed-world governments since the end of the global financial crisis, which were accelerated after the Covid-19 pandemic rattled markets and depressed economic activity last year. And in part it is driven by benchmarking — the practice of institutional investors measuring their performance against a benchmark such as the S&P 500.

As monetary and fiscal policies have pushed securities valuations to new heights, institutional investors have been tempted to overweight their portfolios to stocks, even at record-high prices, for fear of missing out on extraordinary gains. The buying pressure created by these strategies is only driving prices higher and herding capital into risk assets.

At present, risks are at, or close to, the highest levels in market history. For instance, the market capitalisation of all domestic US public and private equities is now at 280 per cent of gross domestic product, much higher than the previous peak of 190 per cent just before the collapse of the dotcom bubble. And household equity allocations are at an all-time high of 50 per cent.

Eventually, rising inflation, rising interest rates or some unforeseen turn of events could cause a substantial stock and bond market decline, perhaps in an unpredictable sequence. What then for the institutional managers when the rush for the exits begins? One answer might be that the authorities will never allow a sustained downturn in asset prices to happen again. This points to one of the key problems with the current set of monetary and fiscal policies in the developed world: they mask and minimise risks while preventing stock and bond prices from performing their indispensable signalling roles.

Currently, policies across the developed world are designed to encourage people to believe that risks are limited and that asset prices, not just the overall functioning of the economy, will always and forever be protected by the government. Due to this extraordinary support for asset prices, almost all investment “strategies” of recent years have made money, are making money and are expected to keep making money. The most successful “strategy,” of course, has been to buy almost any risk asset, leaning hard on the latest fads, using maximum leverage to enhance buying power and buying more on the “dips”. So it is no wonder that under these manufactured conditions, investors would “move out on the risk curve” — investor-speak for taking on more risk unconnected to expected returns.

Most investors who say that they are willing to bear more risk do not actually mean that. What they really mean is that they fear missing out on the higher returns experienced by other investors — in other words, missing their benchmarks. However, the ability of governments to protect asset prices from another downturn has never been more constrained. The global $30tn pile of stocks and bonds that have been purchased by central banks in order to drive up their prices has created a gigantic overhang. With inflation rising, policymakers are reaching the limits of their ability to support asset prices in a future downturn without further exacerbating inflationary pressures.

With all this in mind, it is puzzling that a growing number of otherwise sober money managers are in the process of boosting their allocations to riskier assets, rather than trying to figure out ways to make some kind of rate of return without giving back years of capital accretion in the next crash or crisis. Investors who have upgraded their risk levels, relying on policymakers to protect the prices of their holdings, may suffer significant and perhaps long-lasting damage when the government-orchestrated music finally stops.

Recce’d giudica questo articolo eccellente, e da più di un punto di vista: è una sintesi equilibrata ed insieme efficacissima dello stato degli affari, sui mercati finanziari, ed è chiarissimo anche quando fa riferimento agli atteggiamenti delle diverse categorie di investitori.

Se leggete con attenzione questo articolo di Paul Singer (uomo che certamente NON ha alcun interesse personale a deprimere i mercati finanziari) avrete un quadro preciso di dove si trovano, oggi i soldi che avete investito sui mercati finanziari. Non c’è molto altro da aggiungere.

C’è però da rispondere alla domanda: e quindi? Cosa facciamo? Come operiamo? Come modifichiamo il portafoglio titoli?

Recce’d ha una propria risposta, che concretamente si traduce nel portafoglio modello che successivamente si traduce nei portafogli dei nostri Clienti.

Questo è il servizio che Recce’d propone ai propri Clienti: una gestione di portafoglio in remoto, che non impone a nessuno di trasferire i propri soldi, e che risolve ogni eventuale complessità operativa nel modo più semplice e gestibile, consentendo al Cliente di beneficiare dei numerosi vantaggi dei propri portafogli modello, ed al tempo stesso mantenendo sempre il proprio Cliente perfettamente informato ed anche consapevole di ciò che sta facendo, in totale ed assoluta trasparenza.

Noi non facciamo parte della schiera di imbonitori iscritti all’Albo che sono costretti a raccontare sempre che “tutto va bene come meglio non potrebbe”. Non ci tocca di fare “marchette”, come si dice in gergo.

I nostri Clienti sono tra i pochi ad essere consapevoli dei rischi che stanno correndo, e non solo questo: noi siamo capaci di farli guadagnare, mantenendo i rischi sempre sotto stretto controllo.

Un lavoro importante, e risultati che pochissimi sono in grado di garantire. Non parliamo tanto del rendimento, quanto della consapevolezza e l’equilibrio.

Torniamo alle parole di Paul Singer che avete letto più in alto: tra le moltissime cose che meritano una sottolineatura, noi scegliamo oggi di sottolineare l’accenno ai Fondi Pensione ed ai loro problemi, un tema urgente sul quale ritorneremo poi in un Post successivo.

Poi riprendiamo anche nello specifico una frase di Singer: At present, risks are at, or close to, the highest levels in market history.

Quando i prezzi, sui mercati finanziari, risultano scollegati dalla realtà sottostante, nel brevissimo termine questo a molti sembra essere “un successone”, ovvero “una bellissima cosa”, e questo perché “è facile guadagnare”.

Recce’d vi ripete che i VERI guadagni, nella gestione del portafoglio in titoli, NON si fanno così.

I VERI guadagni sono quelli che restano ALLA FINE di una fase di mercato. I conti si fanno alla fine: sempre, ed anche questa volta.

E quindi, come si gestisce il portafoglio in titoli in una fase come quella che Singer più sopra ha descritto alla perfezione?

Noi al Cliente lo abbiamo illustrato, e per diverse settimane, nel nostro The Morning Brief: quando i prezzi sui mercati finanziari sono del tutto scollegati dalla realtà, chi vince lo fa se è capace di gestire la volatilità e le sue improvvise esplosioni.

L’articolo che segue, sempre della settimana scorsa e sempre dal Financial Times, vi sarà utile a comprendere il natura, origini e ruolo della volatilità in una fase nella quale le Banche Centrali mantengono elevata la liquidità per i mercati finanziari: cosa che a molti risulta difficile da comprendere. Perché non rimane sempre tutto tranquillo?

In aggiunta, vi segnaliamo che, come già fatto da Paul Singer, anche in questo articolo si mette in evidenza l’importanza, negli anni 2020 e 2021, dell’atteggiamento di alcune categorie di investitori verso il rischio: in particolare laddove si dice che: More and more people got sucked into similar positioning. In the process, the risk of systemic financial instability shifted from banks subject to stronger regulatory oversight to under-supervised and poorly regulated non-bank participants in the market.

E questa, amici lettori, per tuti voi è già una indicazione operativa.

The writer is president of Queens’ College, Cambridge, and an adviser to Allianz and Gramercy

As bouts of market volatility have become more common in recent weeks, it is clear that investor appetite to buy on dips, while still strong, will be tested when the US Federal Reserve withdraws support for asset prices.

For now, overall liquidity in markets remains high. While starting to taper, central bank asset buying programmes are still huge. But the sharp swings in markets experienced in recent weeks illustrate a phenomenon that we are likely to see more of: “illiquidity in the midst of liquidity” — a phrase I first heard from Gramercy’s founder Robert Koenigsberger.

The seemingly counter-intuitive notion is that liquidity dislocations can occur within the context of ample overall liquidity. Having experienced sudden bouts of volatility in recent years, investors seem generally well equipped to navigate their way through it, including by using market drops as a basis for further future gains. Yet the emergence this time round of two factors that were not foreseen just a few months ago complicates matters: inflation and the investability of China and Russia. Investors now need to assess more carefully the possibility not just of pockets of illiquidity in the midst of generalised liquidity, but also of a retreat of overall liquidity.

Global bond and equity investors have been taken on quite a rollercoaster ride in recent days. Last week’s unsettling fall in stocks was followed by this week’s impressive two-day rally and yet more outsized moves in bond yields. The immediate causes of this volatility were concern — on health, economic and financial grounds — about Omicron, the new and more infectious coronavirus variant, and the manner in which Fed chair Jay Powell chose finally to retire the gross mis-characterisation of inflation as “transitory”. The volatility caused by disorderly closing of “pain trades” was amplified by a longstanding structural imbalance: the lack of sufficient risk-absorbing capital in the face of a sudden shift in conventional market wisdom.

This is not just about the multi-year reduction in the willingness and ability of intermediaries (broker-dealers) to act counter-cyclically. It also reflects the greater uniformity of portfolio positioning in the context of protracted Fed-induced market distortions. Until now, episodes of sudden illiquidity in the midst of liquidity have proved to be temporary and reversible, and for good reason: The Fed’s constant flooding of financial markets with liquidity reinforced the markets’ conditioning to buying the dip, for “fear of missing out”.

Markets are more fragile than investors think With such high market confidence in the “Fed put”, every bout of localised illiquidity encouraged the private sector to extend its leverage to take advantage of a reversible market drop. More and more people got sucked into similar positioning. In the process, the risk of systemic financial instability shifted from banks subject to stronger regulatory oversight to under-supervised and poorly regulated non-bank participants in the market.

This is where the two new global themes come in — inflation and the investability of major emerging economies. Higher and more persistent inflation limits the Fed’s ability to inject liquidity in a substantial and predictable fashion. It also forces other central banks to become less dovish, resulting in a generalised tightening of global monetary policy. The more this reality sinks in, the greater the risk to the markets’ own factories of leverage and debt, threatening an additional endogenous tightening of global financial conditions. Omicron amplifies this risk given stagflationary tendencies accentuated by the unintended effects of well-intentioned pre-emptive health measures.

This week’s understandable imposition of a vaccine mandate on the private sector by New York mayor Bill de Blasio is just one example. The question of China and Russia is more complex. The greater the uncertainties about the scale and scope of direct Chinese government intervention in markets, the higher the risks to global capital, especially so-called tourist flows that ended up far from their natural habitat, “pushed” there by highly repressed yields at home. This can also tighten global financial conditions.

Meanwhile, the more the west is concerned about threats to Ukraine, the greater the possibility of a destabilising round of sanctions and counter-sanctions. The hope is that recent market volatility is a simple repeat of past episodes of reversible illiquidity amid conditions of general liquidity. But the risk, which would grow in response to the persistence of high inflation and emerging market uncertainties, is one of a generalised and more permanent receding of overall liquidity.

Non c’è nulla come la prima pagina del quotidiano Wall Street Journal che aiuta a comprendere che cosa ha importanza, ad oggi, nel mondo dell’economia e della finanza.

E quindi, dei nostri investimenti e del nostro portafoglio.

Pensate che il fatto è di tale clamorosa rilevanza, da avere risvegliato l’attenzione, alla fine e dopo molti mesi, persino della stampa italiana: ad esempio, prendiamo anche oggi il Corriere della Sera.

Recce’d ne ha scritto, in numerose occasioni, anche qui nel Blog, e lungo tutto l’arco degli ultimi 12 mesi: avevamo ben chiaro già un anno fa, che era questo, quello che tutti vedete, l’unico esito possibile di scelte di politica economica spregiudicate, mal calcolate ed azzardate.

Molti ci chiedono: come se ne esce?

Recce’d da molti mesi (dall’agosto 2020) vi scrive di Anni Settanta e di stagflazione: la situazione a noi risulta chiarissima, ragione per la quale, se il “come se ne esce” riguarda gli investimenti ed il portafoglio … noi siamo già pronti oggi.

Come facemmo un anno fa sul tema dell’inflazione, anche sul tema dei mercati finanziari e degli investimenti ci sentiamo di affermare oggi che l’esito possibile è uno solo, e non è certo difficile da immaginare.

Se invece il come se ne esce riguardasse le Banche Centrali ed i politici, allora noi non abbiamo oggi una risposta: è più che evidente il loro grandissimo imbarazzo, la loro confusione. Ascolteremo questa settimana Federal Reserve e BCE, e potete essere certi che tutti i mercati finanziari andranno in tensione.

Chi avesse interesse ad approfondire è invitato da noi a leggere le migliaia di analisi che vengono pubblicate sul Web e sui quotidiani, e farsi una propria opinione. Oppure, in alternativa, contattare noi di Recce’d e confrontarsi con noi su questi temi, anche in considerazione del fatto che Recce’d ha dimostrato una solida capacità di anticipare gli eventi di mercato nel corso degli anni.

Tra le cose che noi vi suggeriamo di leggere, c’è sicuramente quello che ha detto e scritto un autorevolissimo commentatore come El Erian, a cui è riferita l’immagine qui sotto.

L’immagine vi spiega che se si ritarda a reagire, dopo che l’inflazione è ritornata, dopo qualche mese accade che i fattori che sono alla base dell’inflazione stessa cambiano: non sono più i medesimi che l’hanno fatta partire.

El Erian ha le idee molto chiare e da molti mesi: le avranno, adesso, altrettanto chiare alla Federal Reserve, pressati come sono da pressioni di tipo politico da tutte le parti?

Noi da molti mesi NON scriviamo di Federal Reserve: tutto ciò che c’era da dire, lo trovate scritto anche le Blog nell’agosto dello scorso anno, ben 16 mesi fa. Oggi il gioco è scappato di mano, e loro possono solo rincorrere. Oppure inventare qualche cosa di mai visto e sentito: ma quello è un gioco a rischio estremo.

Ci affidiamo, qui di seguito, alle analisi di Bill Dudley, un ex-Governatore della Federal Reserve, che vi introduce ai tempi principali della riunione di martedì e mercoledì prossimi.

Quanto alla BCE, lo sapete già tutti: la BCE per i mercati finanziari oggi conta poco o nulla.

Buona lettura.

Bill Dudley 9.12

The U.S. Federal Reserve has bitten the bullet: At their policy-making meeting next week, in recognition of persistent high inflation, officials will announce a speedier tapering of asset purchases that have been supporting economic growth. The aim is now to complete the program in time to be able to start raising short-term interest rates as soon as March should that prove necessary.

But the taper isn’t all that will be on the agenda at next week’s meeting. Fed officials are also likely to signal a faster and larger tightening of monetary policy over the next three years — to an extent that markets haven’t yet anticipated.

The last time the Fed published officials’ economic projections, in September, the outlook was remarkably benign. They expected inflation to fall back close to the Fed’s 2% target, even as employment pushed past the level consistent with price stability. And they thought this pleasant outcome would require very little Fed intervention: Their median projection for the central bank’s short-term target rate at the end of 2024 was 1.8%, well below the 2.5% level most judged as neutral.     

This time around, the broad contours of the economic outlook will probably be similar. The median forecast for next year will show above-trend growth pushing unemployment below the 4% level considered sustainable in the long run. Inflation will fall from current high levels, though not as much as previously projected, resulting in a larger and more persistent miss over the Fed’s 2% objective.

The biggest change will be in the interest-rate policy officials deem necessary to achieve that economic outcome. Last time, the median projection for the Fed’s short-term interest rate target at year end was 0.3% for 2022, 1.0% for 2023 and 1.8% for 2024. This time, the upward path will start sooner, be steeper, and rise higher.

For 2022, I expect a median forecast of 0.8%. This would signal three 0.25-percentage-point increases next year – not so many as to require a rate hike in March, but enough to be consistent with the faster taper and the unemployment and inflation outlook.

For 2023, I expect officials to project four more rate hikes, taking the median target rate to 1.8% a year earlier than in the September projections. Such gradual, consistent tightening makes sense once the Fed gets started. But policymakers aren’t likely to anticipate moving more quickly as long as they project inflation to remain below 2.5%.

For 2024, I expect the projected target rate to reach the 2.5% level judged as neutral. Anything less seems hard to justify, given that the economy will have been running beyond full employment and above the Fed’s 2% inflation target for several years.

One could make the case that the 2024 interest-rate projections should go beyond neutral, signaling greater resolve to keep inflation in check. But I doubt officials will have the stomach for that, given the uncertainties surrounding any long-term economic forecast, made even more complicated by the constantly evolving pandemic.

The shift in the Fed’s interest-rate projections might come as a shock to markets. Futures prices suggest that investors are expecting two or three 0.25-percentage-point rate hikes in 2022. But the total magnitude of tightening has not increased: Eurodollar futures imply a peak in the federal funds rate of around 1.5%. That’s well below the levels projected by every member of the Federal Open Market Committee, and well below what common sense would dictate. The Fed’s operating framework, actions and projections all suggest that monetary policy will remain accommodative long after employment and inflation have exceeded the central bank’s objectives. It follows that interest rates will eventually have to go higher to compensate.

A faster taper should be welcome news: It gives the Fed more room for maneuver, opening up the possibility of earlier rate hikes if they’re needed. But it may entail a difficult adjustment for markets. At some point, investors will have to revise their interest-rate expectations significantly, potentially triggering a market tantrum. And the longer this adjustment is delayed, the greater the tantrum is likely to be.