Bubbles, Quantities and Short Sales podcast

My friend and former Salomon Brothers colleague, Larry Bernstein hosts an engaging “What Happens Next?” weekly podcast.

We spoke about bubbles, monetary quantities and short sales – covering:

– future implications for financial markets… why it’s a bubble and
– public policy, regulatory risks, and what to do.

To listen to the podcast:
https://www.whathappensnextin6minutes.com/sessions/gamestop-and-antitrust/#goodman

To view the remarks:
http://www.centerforfinancialstability.org/research/Bubbles_Shorts_021721.pdf

FRED Publishes 100+ Years of CFS/Johns Hopkins Data on the Fed’s Balance Sheet

The Federal Reserve Bank of St. Louis FRED database, the premier source for free U.S. financial data, now includes data of the Federal Reserve System’s weekly balance sheet back to the Fed’s beginning in 1914. The data come from a paper and data set I compiled with five students of CFS Special Counselor Steve Hanke.

The students — Cecilia Bao, Andrew Chen, Nicholas Fries, Justin Gibson, and Emma Paine — were undergraduates who have all since graduated from Johns Hopkins University. As part of their work for Hanke’s course Research in Applied Economics, they wrote papers dividing the Fed’s history into three periods, with each paper using the corresponding data. I served as an adviser and outside reader. We then combined the data into one big data set.

Previously, some monthly balance sheet data from the Fed’s early years were digitized, along with full data from recent years. Full weekly data from the beginning, integrated with recent data, were however unavailable in any readily usable form. The students put in many hours digitizing the data, a task that any of thousands of professional economists could have done over the last 30 or even 50 years but none were enterprising enough to do.

Here is the announcement from FRED about the data set and here are the data series. For the original papers, see Chen and Gibson, Bao and Paine, Fries, and our joint paper. For the data from the joint paper, see here.

Thanks To A New Way Of Counting Money… This Is The Best Outlook For GDP In Years

My friend and former colleague, Raul Elizalde wrote a thoughtful piece for Forbes – “This Is The Best Outlook For GDP In Years, And We Know It Thanks To A New Way Of Counting Money.”

Raul nicely frames CFS Divisia and key issues in plain and direct language. He then offers his perspective on financial markets by incorporating CFS Divisia.

Raul is the founder, president, and CIO at Path Financial.

To view the full article:
https://www.forbes.com/sites/raulelizalde/2021/02/10/this-is-the-best-outlook-for-gdp-in-years-and-we-know-it-thanks-to-a-new-way-of-counting-money/?sh=b3a4983122c2

Robinhood and GameStop: Essential issues and next steps for regulators and investors

The hullabaloo surrounding the run up in the price of GameStop (GME) and the activities of Robinhood have generated front page news, calls for action, and allegations of wrongdoing.

However, lost in the headlines and struggles between good and bad or big and little is the issue of greatest concern to all – financial stability.

A group of Center for Financial Stability (CFS) experts
1) examine essential issues as well as
2) propose next steps.

As these are complex and multipronged challenges, we look forward to any comments you might have.

To view the full article:
www.CenterforFinancialStability.org/research/GME_Robinhood_020421.pdf

Today’s WSJ: “Corporate Debt ‘Relief’ Is an Economic Dud”

Today, The Wall Street Journal published an op-ed titled “Corporate Debt ‘Relief’ Is an Economic Dud.

CFS Board Member and former FDIC Chair Sheila Bair and I note how:

Conservatives accuse progressives of wanting to destroy capitalism. Yet a greater threat than Bernie Sanders is the prospect of serial market bailouts by monetary authorities.

The creation of the corporate facilities last March marked the first time in history that the Fed would buy corporate debt. The plan went far beyond previous quantitative easing.

– There is not much evidence that all of that cash went toward creating and preserving jobs in the U.S.
– Corporate facilities merely intensified the damage that monetary interventions had already dealt to U.S. capital allocation.

Capitalism doesn’t work unless capital costs something and markets don’t work unless they are allowed to rise and fall.  Corporate facilities should not become part of the Fed’s standard tool kit. Let them die.

We look forward to any comments you might have.

To view the full article:
https://www.wsj.com/articles/corporate-debt-relief-is-an-economic-dud-11609975810?st=3v9nhfz6u4los6q&reflink=desktopwebshare_permalink

The Great Demographic Reversal (Goodhart and Pradhan)

Last week, we hosted a roundtable discussion with CFS Advisory Board Member Charles Goodhart and his co-author Manoj Pradhan.

The Great Demographic Reversal is superb.  It addresses head-on demographic forces that will only gain in importance over time.  The book proposes that the underlying forces of demography and globalization will shortly reverse three multi-decade global trends – it will raise inflation and interest rates, but lead to a pullback in inequality.  Charles and Manoj broadened the country-by-country demographic analysis by connecting many global threads and interactions among nations.

Please find their slides at
http://www.centerforfinancialstability.org/speeches/The_Great_Demographic_Reversal_CFS.pdf

Goodhart on “Deflation or Inflation”

CFS Advisory Board Member Charles Goodhart offers thoughts on “After Coronavirus: Deflation or Inflation?”  Charles is a member of the Financial Markets Group at the London School of Economics and a former member of Bank of England’s Monetary Policy Committee.

Topics include:

– Understanding the past.
– Assessing “low for longer” and “inflation is a monetary phenomenon?”
– Offering potential future pathways for prices.

For full remarks:
http://centerforfinancialstability.org/research/Goodhart_Deflation_Inflation_081420.pdf

Value Investing and Monetary Policy

Jason Zweig’s “The Bull Market Isn’t As Big as You Think” in The Wall Street Journal  nicely illustrates how the stock market may not be as disconnected from economic reality as many suspect. However, the piece misses the monetary elephant in the room.

Since the introduction of Quantitative Easing (QE), value investing only outperformed growth strategies during four brief moments – as measured by S&P Value and Growth Indexes (see http://www.centerforfinancialstability.org/oped/Value_Investing_063020.pdf). 

Not surprisingly, the relative outperformance of value versus growth strategies coincided with periods when the Fed curtailed its injections of monetary liquidity: 1) the end of QE1, 2) end of QE2, 3) end of QE3, and 3) the period of quantitative tapering.

Although the monetary policy response to the Coronavirus was needed, unintended distortions should be acknowledged and incorporated into future actions.

The implication for value investors is clear.  Monetary largess is wreaking havoc with the investment strategy.  For the public and officials, the propagation of valuation distortions starve a wide spectrum of deserving companies and industries access to capital.  This will surely minimize private sector driven growth going forward.

View the report
http://www.centerforfinancialstability.org/oped/Value_Investing_063020.pdf

FT Letter: The faultlines of the crisis are complex and varied

Today my letter in the FT responds to Martin Wolf’s “Coronavirus crisis lays bare the risks of financial leverage, again.”  Martin clearly highlights segments in capital markets creating fragilities before the recent shock.

The role of central bank policy distorting incentives in 2019 was absent.  Skewed investing incentives began on December 18, 2018 – when the FOMC statement misread the global economy and markets and balance sheet expansion resumed.

“The faultlines of the crisis are complex and varied”
https://www.ft.com/content/48e41d0c-8bb4-11ea-a01c-a28a3e3fbd33

For more on Fed policy and markets after December 18, 2018 – see pages 5-6 of my Boston Economic Club remarks
http://centerforfinancialstability.org/speeches/BEC_Now_What_031820.pdf

Now What? Three Vectors for Investors and Officials

In the middle of financial crises, one often hears “Now What?”

At the Boston Economic Club, I discussed the evolution of three vectors (policy, markets, and the Coronavirus). These vectors offer officials a blueprint to stabilize markets and asset managers a roadmap for investment decisions. To be sure, the Coronavirus is only part of the reason behind the fierce market response.

Six big “Now Whats” or action items are discussed.

For full remarks:
http://centerforfinancialstability.org/speeches/BEC_Now_What_031820.pdf