Forget the September ’
15 Fed Tightening – There Has Been a
Stealth Tightening Since September of ’
14!
The Econtrarian September 2, 20
15 (Closing Thoughts)
The Fed’s creation of thin-air credit likely financed,
directly or indirectly, increased purchases of riskier financial assets, which, in turn, boosted the prices of these riskier assets.
If so, then the Fed’s cessation of securities purchases and contraction in its contribution to thin-air credit would reduce the
demand for riskier assets, which would have an adverse effect on their prices. So, why did I wait until now, after the recent
swoon in the stock market, to tell you that the Fed’s cessation of QE would have an adverse effect on the stock market? Well,
truth be told, I did alert you to this probability back on November
17, 20
14, in a commentary entitled “20
15 Is Shaping Up
to Be a ‘Turkey’ of a Year for the U.S. Economy and Stock Market” {read now}.
http://www.lptrust.com/wp-lptrust/uploads/2014/12/Paul-Kasriel-Commentary-Nov-19-2014.pdfBut the truth also be told, I had no idea that a stock market swoon would occur in August 20
15. In fact, I had no idea a stock
market swoon would occur at any time in 20
15. But it did appear to me back in November 20
14 that thin-air credit growth
was likely to decelerate sharply in 20
15 compared to 20
14. And that a sharp deceleration in thin-air credit growth would
have adverse effects on nominal aggregate demand and the value of risk assets. The adverse effect on the value of risk assets
appears to be upon us. Of course, the collapse of the Chinese stock market has played a large role in the decline in prices
of U.S. risk assets, perhaps a larger role than the sharp deceleration in U.S. thin-air credit. Weather-adjusted, U.S. aggregate
demand has held up relatively well. I suspect that will change in the fourth quarter of this year.
In the face of very low goods/services price inflation and weak wage growth, the recent U.S. stock market rout is likely to
postpone the previously-anticipated September 2015 Fed rate hike. It is too early to expect QE4. But the Fed certainly has
the leeway to restart securities purchases if need be. In other words, take some comfort in a Yellen put. n
The Econtrarian
© 20
15 Legacy Private Trust Company®. All rights reserved.
Two Neenah Center | Fifth Floor | Neenah, WI 54956 | 920-967-5020 | www.lptrust.com
Forget the Sept. ’
15 Fed Tightening – There Has Been a Stealth Tightening Since Sept. ’
14!
Paul L. Kasriel Senior Economic and Investment Advisor Econtrarian, LLC
http://www.lptrust.com/wp-lptrust/uploads/2015/09/Paul-Kasriel-Commentary-September-2-2015.pdfhttp://www.lptrust.com/people/paul-l-kasriel/
