"The Fed Is Heading For Another Catastrophe... Central Banking Has Lost Its Way" Stephen Roach WarnsSubmitted by Tyler Durden on 12/24/2014 11:17 -0400
America’s Federal Reserve is headed down a familiar — and highly dangerous — path. Steeped in denial of its past mistakes, the Fed is pursuing the same incremental approach that helped set the stage for the financial crisis of 2008-2009. The consequences could be similarly catastrophic. The Fed’s incrementalism of 2004-2006 was a policy blunder of epic proportions. The Fed seems poised to make a similar — and possibly even more serious — misstep in the current environment. In these days of froth, the persistence of extraordinary policy accommodation in a financial system flooded with liquidity poses a great danger.
Despite the authorities' best efforts to keep everything orderly, we know how this global Game of Geopolitical Tetris ends: "Players lose a typical game of Tetris when they can no longer keep up with the increasing speed, and the Tetriminos stack up to the top of the playing field. This is commonly referred to as topping out."
"I’m tired of being outraged!"
The stock market takes off in holiday celebration of the FOMC being even less clear than it really has been in some time; perhaps going all the way back to Alan Greenspan’s intentional mush. Equity “investors” are happy that the Fed may be happy about the economy, even though there is nothing in actual markets (outside of stocks) to suggest that anything the Fed proclaims carries even the slightest validity. The recovery is over because it never was. The Fed is now kamikaze and stuck on this course, having painted itself into a smaller and smaller corner in which to operate. Their only hope is that their confidence turns into your confidence, but credit and funding markets are impenetrable at this moment to such utter nonsense. For many places, it is already “look out below.”
Every year, David Collum writes a detailed "Year in Review" synopsis full of keen perspective and plenty of wit. This year's is no exception. "I have not seen a year in which so many risks - some truly existential - piled up so quickly. Each risk has its own, often unknown, probability of morphing into a destructive force. It feels like we’re in the final throes of a geopolitical Game of Tetris as financial and political authorities race to place the pieces correctly. But the acceleration is palpable. The proximate trigger for pain and ultimately a collapse can be small, as anyone who’s ever stepped barefoot on a Lego knows..."
Through the overly-complex verbiage riddled with a copious number of contingencies, a simple message was actually able to surface. The net result is modestly hawkish and one consistent with our "Sooner but Slower" rate cycle perspective. Markets are being driven more by fear of missing the upside, and fear of under-performing peers and benchmarks, than by any other factor. This Pavlovian response has worked well in recent years and encouraged by the Fed. However, this pattern is in the 9th inning. Moreover, such herd-like behavior will run into great difficult due to dreadful market liquidity that is the result of regulatory over-reach; indications that were evident in markets over the past few weeks.
In our dire era of increasing economic inequality, we need a symbol for the oppression of the masses. Now is time for a new revolution. All the talk of the American entrepreneur is bullcockey. Warnings about human complexity and the need for peaceful cooperation is just a smokescreen for tyranny. Our freedom lies in tearing down those better and more well-off than us. We are the glorious heirs to the brave candlemakers who sought to block out the sun. Where our French brethren fought for freedom from natural competition, we fight for the liberty of not feeling inadequate next to an adorable feline. It is the most noble of causes. For if inequality is a crime, then Tarder “Grumpy Cat” Sauce is hostis humani generis.
Underneath the Propaganda, the Economy Is In BAD SHAPE …
Fraud generates risk, and risk eventually breaks out in the "safest" parts of the financial plumbing, the ones nobody gives a second thought to because they're "low risk." Using unspeakable powers to generate global fraud is not as sustainable as punters imagine. Those who don't believe in risk can alternatively ponder karma as a guide to the future.
A few nations may indeed be forced to sell some of their official gold reserves as a result of plunging oil prices. It seems however not likely at this juncture that Russia will be one of them, there is a good chance that Venezuela will eventually be forced to sell some of its official gold holdings. However, the impact - short term psychological impact - on the gold market should be quite limited.
The investment game is becoming more suspect and dangerous as asset price levels continue to ignore economic weakness and the lack of necessary political reform. Instead, many investors (not just in the EU) have become conditioned like B.F. Skinner rats to bid up financial risk assets whenever a central banker makes a promise about accommodation or further stimulus; this even occurs when data disappoints, because investors expect ‘the promise’ to soon follow. Fear of missing the upside and underperforming peers and benchmarks is what makes this reflexivity work. This is actually a sad state of affairs and an ever-more dangerous and epic game of chicken. This conditional response pattern is unsustainable. Indebtedness and market speculation continue to soar. In the end, printing is a not a solution, but a source of long-term harm to markets and national economies.
In the great fiscal scheme of things, October 22, 1981 seems like only yesterday. That’s the day the US public debt crossed the $1 trillion mark for the first time. It had taken the nation 74,984 days to get there (205 years). What prompts this reflection is that just a few days ago the national debt breached the $18 trillion mark; and the last trillion was added in hardly 365 days.
December 5th 1996: After rising 210% off the 1987 crash lows, Alan Greenspan speaking at the American Enterprise Institute in Washington, asks: "But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?" The next day, the Dow Jones Industrial Average slumps by 1% to close at 6,381.94; over the next three years, the market nearly doubles...then crashes...then doubles... then crashes... and then triples in the last five years... "rational exuberance"
Citi claims gold is a 6000-year-old bubble, perhaps Mr. Buiter has not seen this chart?