Albert Edwards: "Why The Current Situation Is Even Worse Than The 2008 Crisis"

Tyler Durden's picture

Back in May, we first reported that Goldman became the first bank to dare to ask if the Fed has lost control of the market, if in slightly more polite terms of course. This is how Jan Hatzius phrased it: "Despite two rate hikes and indications of impending balance sheet runoff, financial conditions have continued to loosen in recent months. Our financial conditions index is now about 50bp below its November 2016 average and near the easiest levels of the past two years." Several months later, after the third rate hike, Goldman found that once again, paradoxically, financial conditions eased further, and the market rose even more in direct opposition of what Fed rate hikes are supposed to do!

Fast forward to this weekend, when we reported that that lovely word which describes the new normal so well - "paradox" - made a repeat appearance, this time in the last quarterly report by the Bank of International Settlement, which for the nth time issued an alert on the state of the stock market, an alert which will be summarily ignored by everyone until after the crash, and reminded everyone what happened the last time financial conditions eased instead of tightening when the Fed hiked rates (spoiler alert: biggest crash in modern history). This is what the BIS' chief economist Claudio Borio said (among other things)"

Hence a paradox. Even as the Fed has proceeded with its tightening, overall financial conditions have eased. For instance, a standard indicator of such conditions, which combines information from various asset classes, points to an overall easing regardless of the precise date at which the tightening is assumed to have started. Indeed, that indicator touched a 24-year low. If financial conditions are the main transmission channel for tighter policy, has policy in effect been tightened at all?  (We can see from the BIS chart below how, unlike the last 12-month period, the Chicago Fed Financial Conditions Index did actually tighten in the May 2004-May 2005 period, and especially in the January 1994-January 1995 period.)

“In fact, this paradoxical outcome is not entirely new… it is reminiscent of the Fed policy tightening in the 2000s - the phase that spawned the now famous "Greenspan conundrum". Then, overall financial conditions hardly budged, and in some respects eased, as the Federal Reserve progressively raised rates. The experience contrasted sharply with previous tightenings, not least the one in 1994. At that time, long-term rates soared, the yield curve steepened, asset prices fell, corporate spreads widened, and EMs came under pressure. 

 

Today's experience is reminiscent of the repeated reassurance of the 2000s' "measured pace", except that the adjustment has been, if anything, even more telegraphed. If gradualism comforts market participants that tighter policy will not derail the economy or upset asset markets, its predictability compresses risk premia. This can foster higher leverage  and risk-taking. By the same token, any sense that central banks will not remain on the sidelines should market tensions arise simply reinforces those incentives. Against this backdrop, easier financial conditions look less surprising.

Today, it was SocGen's grumpy "permarealist" Albert Edwards' turn to focus on this peculiar "paradox" in which the more the Fed tightens, the higher markets rise in the process "poisoning the market."

Picking up on what Bank of America showed yesterday, namely that central banks broke both volatility and the market itself some time in 2013/2014...

... in his latest "weekly' note (published about 3 weeks after the last one), Edwards writes that "so scared (or is that scarred) were central bankers after the summer 2013 taper tantrum, they have now gone out of their way to reassure financial markets. Thus recent tightenings of monetary policy, whether by the Fed, ECB or Bank of England, were all perceived by markets as "dovish" tightening - and hence led to even more buoyant financial markets. Policymakers are so scared the financial bubbles they created might burst that today what might be good for the economy is subservient to the needs of Wall Street."

He then brings up our favorite new normal word - "paradox" of course - and lays out the problem on the chart below, stating that "the current situation is even worse than in the run-up to the 2008 crisis. At least back then rate hikes did not lead to easing financial conditions the way they do now! The Fed'?s desire to soothe the nerves of the financial markets has made a mockery of their tightening cycle."

Naturally, Edwards was just getting started, and the furious rant continues:

You don?t have to be a genius to reach the conclusion that central banks? dovish tightening really means there has been no tightening of monetary policy at all for Wall Street. But for Main Street, interest rate hikes do have an economic impact that will ultimately end in recession, and like an increasingly stretched elastic band this tension will eventually snap with disastrous financial market consequences. Many clients we meet have similarly apocalyptic views to our own but remain fully invested. They cannot see an immediate trigger for the financial Armageddon that they accept is heading slowly our way.

And yet, despite central bankers' best intentions to kill the free and efficient market, this time something may be changing, and may soon unleash that "shock" event that is so critical for the market to determine just what the new strike price of the Fed put is as BofA explained: that something is China.

Making the "China" case, Edwards refers to a post we published recently, and cautions that "investors are convinced that China?'s policymakers remain firmly in control of economic events." Here's why that is no longer the case.

But Gordon Johnson of Axiom Capital notes it may be that the China credit multiplier, after years of diminishing returns, is finally exhausted. He writes, “given what we’ve seen this year – ie 101.7% new credit issuance growth YTD through Oct. 2017 (see chart below) – it seems the level of credit necessary to stimulate growth in China could prove elusive at this point. We don’t recall any economist’s forecasts exiting 2016 pointing to China’s new credit issuance more than doubling Y/Y in 2017, yet that’s exactly what’s happened. Had this been our base case, we would have expected all economic indicators in China to be moving substantially higher at this point in the cycle.”

Edwards then goes full circle to reach the same conclusion we have referenced so many times: the next crash will come out of China, and it will be at Beijing's doing:

On this view if China?s policymakers are now pressing hard on the policy brakes after their politically expedient puffing up of the economy, a soft landing might prove more elusive than almost any investor currently assumes. Could this yet be the trigger that blindsides investors?

It could, especially since it was -ironically enough - China which in early 2016 halted what then appeared to be a global risk crash:

... it was this February?s Shanghai G20 deal that marked the point when global investors totally removed China from their watch list of things to be concerned about. That G20 meeting saw an agreement not to engage in further competitive devaluation and helped reverse the period of sustained dollar strength that had been exacerbating the renmnibi''s problems (weaker US economic data in the face of huge dollar bullishness also helped reverse the dollar?s prior relentless rise). Hence investors are very relaxed about China at exactly the point they should not be.

Which is why it would be so delightfully ironic once the next global crash originates out of China, the same country that saved the world with its gargantuan credit creation first in 2008/2009 and the second time in 2016/2017. Ironic, or perhaps the right word is paradox...

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Post-Truth Society's picture

Yesterday Trump had a stroke.  Soon he will be wrapped in a white sheet and buried next to his dear Muslim brother, the former king of Saudi Arabia.

Trump is a filthy Muslim.  Wake up before it's too late.

 

Post-Truth Society's picture

All the ZHombie Trump-tards will sell their stawks, gold, and bitcoin when their vile Muzzie leader, whom they worship, finally falls.

bobcatz's picture

In 2008, the (((powers that be))) stole $30 TRILLION.

So what cataclysm are they planning this time? http://bit.ly/1KogtGi

Post-Truth Society's picture

Go fuck yourself, trump-tard. You are probably also a filthy muzzie, or (((worse))).

Arnold's picture

That's a good boy, back on your meds and Mommy will be by in a minute to tuck you in.

Post-Truth Society's picture

Another ZH snowflake who can't handle the truth.  Sad!

Gold Banit's picture

Trump is your President and will be your President for the next 7 years..

LOL.....

old naughty's picture

and then a dynasty continues,
as the master planned,
rekindle with post?-econmist01.01-truth?
he sits on a globe with a S&S covered the west?

Post-Truth Society's picture

Not unless you keep sucking his tiny orange dick to keep him alive. Soon he will have some more strokes and be in the old folks home with his other strokey pal Cankles.

Post-Truth Society's picture

The orange blob is the one who needs to see a doctor about his stroke yesterday. He's blleding out of his ... wherever. Sad!

Gold Banit's picture

Take a pill and in the morning call a doctor, you are very sick...

MK13's picture

Glad your name says it all, 'false society' member, say ho to George!!

Post-Truth Society's picture

Yes, my name means that I "post the truth", bitchez.

Fallen under (((Ivanka's))) spell, have you?  She is her Muzzie dad's link to the tribe.  Pretty obvious when you think about it.

BeanusCountus's picture

Excuse me, that's our line against O'bummer. Didn't work for us. Your take is even less credible. Trump just banned 'em from coming here.

Post-Truth Society's picture

Trump's first official state visit was to .... drumroll... Saudi Arabia.  Odd, right?

ah-ooog-ah's picture

Paradox is a database from Borland

new game's picture

credit multiplier has done run out multiple multiples of multipliers of last resort(another fool)...

Arnold's picture

We'll make up the velocity with volume.

Shhh's picture

No currency can every replace integrity.

ThanksIwillHaveAnother's picture

Can't explain the paradox?  Really?   The FED is not raising the Federal Funds rate by removing money from the market by selling treasurys.   It is raising the Interest On Excess Reserves which gives big banks more money to send to the casino!   Dummies!!!

ThanksIwillHaveAnother's picture

Why doesn't ZH SSL???  Won't donate until then.

itstippy's picture

The current Federal Funds Rate is 1.25%.  Likely it will soon be raised to 1.50%.  The official inflation rate continues to hover around 2%.  This is "Fed Tightening"?  This is "Normalizing"?

There is no economic theory, of any persuasion, that can explain a Fed Funds Rate at or below 1.50% and below the rate of inflation for ten years and no ensuing financial chaos.   

The financial chaos is upon us, yet people refuse to see it.  The insanity is global.  High-risk Italian junk bonds pay less interest that 10-year U.S. Treasuries?  The Japanese Yen is considered a "safe haven" currency with government debt at 300% of GDP?  Bitcoin is a store of value and is up 1600% since January?  An antique ten volume leather-bound Complete Works Of Shakespear sells on eBay for $200 and a Batman comic book sells for $2,500?  Grade school teachers live in 2,500 sq. ft. houses and drive $40K vehicles?

Something is seriously out of whack.

CRM114's picture

Yes, the data they are using has been completely manipulated for political purposes.

GIGO.

Plus, no one up in the clouds of politics or banking knows or cares about what is really happening to Joe Average.

 

But, apart from total moral, philosophical, reasoning, courage, intelligence and leadership failures, what have they done wrong? ;)

marathonman's picture

Inflation is not 2%. It’s more like 8%. It drives me nuts that everyone says inflation is subdued. Prices doubling every 8-10 years is a disaster. When wages can’t keep up that means your standard of living takes a beating. That’s why the homeless and hopeless are expanding exponentially. Because prices rising as the Fed keeps the Ponzi in full exponential growth mode.

Pumpkin's picture

"Something is seriously out of whack."

 

EVERYTHING is seriously out of whack.

 

There, fixed it.


ThrowAwayYourTV's picture

All I know is that theres SO MUCH money in the system now it may as well be popcorn.

Talked with a UPS driver the other day after seeing him driving a u-haul truck.

He said that UPS usually delivers around 9ooo packages a week in this area. This week they have over 20,ooo. packages and not enough UPS trucks to deliver them.

When this shit ends, and it will, you better be ready.

Yogizuna's picture

Speaking of shit, I have not received this many mail order catalogs since just before the Great Recession. A bad omen? 

CRM114's picture

Paradox, my @rse.

What they mean is "My ivory tower model doesn't work, so reality must be at fault."

trueFacts's picture

Bankers and economists are clueless sycophant idiots who, in a just world would, be living in a mud hut down by the river, instead of running the finance of the world.  If these idiots had one brain cell between them, they would know that their backing-off the gas these last 10 years has lead to a mathematical condition called "freewheeling."  this is the same feeling you get when you take your foot off the gas as your car crests a mountain and begins downhill.  There is no power from the engine and no foot on the brake, and results in that never-never land of mathematics called freewheeling.  The knuckleheads at the fed dont realize that their ever-so-slight touching of the gas pedal has no effect whatsoever, whereas any teenager behind the wheel would realize that it takes a fair amount of gas to re-engage the engine on the downhill side.  Sadly, too many idiots at too high of levels of finance for any hope of any outcome but disaster.  

daedon's picture

In 2010 388 people owned half then planet's wealth.
In 2011 177 people owned half then planet's wealth.
In 2012 159 people owned half then planet's wealth.
In 2013 92 people owned half then planet's wealth.
In 2014 80 people owned half then planet's wealth.
In 2015 62 people owned half then planet's wealth.
...

You could call them "clueless sycophant idiots" if they were on this planet to please us, but they aren't, so it appears they're doing just fine and they know exactly what they're doing.
trueFacts's picture

Bankers and economists are clueless sycophant idiots who, in a just world would, be living in a mud hut down by the river, instead of running the finance of the world.  If these idiots had one brain cell between them, they would know that their backing-off the gas these last 10 years has lead to a mathematical condition called "freewheeling."  this is the same feeling you get when you take your foot off the gas as your car crests a mountain and begins downhill.  There is no power from the engine and no foot on the brake, and results in that never-never land of mathematics called freewheeling.  The knuckleheads at the fed dont realize that their ever-so-slight touching of the gas pedal has no effect whatsoever, whereas any teenager behind the wheel would realize that it takes a fair amount of gas to re-engage the engine on the downhill side.  Sadly, too many idiots at too high of levels of finance for any hope of any outcome but disaster.  

adolphz's picture

Is the worse here Yet? No. The main thing thing is to stay profitable  So far Shepwave  triggers and targets been clear guidance 

pizdowitz's picture

That's right. 2009 inflexion point should have been a year for a reflection, and a humble jubilee.

The hard lesson to be learned now is the the "double-down" is a medicine that works only once.

https://www.youtube.com/watch?v=17ocaZb-bGg

vladiki's picture

LAG is the thing. The Fed only sees 'paradox' if it assumes that it's driving the bus with controls that do what they think they SHOULD do, and are snappily responsive. (A) It's not driving the bus ... the whole point of capitalism and free markets is that NO ONE drives the bus ... it drives itself (B) The controls are sloppy, operate with substantial lag and often don't work at all as expected ...like they press the accelerator and the headlights go on high beam, or they they turn on the wipers and the sun roof opens instead. What they're trying to do is ridiculous and beyond them - beyond anyone. The lesson of the past 9 years is that they must stop this nonsense and take a long holiday.