Political Observer comments from 2015 & 2024.

Here is a portion of Tett’s essay from January 16, 2015, the whole essay is more than worthy of your attention!

Headline: A debt to history?

Sub-headline: To some, Germany faces a moral duty to help Greece, given the aid that it has previously enjoyed 

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Last summer I found myself in that spot for a conference, having dinner with a collection of central bank governors. It was a gracious, majestic affair, peppered with high-minded conversation. And as coffee was served, in bone-china crockery (of course), Benjamin Friedman, the esteemed economic historian, stood up to give an after-dinner address.

The mandarins settled comfortably into their chairs, expecting a soothing intellectual discourse on esoteric monetary policy. But Friedman lobbed a grenade.

“We meet at an unsettled time in the economic and political trajectory of many parts of the world, Europe certainly included,” he began in a strikingly flat monotone (I quote from the version of his speech that is now posted online, since I wasn’t allowed to take notes then.) Carefully, he explained that he intended to read his speech from a script, verbatim, to ensure that he got every single word correct. Uneasily, the audience sat up.

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https://www.ft.com/content/927efd1e-9c32-11e4-b9f8-00144feabdc0

Editor: Let me quote from selected paragraphs of Jillian Tett’s latest essay at The Financial Times of August 8, 2024

Opinion: The QE retreat

Market gyrations reflect fears about the unwinding of QE

The yen carry trade is a symptom not a cause of investor anxiety

https://www.ft.com/content/c6596fdd-d184-4dee-b6ff-f70c7081003a

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There are two lessons here. The first is that not even ultra-well-paid financiers — be they hedgies, private equity players or bankers — can really forecast the precise moments of market meltdowns. Yes, fundamental strains and cracks can be identified. But judging when these will cause a market earthquake is as hard as real geology; humility is required. And doubly so given that the rise of algorithmic trading is creating dramatically more price volatility and feedback loops.

Second, this week’s market rout was driven not so much by panic around the “real” economy as by financial dynamics. Or, as Bridgewater wrote in a client letter: “We view the widespread deleveraging firmly as a market event and not an economic one,” since “periods of structurally low volatility have always been fertile ground for the accumulation of outsize positioning” — and eventually they unwind.

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Editor: Tett broaches the telling subject of Quantitative Easing :

Or, to put it another way, these events can be viewed as (yet another) aftershock from the unwinding of that extraordinary monetary policy experiment known as quantitative easing and zero interest rates. For while investors have normalised cheap money in recent years — and to such a degree that they barely notice the distortions this has caused — they are now belatedly realising how odd it was. In that sense, then, the dramas have been thoroughly beneficial — even if electronic trading has made that lesson more dramatic than it might have been.

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The immediate display of this is the yen carry trade — the practice of borrowing short in cheap yen to buy higher-yielding assets such as US tech stocks. Cheap yen loans have fuelled global finance ever since the Bank of Japan embarked on QE in the late 1990s, albeit to a degree that has fluctuated, depending on US and European rates. But the carry trade appears to have exploded after late 2021, when the US moved away from QE and zero rates. Then, when the BoJ (finally) also started to tighten earlier this year, the rationale waned.

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Editor : Instead of completely scavenging her insights, let me offer some selective quotations that might better evoke portions of her essay.

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UBS and JPMorgan also think that about half of these have been unwound.

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Either way, the key point is that insofar as free(ish) money was fuelling asset inflation in America and Japan, this is coming to an end.

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Unsurprisingly, this leaves some investors hunting for other long-ignored QE distortions that could also unwind.

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Unsurprisingly, this leaves some investors hunting for other long-ignored QE distortions that could also unwind.

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My answer is “not now”. Although these holdings look odd by historical standards, the BoJ insists it will not sell soon. But what is most interesting is that non-Japanese investors are waking up to this issue, after ignoring — that is to say, normalising — it for years.

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But this confidence — or complacency — has been reinforced by the Federal Reserve acting as a buyer of last resort for bonds during QE.

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Editor: The final paragraphs:

A cynic might retort that all this mental readjustment may yet turn out to be unnecessary: if markets truly swoon, central banks will be pressured into propping up them up — yet again. Thus on Wednesday, the BoJ deputy governor pledged to “maintain current levels of monetary easing”, contradicting hints from the BoJ governor last week that more rises loom.

But the key point is this: bountiful free money is not a “normal” state of affairs, and the sooner investors realise this the better — whether they are mom’n’pop savers, private equity luminaries, hedge funders or those central bankers.

Julian Tett manifests integrity in both these essays!

Political Observer