The Fed understands that economic cycles do not last forever, and we are closer to the next recession than not. While raising rates would likely accelerate a potential recession and a significant market correction, from the Fed's perspective it might be the 'lesser of two evils. Being caught at the "zero bound" at the onset of a recession leaves few options for the Federal Reserve to stabilize an economic decline. The problem is that they may have missed their window to get there.
Global central banks are afraid. Before Greece tried to stand up to the Troika, they were merely worried. Now it’s clear that no matter what they tell themselves and the world about the necessity or even righteousness of their monetary policies, liquidity can still disappear in an instant. Or at least, that’s what they should be thinking. The problem is that central banks have no plan B in the event of a massive liquidity event. In this cauldron of instability and lack of leadership, cash is the one remaining financial possession that Main Street can translate into goods, services and security. That’s why private banks want more control over it.
This weekend's reading list is a smattering of articles to enjoy between your favorite beverage, grilled meat and really fattening desert. Just remember to go back to the gym on Monday...
The US Federal Reserve has been universally lauded for the apparent success of its extreme monetary policy of recent years. With key world stock markets near record highs, traders universally love the Fed’s zero-interest-rate and quantitative-easing campaigns. But this celebration is terribly premature. The full impact of these wildly-unprecedented policies won’t become apparent until they are fully normalized. The most-extreme monetary experiment by far in US history is just at half-time now, the fat lady hasn’t even taken the stage. The full normalization of ZIRP and QE is likely to be as negative for stock and bond prices as its ramping up proved positive for them.
"U.S. regulators are sounding the alarm about banks’ exposure to oil-and-gas producers, a move that could limit their ability to lend to companies battered by a yearlong slump in prices," WSJ reports, reinforcing the notion that North America's "zero hedged" O&G sector is in for a rough ride.
Assuming "growth" will fund all promised pensions and entitlements is magical thinking. We're going to have to do better than indulge our Spoiled Brat Economy mindset because "we wuz promised." What we were promised based on faulty assumptions, faulty projections and wishful thinking no longer matters.
There are two narratives, according to WSJ's Fed whisperer Jon Hilsenrath, that need to be considered when judging the Fed's next steps. First is, the economy stumbled in Q1 but everything will be awesome going forward (so we should hike rates); and a second newer narrative is the turmoil overseas which could be exaggerated by Fed actions. Hilsenrath hints today that despite the miss in jobs data, it remains above 200,000 and "suggests the U.S. economy finished the first half of the year with a solid foundation to weather turbulence from overseas," giving The Fed room to hike.
This is the question that astute investors are forced to ask themselves these days. No reasonable person believes that a system of ever-expanding debt can resolve painlessly. It simply cannot happen... not, at least, until 2+2 stops equaling four. But the international money system, while deeply interconnected, can implode in sections. In fact, it’s highly unlikely that it will crash as a single unit. So, if you have significant moneys to invest, you end up coming back to our question: Who will be the last to crash?
The oil price collapse of 2014-2015 began one year ago this month (Figure 1). The world crossed a boundary in which prices are not only lower now but will probably remain lower for some time. It represents a phase change like when water turns into ice: the composition is the same as before but the physical state and governing laws are different. The market must balance before things get better and prices improve. That can only happen if production falls and demand increases. That will take time. The most likely case is that oil prices will decrease in the second half of 2015 and that financial distress to all oil producers will increase. The hope and expectation that the worst is over will fade as the new reality of prolonged low oil prices is reluctantly accepted.
We warned previously that when (not if) the market crashes next, The Fed is going to need a scapegoat (other than British traders living at home with their parents) and judging by The Fed's Lael Brainard's comments today, high-frequency-traders (HFT) are in the crosshairs. Crucially, Brainard warns that HFT "may amplify market shocks," and The Fed is "studying possible changes in liquidity resilience."
The Export-Import Bank died last night when its charter expired. After 81 years, what is commonly known as Boeing’s Bank is headed toward Washington’s trash bin. When Congress returns it could revive Ex-Im, which primarily subsidizes big business exports. But a proper burial for what Barack Obama once called “corporate welfare” would save Americans money, reduce economic injustice, and promote economic growth. Ex-Im’s closure is a very rare victory for the good guys in Washington. Crony capitalism is running rampant in America, undermining confidence in a market economy.
By insuring spoiled brats/vested interests never face the consequences of their actions and choices, we guarantee failure of the entire system.
With all eyes on Greece it would seem another crisis relating to unpayable debt is brewing in the Caribbean. The governor of Puerto Rico, Alejandro García Padilla, has warned that the island is unable to pay its debts of $72 billion.
Every quarter ConvergEx's Nick Colas reviews a raft of unusual and less examined datasets with an eye to refining and adding perspective to the more traditional macroeconomic analyses. This quarter’s assessment of everything from large pickup truck and firearms sales to Google search autofills for “I want to buy/sell” shows a U.S. economy that is reasonably strong but growing only very slowly. The chief areas of concern: Food Stamp participation is still very high at 45.6 million Americans (14% of the total population) and indicators like used car prices and large pickup sales are flat.
That an ETF can satisfy redemption with underlying bonds or shares, only raises the nightmare possibility of a disillusioned and uninformed public throwing in the towel once again after they receive thousands of individual odd lot pieces under such circumstances.