onsdag 28 december 2016

William White 2.0

Av en slump hade jag möjlighet att träffa en väldigt trevlig individ på en arbetsplats för någon vecka sedan. Individ heter från och med nu "Pär". Mitt i ett samtal med Pär rusade en kvinnlig kollega till Pär in och frågade om han fått aktierna han tecknat?

När den kvinnliga kollegan gick ut frågade jag Pär om han var intresserad av aktier, vilket han visade sig vara. Uppenbarligen hade Pär insett att teckna man aktier inför en notering så gick de i regel upp och det var därför han gillade att teckna aktier. Pär berättade även om hur han satt och hoppades att marknaden skulle falla kraftigt när Trump valdes för då skulle han kunna gå in och köpa "billigt".

Uppenbarligen har Pär hittat en fungerande strategi och beviset för att denna strategin fungerar finnes här, eller som en placerare beskrev det:

 "the pattern of fading a potential crisis and then scrambling to cover and get long when everyone takes a breath and realizes that this time not the apocalypse either still holds more than ever. I can’t justify any of this. The lesson investors and traders are getting is that everything is a buying opportunity and you need to not miss the boatBrexit? Bullish. Trump winning the election? Bullish. Italy saying no to the referendum and the Prime Minister handing in his resignation? Bullish. Heck, all we need is a coup d’etat in India and the entire Belgian banking system to go kablooey and the S&P 500 will be at 3,000 by Christmas Eve" (här)

Jag har tidigare skrivit om William White här och han är en av få större ekonomiska tänkare. William White och hans kollegor gav kraftfulla varningar angående ekonomin under Greenspanns välde. Riskerna White talar om är inte negligerbara, vilket kan ses på den amerikanska fastighetsmarknaden där priserna nått samma nivåer eller högre (justerat för inflationen) som 2005. Om man föredrar att läsa William Whites artikel i sin helhet finnes den här.

"The global situation we face today is arguably more fraught with danger than was the case when the crisis first began. By encouraging still more credit and debt expansion, monetary policy has ‘‘dug the hole deeper.’’ The fundamental analytical mistake has been to model the economy as an understandable and controllable machine rather than as a complex, adaptive system. This mistake also implies that the suggestion that central banks should necessarily reduce the ‘‘financial rate of interest,’’ in response to a presumed fall in the ‘‘natural rate,’’ is overly simplistic. In practice, ultraeasy policy has not stimulated aggregate demand to the degree expected but has had other unexpected consequences. Not least, it poses a threat to financial stability and to potential growth going forward. Further, ‘‘exit’’ threatens to be delayed in many countries, underlining the dangerous fact that the global economy has no nominal anchor. Much better would be policies, introduced by other arms of government, that would recognize that the fundamental problem is not inadequate liquidity but excessive debt and possible insolvencies. The policy stakes are now very high.

(...)In this presentation I will try to trace the origins of the crisis, and the particular contribution made by expansionary monetary policies before (unnaturally easy) and after (ultra-easy) the crisis broke. I will contend that the situation we face in late 2016, both in the advanced market economies (AMEs) and the emerging market economies (EMEs), is arguably more fraught with danger than was the case when the crisis first began. By encouraging still more credit and debt expansion, monetary policy has dug the hole still deeper.

(...)The fundamental ontological error has been to model the economy as a relatively simple machine, whose properties can thus be known and controlled by its policy operator. In reality, it is an evolving system, too complex to be either well understood or closely controlled. Moreover, it is a system in which stocks and ‘‘imbalances’’ build up over time in response to monetary stimulus. This reality makes future prospects totally path dependent, and we are on a bad path.

(...)How did we get into this mess? I want to suggest that monetary policy, guided by flawed theory, has played a big role even if other agents also contributed materially. The flawed theory is, essentially, that growth and job creation deemed to be inadequate are solely due to inadequate demand and that this can always be remedied with expansionary monetary policy. Moreover, it is assumed that such policies do not have significant undesirable side effects. They are, therefore, the proverbial ‘‘free lunch.’

(...)In short, in the aftermath of the crisis, ultra-easy monetary policy soon became ‘‘the only game in town.’’ Unfortunately, monetary policy shares the shortcoming of all the other policies. Its effectiveness decreases over time, while its negative side effects increase over time.

(...)These are not just theoretical considerations. The BIS Annual Report of 2014 sounded the alarm when it noted that the level of debt in the AMEs (sum of corporate, household, and governments) was then significantly higher than it had been in 2007. Moreover, it has since risen further, to over 260 percent of GDP. This increase has prompted the question ‘‘Deleveraging? What deleveraging?’’ This suggests that, by following polices that have actively discouraged deleveraging, we may instead have set ourselves up for an even more serious crisis in the future.

(...)There are clearly grounds for believing that monetary policy, both before and since the crisis, has contributed to a reduction in the level of potential or even its growth rate. In fact, both seem to have declined sharply in AMEs in recent years. As Schumpeter might have put it, without destruction there can be no creation. It is a fact that in many countries, the entry of new firms and the exit of old ones has been on a declining trend. Worse, if easy money actually lowers potential growth, and this induces still more easy money, the possibility of a vicious downward spiral is clear.

(...)Moreover, as perceptions changed as to whether monetary policy would be effective or not, market reactions have bifurcated. When the mood is positive, financing flows (Risk On) to more risky assets, and when the mood is negative the opposite occurs (Risk Off). This focus of RORO investors, essentially on tail risks, seriously reduces the longerrun benefits of diversification and of value investing

(...)As of mid-2016, we observed record high equity prices, record low (even negative) bond yields for ‘‘riskless’’ assets, high-yield spreads back down from February levels, record low costs of cover (e.g.: the Vix), the return of cov-lite and Payment in Kind (PIK) financing, and a general lowering of lending standards. Broadly speaking, the levels of prices in financial markets today look as stretched as they did in 2007 just before the crisis erupted

(...)4. The Need for ‘‘Exit’’ and Possible End Games 

Simple uncertainty about the full effects (not only unexpected but potentially undesirable) of today’s radical monetary policies might, in itself, seem to argue powerfully for their moderation What has been done is totally unprecedented and totally experimental. But there is another no less powerful argument for eventual exit. If the effects on aggregate demand decline with time, while the undesired side effects cumulate with time, at some point these two functions must intersect. At that point, monetary policy would have to be judged to be doing more harm than good. At this due date, ‘‘exit’’ would then be warranted. Finally, and more in keeping with the conventional wisdom, exit would be warranted if there signs of emerging inflationary pressures. This danger seems greater today in the U.S. than elsewhere.

(...)the best I can do is suggest certain scenarios. In any event, one characteristic of complex systems is that precise forecasting is literally impossible. In the scenarios I sketch out, polices other than monetary policy are taken as given. I proceed from the most optimistic to the least optimistic outcomes

A first scenario assumes a happy ending, though even that is not guaranteed. Suppose that significantly faster growth does reemerge in the global economy, and that bond markets react in an ‘‘orderly’’ way. Thus, monetary policy could begin to tighten and low bond rates would move up only slowly. Ideally, they would rise less than the increased nominal growth rate, implying a gradual reduction in the burden of debt over time. In this assumed world, current high equity prices and tight risk spreads might seem generously valued, but they would be fundamentally justified by future growth prospects.

(...)If there are risks to the optimistic scenario, there are even darker possibilities. The current, relatively slow pattern of global growth could continue or even weaken further. The secular factors suggested by Gordon [2016] could contribute to this, as could the accumulating headwinds of debt. In this case, both policy rates and longer-term risk-free rates would be expected to stay very low. However, in this environment, current equity prices and narrow risk spreads will be increasingly seen as unrealistic. Resulting sharp declines in the prices of such financial assets are likely to catch out many speculators and could, potentially, do further harm to banking systems in countries already affected by the crisis. Unaffected AMEs, where household debt and property prices have continued to rise since 2007, might be particularly badly hit. Banks everywhere will, in any event, be further weakened by slow growth that raises the number of non-performing loans. Both the demand for and the supply of credit will remain very subdued, as in Italy today.

In this scenario, the current low level of inflation (in the AMEs) seems likely to decelerate further. As noted above, while falling prices would exacerbate the real burden of debt service, the likelihood seems small that price decreases would be extrapolated into the future and spending held back in anticipation. Nevertheless, given the biases noted above (leading to ‘‘exit’’ being delayed), still more aggressive use of monetary policy would likely be the chosen option to respond to this slow growth, with central bank balance sheets expanding still further.

On the one hand, further monetary expansion might finally succeed in promoting more spending and the expansion of the real economy. Deflationary expectations might then be avoided. Logically, the possibility cannot be ruled out that the tepid response of spending to the monetary stimulus to date has been simply due to the stimulus being too small. On the other hand, there is also the possibility that this process might get out of hand. Still more monetary expansion might cause inflationary expectations to finally ratchet sharply upward, leading to a sudden fall in the demand for both base money and broader stocks of money as well. While the demand for real assets would rise, the effects on current production of significantly higher levels of inflation are harder to predict but could well be negative.

A sudden speeding up of the inflationary process would be more likely in countries where both government deficits and debts were initially very large. Thus, governments would have to borrow but could not get adequate private sector financing. This would raise expectations of ‘‘fiscal dominance’’ further eroding the private sector’s demand for government paper. Bernholz [2006] has pointed out that such processes, potentially leading to hyperinflation, are not uncommon in history. Such outcomes would also be consistent with those described in the famous article by Sargent and Wallace [1981]. At the moment, Japan is clearly the country to watch in this regard. Should the Bank of Japan opt for still more monetary stimulus, this danger would obviously increase." (http://www.williamwhite.ca/sites/default/files/11369_2016_12_OnlinePDF.pdf)

söndag 4 december 2016