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