Federal Reserve

Central banks are fearful and unwilling to normalize but artificially high valuations across asset classes cannot be sustained indefinitely absent fundamental global growth. Central banks are in a prison of their own design and we are trapped with them. The next great crash will occur when we collectively realize that the institutions that we trusted to remove risk are actually the source of it. The truth is that global central banks cannot remove extraordinary monetary accommodation without risking a complete collapse of the system, but the longer they wait the more they risk their own credibility, and the worse that inevitable collapse will be. In the Prisoner’s Dilemma, global central banks have set up the greatest volatility trade in history.

The Federal Reserve is quickly becoming trapped by its own "data-dependent" analysis. Despite ongoing commentary of improving labor markets and economic growth, their own indicators are suggesting something very different. As we have stated previously, while the Federal Reserve may hike interest rates simply to "save face," there is indeed little real support for them doing so. Tightening monetary policy further will simply accelerate the time frame to the onset of the next recession. Of course, the Fed knows this which is why they recently floated the idea of "negative interest rates" out into the markets. In other words, they already likely realize they are screwed.

If housing tanks, the last prop under the veneer of middle class wealth collapses. No wonder the Powers That Be are so desperate to prop up housing. But the bubbles and busts they've engineered are integral to credit/asset booms; their goal--a steady, permanent rise in prices that never falters--simply isn't possible.

• China economic growth seen slowing despite policy easing (Reuters)
• FBI, Justice Department Investigating Daily Fantasy Sports Business Model (WSJ)
• Obama to slow pace of withdrawal of U.S. troops from Afghanistan (Reuters)
• Corporate America's Epic Debt Binge Leaves $119 Billion Hangover (BBG)
• Islamic State battles insurgents as Syria army prepares assault (Reuters)
• Why Hillary Clinton Can’t Win by Going After the NRA (BBG)

Between the plunging market-implied rate-hike probabilities and Fed-Whsiperer Jon Hilsenrath's WSJ piece this evening strongly hinting at no hikes in 2015, the 'relief' rally in Asian FX (and Japanese stocks) is - in a word - insane. If the world's central banks mandates are "price stability" in whatever format they believe that to manifest, they have well and truly failed. The Won has jumped most since 2011, Ringgit and Rupiah are soaring over 2%, and Nikkei 225 is up over 400 points from the US session close...

"You thought it was safe to drive 90 miles an hour on a rain-slicked narrow road while you were tipsy because the airbag would save you, but it still hurts when you crash." This is the Paradox of Risk: the more risk is apparently lowered, the higher the risk we are willing to accept.

News That Matters

One of the primary arguments by the more "bullish" media is that the current setup is much like that of 2011 following the "debt ceiling" debate and global economic slowdown caused by the Tsunami in Japan. While there are certainly some similarities, such as the weakness being spread from China and a market selloff, there are some marked differences.

As Allianz latest survey notes, 61% of all middle-class Americans, across all income levels included in the survey, admit "they are not sacrificing 'a lot' to save for retirement," which is a major problem as, assuming 2% inflation (the Fed's current target) when millennials enter retirement, they will need to withdraw about $270,000 per year from their retirement plans.

Global central banks have made a Faustian bargain with our economic soul selling our future for a false stability today. At this stage, absent continuous intervention, a large deflationary crash in the global economy is inevitable. The next Lehman brothers will be a country. The real ‘shadow convexity’ will not come from markets but political unrest or war. Peace is not the absence of conflict. Global Central Banks have set up the greatest long volatility trade in history. Buy the fear and you will be protected from the horror.

No professional or successful investor every bought and held for the long-term without regard, or respect, for the risks that are undertaken. If the professionals are looking at "risk" and planning on how to protect their capital from losses when things go wrong - then why aren't you?  Exactly how many warnings do you need?

This. Will. Not. End. Well. As WSJ reports, "retailers such as Kmart and Office Depot this week are starting to roll out cards that give the recipients small amounts of stock in some of the country’s best-known companies." "I have always wanted to get into the stock market business, but I honestly don’t have the time to explore what’s going on in the market trends of the day"...

Marc Faber is an eloquent advocate of owning physical gold which he describes as being a way to become “your own central bank.”  He believes an allocation to physical gold will serve as vital financial insurance and that Singapore is the safest place to own gold in the world today.

Fed chief Janet Yellen’s hesitations and the market turmoil since August seem to validate that it is impossible to stop the accommodative monetary policy, unless you accept that doing so would trigger a new global crisis. The Fed is aware that raising interest rates too fast and too high could have the same effect as pressing the nuclear button. The whole system could collapse and it cannot be taken for granted that the central banks would be able to extinguish the fire this time. Their strike force has weakened because their balance sheets are exposed to market fluctuations and their credibility was seriously damaged because the measure they have taken have failed to strengthen the economy.

Neurosurgeon-turned-Presidential candidate Ben Carson has been under attack this week by the defenders of the Keynesian faith as he questioned fiat money and flirted with a new gold standard.