Wednesday, April 6, 2022

UPDATED—February 2022: Credit Suisse' Zoltan Pozsar Says The Fed Has To Crash The Market

Original post:

This walk down Memory Lane (two months ago but it seems a lot longer) is brought to you by Janet Yellen and a Japanese gentleman.

First up, from Reuters, February 17, 2022:

LIVE MARKETS
Invoking Volcker

INVOKING VOLCKER (0942 EST/1442 GMT)

"Volatility is the best policeman of risk appetite and risk assets. We need a Volcker moment ... where Vol stands for "vol" – as in volatility."

So says Credit Suisse's Zoltan Pozsar in his latest 'Global Money Dispatch' in which he argues the Fed must take a radically different course to bring inflation down. Instead of raising the fed funds rate, it should lift long-dated yields in order to bring down asset prices, from stocks to credit and especially housing.

Pozsar says the Fed cannot deflate goods prices unless it curbs demand by jacking up the policy rate. This will cause a recession, so it is a non-starter. But it can - and should - tackle services inflation by bringing down asset prices, which will also help boost the labor supply.

To do this, the Fed will have to inject financial markets with huge shots of volatility to push risk premia higher. End policy press conferences. Sell $50 billion of 10-year bonds with no warning. Cease market jawboning and guidance. Keep the market guessing....

....MORE

Why? Because the Fed can deal with that. 

From CNBC, April 6, 2020:

Yellen says the Fed doesn’t need to buy equities now, but Congress should reconsider allowing it

  • “I frankly don’t think it’s necessary at this point ... but longer term it wouldn’t be a bad thing for Congress to reconsider the powers that the Fed has with respect to assets it can own,” Yellen told CNBC’s Sara Eisen.
  • Normally, the Fed is only allowed to own government debt and agency debt with government backing, Yellen said.
  • The central bank has also received special powers during the coronavirus outbreak to buy other assets such as corporate debt through exchange-traded funds.
  • Still, “the Fed ... is far more restricted than most other central banks,” Yellen said.

....MUCH MORE

Of course the "We know how to deal with that problem" argument is similar to the one made to let inflation run hot - we're not very good at dealing with deflation, better at inflation.
But maybe we're not. 

We'll leave that debate to the learned economists.

The Japanese gent was last seen in 2013's Unconventional Measures: "Japan plans 'nationalisation' of factories to save industry":
Remember when, in my naïveté, I would write about, gasp, Central Banks buying equities?

...The question arises "Can the fed intervene in the Equities Markets?"
Again, two answers. 1) It's definitely something Central Bankers have thought about. 2) The Fed may need some enabling legislation which they would probably get if they requested it.
The FT reported February 21, 2002 "Japan Suspected of Stock Market Intervention".
A Google search finds 700 references to the "Stock Buying Body".
Here's a pungent one:

"We must halt this fall in shares. It's like diarrhea, we must stop it. The stock-buying body was set up precisely to absorb such selling (offloading of cross-shareholdings by banks). If February is such a month, there is no excuse for not functioning at that crucial time.
—Finance Minister Masajuro Shiokawa, February 7, 2002

More relevant to the American markets are a couple Fed papers, the first of which is astounding for its frankness....

Keep an eye on volatility as the Fed's preferred tool to destabilize portfolio assets.