Saturday, 4 November 2017

Why put an LBO guy in as Fed chair?

My view on LBOs is a large part of the payoff is just the arb between debt costs and nominal GDP growing over time. If GDP grows 5% a year then most companies will have revenue growth of about 5%, so if you hold the LBO for 5, 6, 7 or so years then sales and profits are up big wihtout any value added. And the cheaper the debt is then the bigger the arb....

With US nominal GDP growing 5-6% or so, and Fed funds at 1.25%, its a pretty big subsidy to business/ real asset owning borrowers. Such as LBOs guys or real estate developers...

Last time U6 was 7.9% (Dec 06) Fed funds were 5.25%. 

 

Financial conditions are very easy. 


With Trump, a bankruptcy artist, in the White House and an LBO guy in the Fed, we might not see 5.25% for a while though. I mean why would we? What incentive do they have to get to a neutral rate for the real economy in a country where non financial debt is hundreds of % of GDP. The problem will be when the Fed breaches its 2% inflation mandate on a consistent basis. At that point after a rate shock I think we see Fed mandate drift which I believe would need legislation.  
 
They have also cut corporate taxes to help facilitate the final transfer of the wealth through debt eroding inflation.

As Michael Hudson has said, we have had the asset pump, next comes the inflation that wipes out the debt and middle class savings which in turn forces baby boomers to live off their Gen X children. 

I also think Powell in the Fed and a Fed under Trump's orders is another sign that we are soon to transition from the third to the fourth turning, ie the politics and societal changes are happening now which will trigger it during this Presidential term.






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