Tags: Farzad | Minsky | US | economy

Pundit Farzad Predicts Economy for 2015

By    |   Monday, 05 January 2015 07:58 AM

This is the season for retrospectives and forecasts, and it was in this spirit that on Jan. 4 radio talk show host Roben Farzad appeared on C-SPAN's Washington Journal. He was interviewed by iconic host Steve Scully, who was back in his customary Sunday seat. Farzad is a former senior writer for Bloomberg Businessweek who can be heard on SoundCloud.

Scully began by bringing up the facts that gasoline prices have declined below $2 in some areas and now average about $2.30, the stock market is continuing to make news highs and unemployment is coming down, and he asked whether there will be "more of the same" in 2015.

Farzad recalled predictions in mid-2008 that oil would never again fall below $100 a barrel when gasoline was near $4 a gallon, yet now the U.S. has the strongest economy among developing countries. He observed that North Dakota is now as big as the smallest OPEC member, Ecuador, and the U.S. is now in a "market share war" with Saudi Arabia. He suggested that at such low oil prices there might no longer be a need to build the Keystone XL pipeline to bring heavy oil from Canada, and now the debate might be about building an infrastructure to export the sudden glut of natural gas that is a byproduct of successful oil exploration.

Scully asked about the state and impact of better consumer confidence numbers. Farzad pointed to the immediate tax cut effect of a gasoline fill-up declining from $60 to $40, giving consumers another $20 to spend every week or two on entertainment, retail and eating out more. He called this and the decline in unemployment "of utmost importance" of all the economic indicators. Those who held on to their brokerage accounts in the face of a record number of liquidations in 2014 saw record levels in their 401(k) accounts. Asked about the $18 trillion debt hanging over the economy, Farzad said the Federal Reserve's policy of flooding financial markets with liquidity has prevented the debt from "crowding out" investment, benefiting both corporate borrowers and private households seeking to refinance their mortgages.

Scully played a clip of Fed Chair Janet Yellen talking about interest rate policy at her final news conference of 2014, saying that given the improvement in the economic indicators, "At some point it will become appropriate to begin reducing policy accommodation." Farzad said this would signal markets to grab one more swig from the proverbial punch bowl that the market has become addicted to.

Farzad questioned how the market would process the likelihood of "some sort of a bond hit" once rates on Treasury securities start to rise. He recalled that former Fed Chair Alan Greenspan had suddenly withdrawn stimulus provided in 1994 in response to the savings and loan crisis, but the U.S. has never seen this magnitude of central bank stimulus, with the consequent inflation of global assets. He asserted that this was not easy for Greenspan's successor, Ben Bernanke, to do. Farzad challenged the audience to imagine the market's reaction when Yellen finally hikes interest rates.

Scully posted a prediction from MarketWatch that there could be a stock market correction in 2015. Farzad noted that the closest to a correction this market has come was 9.9 percent, just shy of the 10 percent standard, and he said, "It speaks to how short-term our memories are." Pundits have been predicting corrections for three or four years. Asked by Scully whether the current bubble might burst, Farzad pointed to an interest rate rise as the precipitator.

The climax of Farzad's presentation was when he questioned whether there is another "black swan event," another "Minsky moment," somewhere out in the economy, such as leveraged trades by financial institutions when the oil price was high, much as the banks had bet on real estate prices to remain high.

Here is the synthesis between Farzad's outlook and the theme of these articles. Yes, there is an event out there, another Minsky moment, but markets expect that in that event, the Fed will respond, as Minsky's theory calls for, with more interventions, because the stock market has become a "government-sponsored enterprise," and the "Yellen put" is in full force. Thus, any withdrawal of accommodation will be offset by accommodative steps by other central banks and by other interventions by the Fed itself, up to and including buying stocks.

(Archived video can be found here.)

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This is the season for retrospectives and forecasts, and it was in this spirit that on Jan. 4 radio talk show host Roben Farzad, a former senior writer for Bloomberg Businessweek who can be heard on SoundCloud, appeared on C-SPAN's Washington Journal.
Farzad, Minsky, US, economy
Monday, 05 January 2015 07:58 AM
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