Have sympathy for the Wizard of Oz. And for the Fed. People really really want to believe in a Wizard. In control. Keeping us safe.
Every society carves out this lonely role role that someone must play – Wizard or Shaman or Priest or Fed Chairman. It is lonely because one must never, ever, betray that fiction that you are just as powerless as everyone else. Shuffling and shaking your bone rattle. Hoping it rains.
The Wizard of Oz didn’t get burned at the stake, but a failed shaman might. People forced to confront their collective powerlessness aren’t usually appreciative. So you keep on banging the drums and shaking the rattles even if the curtain frays.
Not to say the Fed doesn’t have some power. They have 100% succeeded in raising short-term rates. Because they control short rates.
The collective hope was long rates would follow. Instead, the (free) market has responded by cranking long-term rates down down down. Not just the US 10 year. The German and Japanese 10 years bonds are back to 2016 lows (at or near zero).
The simple explanation for rates that low? An admixture of deflation and/or weak economic growth. The market isn’t always right, but it can be pretty smart. I (and many others) am hoping for a more complicated explanation that points elsewhere.
This isn’t just perplexing, it is downright terrifying. Per a quote I recently saw – Warren Mosler has said: ‘Because we think we may be the next Greece, we are turning ourselves into the next Japan’. Japan’s has been stuck in a deflationary ditch for about 20 years now. Its a hard rut to get out of.
That scenario should scare the bejeesus out of all of us. That may be why we aren’t squaring up to it. Much easier to turn back to the Wonderful Wizard. He will keep us safe! He is all powerful! Really! Its going to be just fine…
Looking out a few years, I am more worried than I have been in a while. Perplexing is not good. Especially with so much recent analysis seeming to focus mostly on the drumming and rattling at the short end of the curve. Ignoring the silent, free market at the long end.
POSTCRIPT: Per a prior post, low rates does mean the equity markets look reasonably valued. Or the least ugly dance partner for the next few years. But…