Credit Conditions

Perception is everything in contemporary economics and the Fed is the center of perception; the medium has become the message. The truth is more this: the Fed no longer reacts to the waxing and waning of animal spirit-led demand. In the current monetary regime it exists to create and maintain animal spirits with a secular policy centered on ever-expanding credit, but it is very aware that admitting it’s centrality would defeat its purpose.

Today, much of the world turns its lonely eyes to the Fed and its chieftain. The Fed has as much as promised to make the blind see and the lame walk. It claims that it – and it alone – is capable of improving the U.S. economy and, by extension, the world economy. People will earn more money. They will live better. And they will have less to fear from financial calamities, such as those that happened before the Fed was set up in 1913. In the popular mind – if there is such a thing – it is further believed that the Fed “won’t allow” a major bear market, because “it would be bad for the economy.” The Fed rules the entire universe of commerce, finance, and investment. Janet Yellen rules the Fed. But who rules Janet Yellen?

Will Janet Yellen proudly put the Fed on the side of the angels, announcing that she and her crew have decided to move the Fed’s key interest rate to a more normal level… regardless of how much it costs the cronies? No, she won’t. Once you begin manipulating markets, it’s a hard habit to break. After nearly seven years of emergency financial policies, we are now in a permanent emergency..."What if they say it’s my fault? What if they call it the Yellen Depression? Oh, no... It’s not fair... It’s not fair... Boo-hoo... sob... sob... I should have stayed at Harvard. I’d have tenure. I’d have a nice pension. George and I could go the Martha’s Vineyard in the summer. It would be such a nice life."

The growing roar of 'the establishment' crying for help from The Fed should make investors nervous. While your friendly local asset-getherer and TV-talking-head will proclaim how a rate-hike is so positive for the economy and stocks, we wonder why it is that The IMF, The World Bank, Larry Summers (twice), Goldman Sachs, China (twice), and now no lessor nobel-winner than Paul Krugman has demanded that The Fed not hike rates for fear of  - generally speaking - "panic and turmoil," however, as Krugman notes, “I think it would be a terrible mistake to move. But I’m not confident that they won’t make a mistake."

When it comes to crisis, SocGen notes that there is an abundance of case studies; and against the backdrop of the uncertainty shock delivered by China and the subsequent market tumult, market participants have been looking to the history books for clues as to what could happen next. While individual crises create their own risks, SocGen warns, the overriding risk  is that markets are taking less comfort today from the idea that central banks may step in with further QE-style liquidity injections to save the world.

For anyone who (still) believes that Canada has a diversified economy...

All eyes will be on Mario Draghi on Thursday as expectations for something big from the former Goldmanite have grown over the past two weeks. More specifically, some now think the odds of QE expansion have increased considerably in light of collapsing eurozone inflation expectations, the incipient threat of some $1 trillion in QE-offsetting EM FX reserve draw downs, turmoil in China's financial markets, heightened volatility across the globe, and chaos in emerging markets from LatAm to AsiaPac.

Then - "We will not have any more crashes in our time." – John Maynard Keynes (1927)

Now - "Ambarella, GoPro & FitBit are headed higher" - Jim Cramer (7/22)

"Lower commodity prices and falling farm incomes are continuing to pressure demand for agricultural machinery, with the declines most pronounced in higher-horsepower models. Conditions are more positive in the U.S. livestock sector, supporting some improvement in the sales of smaller sizes of equipment. Based on these factors, industry sales for agricultural equipment in the U.S. and Canada are forecast to be down about 25 percent for 2015."

Seconds ago, someone accidentally (we hope) pulled a Janet Yellen as the following just came across the wires

FOMC MINUTES: MEMB 'GENERALLY AGREED' MORE INFO NEEDED TO HIKE
FOMC MINUTES: NO TIP TOWARDS SEPT LIFTOFF, DOESN'T RULE IT OUT

But the bottom line is that the Fed just admitted things are going from bad to worse: "The risks to the forecast for real GDP and inflation were seen as tilted to the downside." The question now is what comes first: QE4 or the first rate hike in nearly a decade.

"Any rally that occurs over the next few days from the current oversold condition should be used as a "sellable rally" to rebalance portfolios and related risk."

For those who are speculating on the dollar—i.e. most people—there was good news. The dollar rose to 28.3mg gold. It’s a big gain, and welcome news for those who keep all of their eggs in the one dollar basket.

There could be trouble ahead....

Just when the Chinese plunge protection team (and "arrest shortie" task force) seemed to be finally getting "malicious selling" under control, first we saw a crack yesterday when the composite broke the surge of the past three days as a result of yet another spike in margin debt funded purchases, but it was last night's reminder that "good news is bad news" that really confused the stock trading farmers and grandmas, which goalseeked Chinese economic "data" beat across the board, with Q2 GDP coming solidly above expectations at 7.0%, and retail sales and industrial production both beating, but in the process raising doubts that the PBOC will continue supporting stocks.

In April, we noted the NACM's comments that "there are big, big problems" underlying the economy as a surge in unfavorable factors suggested credit conditions were tightening dramatically (only to see that data revised away suddenly). June's data has confirmed this weakness with credit rejections soaring to their highest since 2009 with the biggest spike in 9 years, with NACM CEO Kuehl exclaiming, "There are some obvious signs of distress in the manufacturing community, as the expected wave of consumer demand has yet to manifest... companies that have been awaiting it are getting in trouble with their creditors."