Taps Coogan – February 22nd, 2021

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Most of the great financial bubbles throughout history have had simple growth narratives that could be summed up in just a few words. There was the self-explanatory Dot-Com Bubble, the Housing Bubble, Railroad Mania, the ‘Roaring 20s’ (the mass manufacturing revolution), etc…

Those simple growth narratives, many of which were true to an extent, invariably got exaggerated and stretched in order to provide investors with ‘plausible’ deniability for what really drives financial bubbles: excessive liquidity.

A curious feature of the current bubble, which has some of the most stretched valuations ever witnessed, is that it has evaded a concise naming for years. Perhaps that is because it is a uniquely direct bubble in monetary excess. The power of central bank accommodation is universally understood to be driving markets and is talked about openly. The slogans of this bubble are ‘Don’t Fight the Fed,’ ‘There is no alternative’ (to overpriced stocks), and most concise of all: ‘Money printer go brrr.’

This is the Great Central Banking Bubble. Everyone knows it, though don’t expect the name to take hold.

Most analysts seem to assume that the Fed’s policy response to rising inflation expectations will be to increase treasury purchases at the long end of the curve in an attempt to hold rates down (i.e. more QE). They also assume that the policy response to deflation and falling growth would be the same. In the meantime, the Fed is doing $1.5 trillion a year of QE. Simply put, market participants are expecting more QE to be the Fed’s solution to every conceivable outcome. The Fed certainly isn’t disabusing anyone of the idea either. Hence, we have a raging bubble in financial assets.

However, that logic really is not as robust as it sounds. As we routinely point out, the Fed needs to dramatically accelerate the pace of QE to halt the continued rise in long term treasury rates. However, inflation breakevens are already pushing decade highs, money supply growth is double or triple prior records, GDP growth is forecast to be something like 6.5% for the year, and financial markets are obviously frothy.

Expanding QE from here, without a significant downturn in markets and the economy, is not as simple as many assume. Even if the Fed throws caution to the wind and does it anyway, anything short of formal yield curve control is unlikely to work. After all, how can more QE lower yields tomorrow if we are to believe it’s responsible for raising them today?

This is probably not the end of the Great Central Banking bubble, but you can see it from here.

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