Sentiment/Modern Monetary Self Evaluation

According to AAII which measures the stock market sentiment of individual investors, Bulls were little changed at 24.8, a hair above the lowest level since mid December. Bears rose 4 pts w/o/w to 40, the most since the first week of January. For the sake of a market bounce, in the short term, this is the type of sentiment you want to see. Keep in mind though that I emphasize short term because that’s all this indicator measures as it jumps around like an EKG chart week to week.

While its a long time coming, we’re finally seeing some members of the ECB acknowledge the negative side effects of uber monetary easing all for trying to achieve a higher inflation rate (aka, higher cost of living). Today we heard from a member of the Bank of Japan, a brother in arms in modern day monetary extremism, who is also questioning how far they’ve gone. BoJ member Makoto Sakurai in a speech said “We shouldn’t recklessly seek to achieve our price target with additional easing because doing so could accumulate imbalances in the economy.” With respect to its punitive impact on banks, “While financial institutions’ capital to asset ratios are sufficient from a regulatory standpoint, what’s important to note is that they are declining as a trend.” As to getting to their inflation target of 2%, “Achievement of our price target is being delayed. But this is because the relationship between monetary policy and price moves are changing and becoming more complex.” And finally of note, “The BoJ must make appropriate policy decisions by scrutinizing the merits and demerits, including the risk our policy is building up financial imbalances.”

This is refreshing to hear but it shouldn’t have taken this long to realize and express.

As rate cut odds in the fed funds futures market is at 84% by year end and many assume this would beginning of another round of monetary easing, I implore the Federal Reserve to analyze closely the experience of the BoJ and the ECB. Hearing from some Fed members in speeches on what they would do in the next downturn remains the conventional thinking. Cut rates back to zero, aka the lower bound, and if there with no benefit just do more QE. If that doesn’t work, start to price fix maturities out to one or two years. I believe at this point there is enough evidence globally to study to prove that none of this works in stimulating more borrowing because the cost of capital is already so low and the risks are amplified by the damage it does to ones banking system, the dangerous debt levels it encourages and the threats of getting stuck in perpetual easing mode like the BoJ and ECB.