Should we listen to Ray Dalio? Should we taper? Be patient?

Sender, Foley, and Fleming write for The FT:

Today, many analysts fear the knock-on effect any Fed tightening will have, particularly on emerging markets, especially when combined with a strong dollar.

Messrs Dalio and Dinner wrote: “If one agrees that either a) we are near the end of the developed country central bankers’ ability to be effective in stimulating money and credit growth or b) the dollar is the world’s reserve currency and that the world needs easier rather than tighter money policies, then one would hope that the Fed will be very cautious about tightening.”

Martin Wolf on related topics is also instructive.  I see a few possibilities:

1. Stock and bond markets are at all-time highs, and we Americans are not so far away from full employment, so if we don’t tighten now, when?  Monetary policy is most of all national monetary policy.

2. It’s all about sliding along the Phillips Curve.  Where are we?  Who knows?  But risks are asymmetric, so we shouldn’t tighten prematurely.  In any case we can address this problem by focusing only on the dimension of labor markets and that which fits inside the traditional AD-AS model.

3. The Fed’s monetary policies have created systemic imbalances, most of all internationally by creating or encouraging screwy forms of the carry trade, often implicit forms.  A portfolio manager gains a lot from risky upside profit, but does not face comparable downside risk from trades which explode in his or her face.  The market response to the “taper talk” of May 2013 (egads, was it so long ago?) was just an inkling of what is yet to come.  There is no way to avoid that problem, no one ever will be readier for the adjustment than they are now, so we have to get it over with and take the (international) pain sooner rather than later.  So what if a bunch of foreign companies go bankrupt because of dollar-denominated debt?  They are insolvent anyway.

4. The Fed’s monetary policies have created systemic imbalances, most of all internationally by creating or encouraging screwy forms of the carry trade, often implicit forms.  Fortunately, we have the option of continuing this for another year or more, at which point most relevant parties will be readier for a withdrawal of the stimulus.  That is what patience is for, after all.  To get people ready.  To allow prudent Indonesian, Chinese, and Brazilian foreign companies to unwind or hedge their positions in a careful and measured manner, as they are wont to do.  After all, the taper talk of May 2013 was just talk, so a little more talk, and a little more time, is needed.

5. We should continue current Fed policies more or less forever.  Why not?  The notion of systemic imbalances is Austrian metaphysics, so why pull the pillars out from under the temple?  Let’s charge straight ahead, because at least we know the world has not blown up today.

There’s rather a lot at stake here, isn’t there?

Here is Edward Hugh on when the ECB might start to think about tapering.  Johannes, we hardly knew ye!


Fixed income markets and the housing market are completely out of equilibrium now. Since the mortgage market is AWAL and has been since 2007, the housing market is far outside typical ranges. Housing usually provides income about 1-2% above real long term interest rates. But, today, net rental income is more like 5% while 10 year TIPS are below 1%. All that money locked out of funding mortgages has to go somewhere, so while home yields are above equilibrium, bond yields are bid down. It's surprising how long people seem to be able to ignore this. Look at interest income, housing affordability, homeownership rates, the level of real estate loans at commercial banks, rental income as a portion of GDI. All these measures scream the same story. Real estate is out of whack.

Everybody is stuck on this banks as the boogeyman story, and it's so satisfying that scales have grown over their eyes. We would be in a 2-3% interest rate economy right now if housing were allowed to move to equilibrium prices. So, it probably doesn't matter whether short term rates are 0.5% or 2.5%. The non-housing economy is growing as quickly as it can grow. But, employment and credit can only grow so fast if we are basically running without the mortgage and housing markets. It's like having a piston out on the engine. The horsepower is limited.

Homes may come out of their slumber if home prices rise another 10%-15%, and homeowners have enough equity to start transacting again. Once that happens, then we're at full horsepower. Whether it happens or not may not have much to do with whether interest rates are at 0.5% or 2.5%. But if housing isn't allowed to recover, then we can stay at 0.25% as long as we want, and there won't be inflation.

The only inflation we have now is shelter inflation. And that's because of the negative supply shock, since we've stopped building houses for a decade. If home prices go up 20% and we are building houses again, shelter inflation will go down, so loosening the money supply at this point could be disinflationary for a little while.

Sorry. AWOL.

This post will get (or should get) 200 comments, it's good troll bait by TC. TC is a master...not just over the chessboard!

The money manager Hussman, of Hussman Funds, a bit of a permabear but a scholar and monetarist, has this to say: "Aside from that 2000 peak, the S&P 500 itself is now more overvalued than at the 1929 peak, not to mention the lesser 1972, 1987 and 2007 extremes. We estimate that the S&P 500 Index is likely to be below its present level a decade from now, though adding dividends is likely to raise the nominal total return to about 1.6% annually on a 10-year horizon." (see: - also check out the uber-cool graph that uses various metrics including Tobin's Q on a delayed basis to track ex ante and ex post, stock market performance. VERY persuasive).

If you have time, check out my critique of NGDPLT which addresses TC's "pull out the pillars" argument, see: (comment by Ray Lopez at: 17. March 2015 at 21:11 )

I love Hussman. He's been a superb contrarian indicator lately. If Hussman says 'sell' I know for certain I should buy.

All the permabears are like that. Because markets trend upward over time, they will be wrong most of the time then right for a bit (2007-2009) then wrong again. Permabulls are equally pointless but they are more often right. A lot fewer of them get press, pessimism always sounds smarter than optimism. Also, you shouldn't be market timing that way anyway...pick an allocation, rebalance regularly, adjust it as your life changes.

"pick an allocation, rebalance regularly, adjust it as your life changes." - And have rich parents... I am turning down work now in my consulting job...I'm getting lazy. I have all the money I could care for... it's weird not to have to wear a suit, a tie, and worry about money...been that way now for over ten years. I see the little people stuck in their commute, here in PH, for a mere $2.5 to $5 profit a day, to feed their little families. In the USA it's not much better, all those little morning commuters stuck in traffic, racing downtown to play little office politics, and go home to relax watching a little cable TV... I am free. I wonder though if my capital is at risk. I'm thinking of investing in more real estate, at about 5% yield, in DC, any ideas? Can DC ever fall, like Babylon? Probably not, the capital is always safe, as anybody who has seen the Hunger Games knows. Stocks are overpriced. Bonds? No way. Money market gives 1%. Foreign real estate is an option, I might buy here some rice paddies. Even if I lose it all it's just play money, at $25k USD a pop. I'm waiting for the shoe to drop in Greece, to see how default affects my property there...probably not much, as most buyers of Greek real estate are locals. I'm bored today...I need to improve my chess... get a haircut. Ah, life is good.

Ray, you think these posts are making us jealous but you seem very lonely, sad, and bored.

S&P P/E (current): 19.48

S&P P/E (Jan '09): 70.91

S&P P/E (Jan '99): 32.92

S&P P/E (avg): 15.54


But stocks are at an all-time high! ALL-TIME!

Since 1950, the S&P 500 has hit it's ALL-TIME HIGH more than 1,100 times. That's a lot of bubbles.

Speaking from the perspective of the 60s with interest rates much higher and often being bumped higher, then lower, with tax rates really really high and all those distorting tax loopholes, I find the idea that the Fed merely hinting at a couple of basis point increases will cause any problem to be a sign that four decades of going to the right on economic policy has been a disaster.

And Reagan kicked a dog this one time in 1987...

"Monetary policy is most of all national monetary policy"

This is the truth many central bankers wished was a lie. Maybe it's not a bad idea for small countries to abandon their national currencies and adopt one of the bigs, i.e., USD or EUR.

1999 Econ Nobelian Robert A. Mundell, a gold bug, advocates a world currency. Not a bad idea...Amero anybody? see ("The North American monetary union is a theoretical economic and monetary union of three North American countries: Canada, the United States and Mexico. Implementation would involve the three countries giving up their current currency units (U.S. dollar, Canadian dollar, and Mexican peso) and adopting a new one...")

A world currency is an absolutely terrible idea. The Euro (at least in the form it was implemented) was a terrible idea, and North American Monetary union would be a terrible idea (though less terrible than the Euro and way less terrible than a world currency).

Ray do you know anything about anything?

I know one thing he knows a lot about....

Also, I'd love to know what people pay for his advice about in his 'consulting job'.

I would suspect the people buying gold and building compounds in preparation for Armageddon.

@Student - who to believe, you, or Mundell? You are concerned about the US dollar's seniorage and reserve currency status, because you want to live as a rentier, like me. But the rest of the world is going to leave the US in its wake, the same way Britain was left in the dust. Mark my words...I am in the vanguard here in Asia, white boy.

Ray, why believe anyone? How about thinking the problem through for yourself? How many of the criteria for a currency union are met at a global scale?

The issue isnt about seniorage or reserve currency status. Its about labor mobility (pretty easy to move from Nevada to Texas when the labor market deteriorates in Nevada but much much harder to move from Nevada to Saudi Arabia), existent fiscal transfer mechanisms, shared business cycles, etc. Come on man...

Have fun in Asia. Why not take your drivel to Asian language and Asian based blogs while your at it.

I like Cowen's new technique: repeat a statement and draw two different conclusions from it. The "systemic imbalances" are not the Fed's fault, they are the result of a one-sided stimulus, monetary stimulus. My short-hand for describing the difference between monetary stimulus and fiscal stimulus: monetary stimulus is redistributive upward, while fiscal stimulus is redistributive downward. There's a reason why the political fight over the two is more intense that the fight over the best faculty parking spaces on campus. Of course, the one-sided stimulus has also created systemic imbalances in inflation, with assets of working Americans, (including labor) deflated and the assets of not working Americans highly inflated. How does the Fed stimulate the former while bringing the latter back to earth? I've been asking that question for several years and haven't yet received any answers. That could be because there is no answer or, more likely, the answer is political and cannot be spoken.

The mandate is maximum employment and stable (currently interpreted as 2% inflation). Employment could go higher. We are nowhere near 2% inflation (especially if using the Fed's preferred PCE), haven't been for years and market based measures of inflation expectation (e.g. spread between nominal treasuries and TIPS) don't show 2% for decades In other words, no current need to tighten.

The Cleveland Fed 10 year inflation expectation is 1.5%. The 10 year TIPS spread, per Bloomberg, is 1.6% and the 30 year is 1.8%

Add in that risks are asymmetric.

Tighten when you see the whites of inflation's eyes. We don't see 2% for decades.

Note that the Fed mandate does not mention asset prices or foreign issues.

How about this: We are several years away from the last recession. The longer you are from the last recession, the higher the odds of another. When that recession hits, what tools will the Fed have available if it doesn't tighten now?

@Ted Craig - this is Old School thinking, out of style today. Nowadays the Fed does not use interest rates as tools, but QE, which, simply put, is to buy junk paper like mortgage backed securities from Fannie, which expands the money supply. Just look at any graph of the Fed balance sheet since 2008. In theory they can do this forever, as long as banks have commercial paper. That's the latest thinking from Scott Sumner and his ilk: have the Fed buy junk paper, pay for it with good (for now) dollars, and keep the junk on your books forever. Lower interest rates? No need.

"Don't you know about the new fashion honey? All you need is looks and a whole lot of money..." - B. Joel

And look at all that god awful inflation they are generating! My gawd, hyperinflation I tell you!

Buy gold and head for the hills! Armageddon is upon us! ahhhhhh!

The stock market has done nicely. What percentage of QE resulted in dollars in hand? What did QE do other than boost asset prices? If QE doesn't cause inflation, why should contractions via austerity cause deflation?

Who is claiming monetary stimulus doesn't cause inflation? Who is claiming monetary contraction doesn't cause deflation? You cant just make shit up and claim intellectual victory, that's just not how it works.

I asked a lot of questions. Questions you could have answered if you were capable and not intent on being an insufferable leftist jackass.

questions that don't deserve answers because they are dumb questions. No one is claiming monetary stimulous is not inflationary.

If the Fed buys a bond (junk or not) and keeps it on its books forever then tightening automatically happens. Every time the bond issues a coupon payment or matures and pays off its principle cash will leave the economy and enter the Fed's books.

QE could be done with anything including longer term Treasury bonds like the 30 year one, not simply MBS's from Fannie (which BTW are a long way from junk status).

I thought well of Wolf's article. But what about Greenspan's years - Wolf surely wouldn't absolve the pseudo-maestro of all blame for our predicament, would he?

Anyway, to the future: you can't go wrong voting against Hellary, almost irrespective of her opponents.

The beauty of markets is that excesses are self-correcting, absent intervention by the government or central bank. And that includes excessive inequality. The Long Recession has confounded many because the Fed has adopted measures that work against the self-correction; indeed, the Fed has adopted measures that restore the excesses that resulted in the financial crisis and Long Recession. If space aliens have been watching these past ten years they no doubt have concluded that we are hopeless and have moved on in their search for intelligent life.

This seems to be missing an important dimension: inflation. There is none, so why tighten?

ding ding ding

Yep, why tighten if you are below your policy goal for inflation? Seems crazy.

I think they want to dip a teeny tiny toe in (one 0.25% rate hike in June) that they telegraph very clearly to see how markets react. If the markets freak out, they stop. If they handle it ok, they wait a few months and do a bit more. No one wants permanent rates at zero. They will do this very carefully. And I doubt they take the short rate over 1%, maybe not even that high.

Yeah, the markets are braced for some kind of increase, but I don't see rates higher than 1%.

If loosening doesn't effect inflation, tightening shouldn't effect inflation either. Is the argument that absent QE we would have deflation? Where is the evidence? What does QE do aside from boost asset prices? How much of that money reaches consumer hands?

CPI dropped 4.4% in the second half of 2008.

Look around (Japan, Euro). Deflation is not a theoretical concept anymore. QE kept US inflation positive after 2008.

Watch inflation expectations move toward zero as the Fed hikes rates.

A more plausible alternative to policy #5 is to keep rates at zero until the core inflation measure tracked by the Fed rises above the 2% target to say 2.5%.

Love it how the sadist nutbags are constantly coming up with reasons to inflict economic pain.

First it was the risk of runaway inflation. Then it was the "size of the balance sheet" (which is another term for "money supply"). Now they're trotting out "systemic imbalances".

What the hell is a "systemic imbalace" and how do you measure it ?

This is just retarded. With inflation at its post-war lowest, only a moron and/or a loon would call for tightening.

So do you believe that holding interest rates artificially low has no structural effect on the economy? The balance of short-term and long-term investments doesn't change? Savings patterns don't change? Money flows don't change? Stock prices don't change? Government budgets don't change?

This argument for perpetual 'easing' is a recipe for an eventual major and painful correction. And many of us who opposed the Fed's actions at the time argued that this was exactly what was going to happen - the 'easing' would last for a very long time and prove to be almost politically impossible to 'unwind' until some sort of major economic event forces the situation.

If the economy is bad, that's not the time to ease. If the economy is good, well then the easing is 'working' and it would be stupid to stop it. Therefore, there is no good time to stop. Or at least, that seems to be the argument.

Bernanke promised that the Fed had many tools for unwinding this painlessly. I guess that depends on your definition of 'pain'.

It's not that you're wrong, it's that you're NOT EVEN WRONG (ie - you just wrote a wall of meaningless ramblings).

Edumacate yourself, moron.

Holy crap Hanson, I am not sure if you write something more wrong that this.

Frankly, I don't understand the magic either. As far as I can tell, Macroeconomics is a bag of tricks that starts with the multiplier and ends with "loosening doesn't effect inflation, but tightening (negative loosening) effects inflation", the former a trick of decreasing savings to increase GDP, the latter a mathematical equation that doesn't equate. Explain the magic to me.

Try doing a little reading and things won't appear to be magic anymore.

Trying justifying your stupid assertions. Thoroughly not impressed by first year Ph.D. students like yourself taking the science on faith. Put up or shut up.

You are a very ignorant man.

Not a student. Just a play on the etymology of the student t distribution. Good try though. Oh and, uh, ur mom.

In a sense, I love Hussman indeed.

Trying to think of others besides Hussman. Roubini?

Tyler and other economists,

I have a question.

Is the 'Wicksellian interest rate' a nominal or a real rate?

Also, is it more appropriate to think of the Wicksellian rate as a yield curve rather than a single number?

I'm guessing the concept refers to a real yield curve. Please correct me if I'm wrong.

In that case, in theory, is it possible to gauge the stance of monetary policy by simply comparing the TIPs curve to this Wicksellian curve?

So, if the TIPs curve is below the Wicksellian curve, policy would be perceived as 'accommodative'.

Two problems are: (1) no one knows where the Wicksellian curve is at any given time, and (2) it doesn't sit still itself.

But do I have the theory right?

@BD--I thought you were an economist? I'm disillusioned. Here is the answer to your inquiry, clearly Wicksellian interest rate is a single number, and not real but a theoretical construct, like 'output gap' and the like:

Ray, sorry to disappoint. Thanks for your characteristic affable good cheer and content-free comments.

I feel like a guy who went fishing in a stream and pulled up an old boot.

If one thinks recessions are inevitable even with ZIRP, then the Fed moving to raise rates ASAP makes perfect sense. What would one say when a recession hits with the previous crisis policy ZIRP in place? Where do you go from there? And then, what about the next recession after that?

You can disagree with the logic, but it's pretty straightforward. The fed causes recessions. Even this last one. It was obviously much worse than they expected for a variety of reasons, but they were raising rates when the economy collapsed. If you keep rates at zero the economy continues to grow. Long term inflation expectations are only low because of expected tightening. Keep rates low enough long enough, you'll get inflation. Then you raise rates, and boom, recession. But since you've increased rates, you can now drop them again. If you want to get away from the zero bound during recoveries, move your inflation target up, don't panic tighten while inflation is still under 2%.

So, you are an advocate of #5?

"If not now when?" When it look like we will overshoot the price level/NGDP targets that e have been undershooting since about 2008?

I do think we should generally listen to Dalio, though I suspect there's a third issue on his mind more important than either of the two quoted.

At a time when US yields are already significantly higher than in Europe and Japan, and unusually high relative to EMs, raising them further would amount to a fairly aggressive strong dollar policy. The main worry is what it could do to China, which so far has been resisting the trend to devalue. It's not just about foreigners' dollar debts, it's about global capital being steered to the US. Which is why for US domestic liquidity I think it would be a wash.

Central banks are mandated to pursue domestic interests. They're not mandated to pretend to live in a closed economy.

If we're going to stick with the Keynesian model here, why not implement a large tax cut paid for by selling a couple hundred billion dollars in 30-year Treasurys to the Federal Reserve with a coupon rate of zero?

That would push up aggregate demand without sucking up surplus savings.

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