The Richmond Fed's Precious Bubble: Deny, Deny, Deny
(h/t Negocios Loucos)
Oh snap, my favorite Fed bank got cussed out by Zero Hedge. Last time ZH took issue with Richmond Fed, I got a tad offended. But this one? I'll give ZH a "right on!"
Come on, Richmond, what the hell are you doing? You're slipping. Someone needs to go give those research economists a good slap or twenty. Tell 'em Jr Deputy Accountant sent you.
Richmond Fed: "Bubble? What Bubble?" (via ZH):
The latest out of the Richmond Fed is a joke of a paper that while analyzing the possibility that the entire stock market and dollar carry trade is one zero cost of capital-funded bubble, skips over this possibility and instead goes on to analyze the "factors that could contribute to a fundamentals-based explanation for the recent rally in certain risky asset markets." Spoiler alert: No bubble - it's all based in sound reality.
In what is likely a first, the Fed quotes Nouriel Roubini:
The near zero nominal interest rate in the United States, jointly with the expansion of the Fed’s balance sheet, have created resources available to be lent. Some investors have taken advantage of those resources by borrowing in dollars at very low rates and investing in foreign assets, especially in emerging economies and commodities. The expected profits from this investment strategy have been magnified by the expectation of a weaker dollar: Once it comes time to pay off the dollar-denominated loans, the investors can repay them using dollars that are worth relatively less. In turn, this trading strategy – referred to as “shorting” the dollar – has itself contributed to the decline in the value of the dollar since investors must exchange dollars to purchase foreign-denominated assets.
In explaining what Roubini means to his intellectually subprime colleagues, Richmond Fed analyst Renne Courtois provides this enlightening narrative:
The argument of Roubini and others is that this represents a bubble because the emerging markets and commodities rallies are fueled by easy money and the carry trade, rather than economic fundamentals. Under this view, several likely factors could cause this asset bubble to burst. After appreciating during the height of the financial crisis, the dollar steadily declined for most of 2009 but eventually will likely stabilize at some point. Stabilization of the dollar would reduce returns for investors with short dollar positions. Additionally, economic recovery in the United States will raise expectations of an interest rate increase. This would cause the dollar to appreciate (since higher interest rates raise the expected return of dollar-denominated assets, all else equal), and thus cause significant losses for investors short on the dollar.
The Richmond Fed goes as far as refuting Bernanke's recent claim that low interest rates have never, NEVER, been responsible for this arcane concept known as a bubble: "Research has shown how a bubble fueled by low interest rates can exist under certain conditions."
"Total waste of time document", yeesh, that's harsh.
Update: it has been brought to JDA's attention that ZH got the facts wrong. No, not the bubble fact, the other facts:
"Renee Courtois is a writer, Brian Gaines is a research assistant and Juan Carlos Hatchondo is an economist in the research department at the Federal Reserve Bank of Richmond."
[H]e lazily attributes the paper to the first name he came to (alphabet, dude!) instead of seeing that the credits identify her as a writer and that an economist actually published the paper.
Sorry, ZH, critics have spoken. I'm staying out of the argument as the fundamental theme is still that the Fed wouldn't know a bubble if it slapped them in the face and that fact is correct no matter how many of the other ones are written incorrectly. *zing*