Perhaps having grown tired of fighting windmills, it was several weeks since Albert Edwards' latest rant against central banks. However, we were confident that recent developments out of the Fed and BOE were sure to stir the bearish strategist out of hibernation, and he did not disappoint, lashing out this morning with his latest scathing critique of "monetary schizophrenia", slamming all central banks but the Fed and Bank of England most of all, who are again "asleep at the wheel, building a most precarious pyramid of prosperity upon the shifting sands of rampant credit growth and illusory housing wealth."
Follows pure anger from the SocGen strategist:
These of all the major central banks were the most culpable in their incompetence and most prepared with disingenuous excuses. And 10 years on, not much has changed. The Fed and BoE are once again presiding over a credit bubble, with the BoE in particular suffering a painful episode of cognitive dissonance in an effort to shift the blame elsewhere. The credit bubble is everyone’s fault but theirs.
First, some recent context with this handy central bank holdings chart courtesy of Deutsche Bank's Jim Reid which alone is sufficient to make one's blood boil.
For those familiar with Edwards' writings over the years, the gist of his note will come as no surprise: after all, how many different ways can you say that central banks have broken the market, have caused a credit bubble, and will be responsible for the crash when they finally run out of cans to kick.
In any event, the focus of Edwards' latest note is the resurgent growth in unsecured household credit.
We have written on this topic before in the context of US and UK economic growth only being sustained by sharp declines in household saving ratios. But though I must revisit the issue after the UK?s Guardian newspaper (for non-UK clients it is similar to The New York Times) ran a huge feature on the desperate situation many of the JAMs (just about managing) now find themselves in - see article here.
Edwards points out the increasingly easy terms offered on unsecured consumer debt, i.e., credit cards and notes that he has "heard stories of credit card loan search engines spewing out money on 4 year, 0% teaser loans. What really shocked me is that after having been offered a credit card loan facility via a search engine, one is able to make multiple further self-certified applications and be offered similarly large amounts! Amazingly there was no question about existing debts!"
Edwards concedes that credit growth in a zero interest rate world is hardly surprising, and certainly "this debt time-bomb is specific to the UK."
We are in a QE, zero interest rate world, where central banks are effectively force-feeding debt down borrowers? throats. They did it in 2003-2007 and they are doing it again. Most of the liquidity merely swirls around financial markets, but there is certainly compelling evidence now of a consumer credit bubble in both the UK and US (as well as a corporate credit bubble in the US).
But the catalyst that pissed Edwards off the most this time around, is the observed reaction from the BOE, which on one hand is railing against the current leveraging trends, and on the other is doing everything it can to encourage it, making Carney?'s cautious statements about consumer credit "look ridiculous and takes BoE monetary policy to a new level of schizophrenia"
Rather than the bubble itself it is the reaction of the BoE that I find most bizarre. Mark Carney warns darkly that ?banks are forgetting the lessons of the past? and he recently increased bank capital requirements on consumer loans.
But as Ed Conway of Sky News points out, at the same time it is warning of a consumer credit bubble, the BoE has just increased its programme of lending to banks at preferential rates to increase bank lending in things like, yes you?'ve guessed it, consumer credit! As Ed says, this is like having your foot on the brake and the accelerator at the same time. This makes Governor Carney?s cautious statements about consumer credit look ridiculous and takes BoE monetary policy to a new level of schizophrenia.
His conclusion is the same as that from three months ago, when Edwards, clearly sick and tired of the whole affair, predicted that it is only a matter of time now before the populace revolts against those who are truly responsible for its sad plight, and "citizens'? rage will be directed where it belongs" - at central banks.
The simple fact is monetary policy is way too loose in the UK as well as in the US, and let us not forget the BoE cut rates in the immediate aftermath of last July?s Brexit vote. Bubbles are appearing in areas like consumer credit because interest rates are far too low and need to be raised. And yes, when interest rates are excessively low, both borrowers and lenders do stupid things. But to ignore their own role in creating debt misery for millions, the BoE can only deal with its own cognitive dissonance by blaming someone else. When this debt bubble blows, I suspect citizens? rage will be directed where it belongs
We are far less optimistic that this will be the final outcome in a world in which a no less than 30% of Americans think the Federal Reserve is a national park...