Not Even Junk Will Fetch High Interest Rates Anymore

By: Doug French

The Federal Reserve tries and tries and just can’t muster up some price-tag ripping price inflation. Blowing up its balance sheet from $900 billion to $4.5 trillion would have seemed to send us to Zimbabwe, but no, prices just won’t cooperate with the monetary masterminds toiling away in the Eccles Building.

MarketWatch’s Caroline Baum says Fed Chairs used to call these things conundrums. However, “Conundrums are a thing of the past. Nowadays, Fed Chairwoman Janet Yellen has an explanation — an excuse, really — for almost anything, from the atypical behavior of asset prices to inconsistencies in economic relationships,” writes Baum.

We’re told by President Trump that we’re at full employment, yet prices (the way the Fed measures them anyway) can’t get to the 2 percent increase level Yellen et. al. considers nirvana.

Baum writes that the Fed called price changes “transitory” then they were “definitional challenges” followed by “idiosyncratic factors,” such as “a precipitous drop in the price of wireless telecommunications services this year.”

It’s in all the economic textbooks: Nothing stops inflation like a drop in cell phone fees.

This summer, private economists are pointing to drops in hotel rates as depressing CPI and whatnot. However, Ms. Baum knows, “Inflation is a monetary phenomenon. When the Fed expands its balance sheet through asset purchases, it has no control over where that newly created money will go: toward the purchase of goods and services; or into financial assets, such as stocks, junk bonds or housing.”

She continues, “The Fed’s asset purchases lower risk-free Treasury rates, encouraging investors to reach for yield and buy riskier assets.

“Because asset prices aren’t part of official inflation measures, and because identifying an asset bubble is beyond their scope, central bankers eschew using monetary policy to respond to them.”

The Fed is not alone in its bubble enabling. A Bloomberg Businessweek headline screams, “Even the Junkiest Sovereign Debt Now Pays Less Than 6%.” with the subtitle naming the culprit, “Central bank buying has distorted the market and reduced yields on the lowest-rated debt.”

It’s not just those cranky Austrians calling central bankers on the carpet for their monetary mischief these days. Everyone knows, is holding their breath, and hoping for the best.

Natasha Doff explains,

The junkiest emerging-market bonds yield less now than U.S. Treasury bills did as recently as 1999. Yields on state debt of Mongolia, Ukraine and Belarus — at seven levels below investment grade, among the world’s lowest ranked — have dropped under 6 percent in the past two months.

It is as Ms. Baum writes, “Asset prices are a symptom; excessive credit growth is the cause.”

William White wrote in a 2009 paper that bubble episodes have the following in common: leverage, speculation and declining credit standards.

For instance money losing Tesla looked to sell $1.5 billion of junk bond debt and ended up selling $1.8 billion because the demand was so high for it’s B- rated paper.

“I won’t call it a bubble,” said Andrew Feltus, co-head of high yield and bank loans at Amundi Pioneer Asset Management in Boston told Reuters. “The (market) fundamentals are pretty good.”

Some would disagree. According to ValueWalk, “Tesla, Inc. is an over-hyped, lousy company, from a financial perspective, that is destined to go bankrupt.”

Famed Short-seller Jim Chanos said last year the announced $2.6 billion merger with SolarCity Corp. will make Tesla Motors Inc. a “walking insolvency.”

A “walking insolvency” can borrow more than it wants at 5.3%; now that’s a conundrum.

Douglas French is former president of the Mises Institute, author of Early Speculative Bubbles & Increases in the Money Supply, and author of Walk Away: The Rise and Fall of the Home-Ownership Myth.

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