The last time that stocks were strongly disconnected from reality and the US Dollar began to rally hard was 2008.
What Denmark has just done is "back-door QE", because as some forget, there are two ways to push the price of an asset higher (thus pushing its yield lower in the case of a bond): increase demand, which is what conventional QE does when central banks buy bonds, or reduce supply. Which is what Denmark just did by completely cutting off all Treasury issuance "until further notice". As a result, paradoxically, increasingly more speculators are betting that the "Trade of 2015" could be doing precisely the opposite of what the Danish central bank is hoping will happen: i.e., shorting the EURDKK (or going long the DKKEUR) in hopes that when the Danish peg finally does break, it too will result in long Swiss France-type profits.
Funding Markets just called The FOMC's bluff. Policymakers are acting out rational expectations theory or at least how they see it. In other words, their job is not to analyze actual economic conditions, but to condition economic thought toward the end goal. If they convince you that they believe the economy is on track they further believe you will act accordingly (“you” being both investor and economic agent). The more the economy diverges from the “preferred” projection, the more emphatic the cries of “recovery” become. At some point, desperation becomes palpable.
It is my expectation, unless these deflationary trends reverse course in very short order, that if the Fed raises rates it will invoke a fairly negative response from both the markets and economy. However, I also believe that the Fed understands that we are closer to the next economic recession than not. For the Federal Reserve, the worst case scenario is being caught with rates at the "zero bound" when that occurs. For this reason, while raising rates will likely spark a potential recession and market correction, from the Fed’s perspective this might be the “lesser of two evils.”
The WTF moment has arrived: the moment when the Chair of the "independent" Fed tells an audience of Democrats, away from the public, just what her plans for monetary policy are in private:
YELLEN TOLD DEMOCRATS NO RATE INCREASE `IMMEDIATELY': SCHUMER
We knew some Fed member would speak today to boost stocks but had no idea it would be Yellen herself.
Jeff Gundlach Warns "The Fed Is About To Make A Big Mistake" (& That's Why Bond Yields Are Crashing)Submitted by Tyler Durden on 01/28/2015 22:06 -0500
Since The FOMC's "hawkish" statement, bond yields have utterly cratered as near-record speculative short positioning in bonds unwind the long-end (and worries about international problems - "and readings on financial and international developments"). However, fundamentally speaking, DoubleLine's Jeff Gundlach explains, the Federal Reserve is on the brink of making a big mistake simply put, "if Fed Chair Janet Yellen goes ahead with this plan (to raise rates for 'philosophical reasons'), she runs the risk of having to quickly reverse course and cut interest rates."
2014 was "relatively easier," as the pre-determined pace of tapering had The Fed on auto-pilot last year. However, as WSJ's Jon Hilsenrath warns, Janet Yellen ’s job is about to get harder. Hinting that The FOMC is likely to remain "patient" in deciding when to start raising short-term interest rates later this year (and markets have started to price in lower for longer-er following recent macro weakness domestically and abroad). Juxtaposed against a mixed picture of the economy is concerns of being boxed in at ZIRP should another economic downturn arrive. However, as III Associates notes, it is the communications challenge for The Fed that is most problematic, "it has been nine years since the last rate hike, and I’d estimate about a third of those working on trading floors have never witnessed one."
Shortly after yesterday’s open, the S&P 500 was down nearly 2% and off its recent all-time high by 3.5%. But soon the robo-machines and day traders were buying the “dip” having apparently once again gotten the “all-clear” signal. Don’t believe it for a second! The global financial system is literally booby-trapped with accidents waiting to happen owing to six consecutive years of massive money printing by nearly every central bank in the world.
The U.S. government is already bankrupt. This is old news to anyone who has been following the number-crunching of individuals such as former Reagan economic advisor, Professor Lawrence Kotlikoff. The U.S. government, the greatest debtor in the history of the world, claims that it is about to (finally) raise interest rates, which have been permanently/fraudulently frozen at 0% for now over 6 years.
Since its inception in 2008, easy monetary policy has created very few positive effects for the real economy — and has created considerable (and in some cases unforeseen) negative effects as well. The BIS warns of financial bubbles. While economic policymakers should take a closer look at Japan, China, and yes, the United States, when debating the limits of monetary stimulus and the dangerous nature of financial bubbles; sadly, the discussion is happening too late to be anything more than an intellectual exercise.
The Euro Crashes To 12 Year Lows And Now The US Commerce Secretary Starts To Grumble About A Strong DollarSubmitted by Tyler Durden on 01/22/2015 12:57 -0500
A crashing Yen failed to help Japan or fix its economy, but while Japan may now be a lost cause, the Keynesian masterminds of the world will give it another try, and following today's Draghi's announcement, the EURUSD has crashed to the lowest level since 2003, tumbling over 200 pips, and printing below 1.14 moments ago. However, in a clear indication that the party for the USD-bulls may be ending, none other than the US commerce secretary moments ago said the impact of a rising dollar on exports and economic growth bears monitoring.
The world of investing as we’ve come to know it is over. Financial markets have been distorted to such an extent by the activities, the interventions, of central banks – and governments -, that they can no longer function, period. The difference between the past 6 years and today is that central banks can and will no longer prop up the illusionary world of finance. And that will cause an earthquake, a tsunami and a meteorite hit all in one. If oil can go down the way it has, and copper too, and iron ore, then so can stocks, and your pensions, and everything else.
We’re getting back to normal, and though normal’s going to hurt – and far more than you realize yet - it’s hugely preferable to upside down; you hang upside-down long enough, it makes your brain explode. The price of oil was the first thing to go, central banks are the next. And then the whole edifice follows suit. The Fed has been setting up its yes-no narrative for months now, and that’s not without a reason. But everyone’s still convinced there won’t be a rate hike until well into this new year. And the Swiss central bank said, a few days before it did, that it wouldn’t. And then it did anyway. The financial sectors’ trust in central banks is gone forever. And none too soon. Now they’ll have to cover their own bets. If anything spells deflation, it’s got to be that. But not even one man in a thousand understands what deflation is.
What we see now is the recovery of price discovery, and therefore the functioning economy, and it shouldn’t be a big surprise that it doesn’t come in a smooth transition. Six years is a long time. Moreover, it was never just QE that distorted the markets, there was – and is – the ultra-low interest rate policy developed nations’ central banks adhere to like it was the gospel, and there’s always been the narrative of economic recovery just around the corner that the politico/media system incessantly drowned the world in. That the QE madness ended with the decapitation of the price of oil seems only fitting.