The Fed’s Vice Chairperson, Janet Yellen reaffirmed that which such one-way bettors already should know but appear not to; that their temporary gift of monetary accommodation will be taken away. Invoking the words of former Fed Chairman William McChesney Martin, Ms. Yellen said policy makers need to “take away the punch bowl when the party is getting out of hand.”
That is not an ‘if’ kind of matter but obviously, only a matter of ‘when.’ The current Fed stance is quite obviously stoking ‘a build-up of leverage and excessive risk-taking in the financial system’ observed Ms. Yellen on Monday. The Fed will keep its benchmark federal funds rate near zero through the beginning of next year, and end 2011 at 0.5 percent, according to a Bloomberg survey. My punch bowl runneth dry inside of twelve months.
The Fed vice chairman went a step further than merely alluding to the removal of said punch bowl in due course. She mentioned the “R” word as well (as in –gasp!-: Regulation). Regulation aimed at averting bubbles before they become a threat to the system. That kind of “risk-management,” coming to a market theatre near you, is also a matter of time and not of debate, as it turns out.
Ms. Yellen’s (cryptic) message read as follows: “We know that market participants won’t take kindly when limits are set precisely in those markets that are most exuberant, the ones in which they are making big money. Even so, discretionary interventions will inevitably play a part in macro-prudential supervision.” While we won’t venture a guess as to ‘macro-prudential’ and its meaning, it is pretty clear which markets have been most ‘exuberant’ (see dollar shorting, for one).
On the other hand, something that is eminently clear is the ‘macro-imprudent’ flow of huge sums of the Fed’s supply of ‘easy money’ into certain niches. Take the equities of a region such as Asia, for example. Plenty of spec funds have (taken positions in Asia, that is), and that seems to be the trouble-in-the-making. The rush of cheaply available US dollars has engendered performance and then some, in the region’s markets. But it is precisely that inflow of hot money that has some Asia watchers staying up at night. Or, all day in other parts of the world, while it is night in Asia.
A sudden U-turn in the pattern of global liquidity flows could – in the opinion of UBS strategists – have ‘devastating consequences’ for the region’s economic growth (not to mention its markets). Think Hong Kong, think India. Think China, South Korea, Singapore, and even Australia. Just don’t think what might happen when/if money gets up and leaves those markets.
Not to mention the very shares within those markets that have been lifted to the price stratosphere by ultra-cheap carry-trade-flavored greenbacks; Jiangxi Copper, Yunnan Tin, Newcrest Mining, Rio Tinto, Cnooc, Aluminium Corp. of China – you get the idea of the sector in question…
HSBC economist Fredric Neumann cautions that: “The set-up for Asia is sweet, but hardly sustainable. Easy money is available in the West, and everyone wants a piece of the East.” The result: Capital keeps pouring into the region. “It was only a short two years ago, after all, when markets froze up and left locals scrambling for dollars across the globe. Lending into Asia from Western banks has soared again over the past year. This cash is especially at risk of being suddenly withdrawn. Local market liquidity can thus quickly dry up, with devastating consequences for economic growth.”