By Eric Peters, CIO of One River Asset Management
Twenty-five years ago today, two Nobel laureate economists and a famous bond trader received a $3.65bln bailout from fourteen financial institutions at the behest of the Federal Reserve.
LTCM had delivered a 21% net return in its first year. 43% in the second. 41% in the third. Greed, hubris, leverage, illiquidity, and lack of imagination led to the inevitable.
A year later, Japan cut rates to zero, started QE in 2001. This sparked the introduction of ever more powerful policy tools to address crises, which manifested regularly, with growing intensity. Decades passed. There appeared no limit to what could be achieved using such exciting new tools.
But of course, that was simply the start of the latest chapter. In the oldest story ever told.
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I would say you know ‘sufficiently restrictive’ only when you see it,” said the Fed Chairman at Wednesday’s press conference, echoing Supreme Court Justice Goldberg, who in 1964 drew a blurred line between art and obscenity in motion pictures.
“It's not something you can arrive at with confidence in a model or in various estimates, you know,” continued Powell, a big fat crayon in his breast pocket. “I think confidence comes from seeing, you know, enough data that you feel like, yes, okay, this feels like we can for now decide that this is the right level and just agree to stay here,” explained Jay, terrified to admit how the discussion amongst his twelve governors had gone.
Unable to quite articulate their definition of ‘sufficiently restrictive,’ the committee members drew pictures instead.
“Nonetheless, you know, we need to get to a place where we’re confident that we have a stance that will bring inflation down to 2 percent over time,” said Powell to the room of reporters, still haunted by the drawings of his fellow board members, images that could not be unseen.
Naturally, many of them included depictions of the years spent with policy tied to the zero lower bound, printing presses burring, purring, moaning under the strain of lifting consumer prices by a few tenths of a percent to achieve an utterly arbitrary target.
The resulting wild economic distortions, inhuman contortions, crept in the shadows, suppressed for years. Then came the virus, masks, debt fueled consumption, gluttony, global conflict.
The twelve drawings were at once beautiful, grotesque, enigmatic, an insult to the senses. But not a single image helped the Chairman put his finger on what exactly it meant to be sufficiently restrictive.
And this left Jay grasping, uncertain how he’d ever return us to a state of normality, prudence.
But no matter, a Fed Chairman’s job is to convey confidence, pretend. “As we’ve gotten closer to it, we’ve slowed the pace at which we’ve moved. I think that was appropriate. And now that we’re getting closer, again, we have the ability to proceed carefully.”
