"What's more fun than a Barrel of Monkeys? Nothing!" What could be better than assembling a long chain of tangled monkeys, each reliant on those either side of it for purchase, with just the one person holding onto a single monkey's arm at the top end of the chain, responsible for all those monkeys dangling from his fingers. Of course, with great power comes great responsibility; and that lone hand at the top of the chain of monkeys has to be careful - any slight mistake and the monkeys will tumble, and that, we are afraid, is the end of your turn. You don't get to go again because you screwed it up and the monkeys came crashing down. On May 22nd of this year, Ben Bernanke's game of Barrel of Monkeys was in full swing. It had been his turn for several years, and he looked as though he'd be picking up monkeys for a long time to come. The chain of monkeys hanging from his hand was so long that he had no real idea where it ended...
Via Grant Williams,
...That day, in prepared testimony before the Joint Economic Committee of Congress in Washington, DC, Bernanke stated that the Fed could increase or decrease its asset purchases depending on the weakness or strength of data:
The program relates the flow of asset purchases to the economic outlook. As the economic outlook — and particularly the outlook for the labor market — improves in a real and sustainable way, the committee will gradually reduce the flow of purchases.
To assuage any lingering doubt, he continued:
I want to be very clear that a step to reduce the flow of purchases would not be an automatic, mechanistic process of ending the program. Rather, any change in the flow of purchases would depend on the incoming data and our assessment of how the labor market and inflation are evolving.
Markets fluttered a little as they tend to do around these carefully stage-managed performances, but remained largely sanguine. However, in the Q&A session that followed his prepared remarks, Bernanke, in response to a fairly innocuous question, went a little offpiste, straying into some improv, making a suggestion that, within minutes, had given rise to a phenomenon which by the end of the day had earned its very own soubriquet: the "Taper Tantrum":
If we see continued improvement and we have confidence that that's going to be sustained then we could in the next few meetings ... take a step down in our pace of purchases. If we do that it would not mean that we are automatically aiming towards a complete wind down. Rather we would be looking beyond that to see how the economy evolves and we could either raise or lower our pace of purchases going forward.
The statement contained the usual bit about the Fed being open to both decreasing OR increasing bond purchases; but it added one, as it turned out vital, piece of information:
"... we could in the next few meetings ... take a step down in our pace of purchases."
Boom! That's all it took. The monkeys began to shiver, shake, and screech.
Now, I have been saying for the longest time that these days nothing matters to anybody until it matters to everybody, and that is largely down to the Fed themselves (and their peers across the various oceans and borders who are complicit in this era of free money). The proof of my statement is seen in the fact that as soon as Bernanke mentioned that the "taper" — which, let's face it, EVERYBODY knows has to happen sooner or later — would possibly begin before the end of 2013, markets began to crumble.
Forgotten in the localized euphoria over the S&P's remarkable resilience was the fact that we live in an ever-shrinking world and that there are lots of other monkeys on the long chain dangling from Bernanke's hand. Moves the Federal Reserve makes have repercussions far and wide.
Like in Jakarta, for example...
Sigh... But wait, there's more...
The root cause of all this instability is, as I said at the beginning of this piece, Benny and the (Ink)Jets and their frivolous generosity. As emerging markets unravel in the face of a taper that was always inevitable at some point, the corner that the free-money Fed has painted other central banks into becomes ever more apparent as it shrinks.
There really is no way out now, I'm afraid — not without some kind of organic growth allied with controlled inflation.
Emerging-market central bankers need both. They have neither.
Ambrose Evans-Pritchard nicely sums up the situation facing the Fed:
(UK Daily Telegraph): The Fed has a duty of care to emerging markets, since its own hands are hardly clean. Zero rates and quantitative easing were the cause of dollar liquidity flooding these countries. It was the biggest reason why net capitals flows into emerging markets doubled from $4 trillion to $8 trillion after 2008, much of it wasted in a late cycle blow-off.
Yes, China, Brazil, India and others handled the liquidity bath badly. They ramped up credit without generating much worthwhile growth. In China's case the economic return on loan growth has collapsed from a ratio of 0.85 to 0.17. The diminishing returns have shrunk to almost nothing.
The credit boom disguised the underlying rot as the BRICS club lost labour competitiveness. Every case is different but nowhere was myth so divorced from reality is in Brazil. The country is languishing at 130th place in the World Bank's rankings for ease of doing business, industrial output is still 3pc below pre-Lehman levels and it has lost its way with dependence on iron ore and commodity exports.
As Matt King from Citigroup says in a pithy note, tourists have discovered that "reality is less good than the brochure" in emerging markets and now they are pining for home. "Don't all come home at once. The exits are small," he warned.
One cannot blame the US for the failings of these countries, yet Ben Bernanke and his successor will still have to live with the consequences. Globalisation has entrapped the Fed. Like it or not, the Fed is the world's monetary superpower.
The exodus of money from emerging markets that we have seen so far is nothing compared with what could happen if this episode is mishandled. The rapid escalation towards a Western missile strike on Syria is bringing matters to a head fast, with talk of a spike in crude oil prices to $150 a barrel setting off its own chain reaction.
If the Fed really thinks that the rest of the world will have to "adjust to us" as it insists on draining global liquidity come what may, it may have a very rude surprise, yet again.
Amen again, Brother Ambrose. A rude surprise may well await the world.
As Ben Bernanke eyes his own exit, Janet Yellen and Larry Summers wait in the wings to see which of them gets to take the handoff of the ominously swaying monkey chain from the incumbent chairman's hand.
One false move and all the monkeys may end up in a heap on the floor.
Full Grant Williams Letter below: