Can the third great bubble of this century survive a Fed that finally wants to get off the zero bound after its way too late, but can’t do it anyway without a massive crash inducing cash drain from Wall Street? And in the teeth of the next recession to boot?Yes, the end of the bubble does begin on December 16th.
We are less than one week away from a historic monetary experiment in two parts: first, attempt the Sisyphean task of pushing up the rate of interest on over $2.5 trillion in excess liquidity, and second, to assure the market that it has correctly priced in the overnight evaporation of up to $800 billion (or more) in liquidity from asset prices. If one or both of these fail to deliver, than the embarrassing disappointment that marked the ECB's December announcement and its dramatic impact on asset prices and FX levels, will be a walk in the park compared to "disappointment" that the Fed will unleash once the market realizes that while in theory the Fed can and is ready to hike, it simply can't do so in practice.
Overnight Hillary Clinton, in her latest populist push to present herself as "one of the people" wrote a NYT op-ed explaining "How I'd Rein In Wall Street", we were wondering if it would include draining Wall Street balance sheets with mandatory and far greater donations to her campaign by Wall Street firms - a strategy that may actually work as it hits banks where it hurts the most: their money. To our disappointment, this was not included.
How would a Fed hike be transmitted? To the uninitiated, it might seem as though Janet Yellen snaps her fingers or twitches her nose and just like that, banks and money markets price in the 25bps. But contrary to Haruhiko Kuroda's characterization of central bankers as fairy tale protagonists, it's not as simple as waving a magic wand and in the US, the whole show runs through Bill Dudley's Open Market Trading Desk at the New York Fed.
The central banks are simply trapped. They have bought in bonds under the theory that this will stimulate the economy by injecting cash. But there are several problems with this entire concept. This is an elitist view to say the least for the money injected does not stimulate the economy for it never reaches the consumer. This attempt to stimulate by increasing the money supply assumes that it does not matter who has the money... The attempt to “manage” the economy from a macro level without considering the capital flow within the system is leading to disaster.
“If the ECB merely does on 3 December what is effectively priced by the market, we could collectively wake up on 4 December feeling a bit deflated, like a child discovering on Christmas day that his parents ‘only’ gave him what he/she had asked for, without the ‘little extra’ that would have kept him/her smiling all day long."
In the short run this will probably lead to dramatic and unexpected change in financial flows. Over the longer run, a much-overlooked problem emerges. Simply put, it is highly unlikely that market rates will respond as the Fed moves its target rate upwards; in this case, the FOMC will have lost all control.
It’s easy to be frightened by these proposals. But if governments think they can force us to accept negative interest rates on our savings by abolishing cash, they need to think again. It’s preposterous to assume that savers will passively accept outright confiscation of their assets via negative interest rates or a ban on cash. Instead, people will simply revert to other stores of value.
The most important thing Bullard said in his speech titled "Permazero" is that the the US may be entering a permanent period of lower inflation and interest rates. Wait, wasn't ZIRP and QE supposed to push the US economy, boost inflation and hike rates? Good to know 7 years later that the biggest monetary experiment in history did precisely the opposite of what it was supposed to achieve.
The funds have flowed in a torrent into stocks, bonds, and real estate, just as 1940's NY Fed President Allan Sproul predicted. That flood of easy-money created the delta of plenty in which we live today. Unfortunately, it’s not likely to continue, because funny things happen when you do funny things to money.
As all eyes, ears, and noses anxiously await the scantest of dovishness from Kuroda and The BoJ tonight (despite numerous hints that they will not unleash moar for now), the data that was just delivered may have helped the bad-news-is-good-news case. Most notably Japanese household spending dropped 0.4% YoY (with tax hike issues out of the way) missing expectations by a mile as the 'deflationary' mindset remains mired in Japanese heads. AsiaPac stocks are hovering at the week's lows unable to mount any bid as China fixed the Yuan notably stronger and instigated a new central pricing plan for pork prices (which suggests concerns about inflation domestically). Once again Chinese margin debt reaches a new 8-week high as 'stability' has prompted releveraging among the farmers and grandmas.
No, Ben S. Bernanke will be someday remembered as the world’s most destructive battleship admiral. Not only was he fighting the last war, but his whole multi-trillion money printing campaign after September 15, 2008 was aimed at avoiding an historical Fed mistake that had never even happened!
Since either NIRP, or QE, or most likely both, are about to cross the Atlantic and make landfall in the US before the Fed is forced to launch the monetary helicopter, those who want to know what is really coming - no, not rate hikes - are urged to read this.
Oil companies have sold $61.5 billion in stocks and bonds since January as oil prices have tumbled. However, the fees geneated are a tiny fraction of the bank's real exposure to the energy sector, at over $150 billion. So have the banks learned their lesson? "The bankers have gone through this before,” says Oscar Gruss’s Meyer. “They know how it works out in the end, and it’s not pretty." Then again, perhaps banks are just sailing on an ocean of liquidity allowing them to postpone the day of Mark to Market reckoning, especially since this time, everyone is in it together....