Janet Yellen

Just days ago Citi pronounced, much to the chagrin of the status-quo-hugging Fed faithful, that given the turn in corporate profits (and concerns over margin sustainability) that the chance of a recession in the US had risen to 65% (and on that basis had a bearish outlook for US equities). Now, as other major sell-side shops jump on the equity un-bullish narrative, JPMorgan's Michael Feroli warns that in the past, a low unemployment rate, rising compensation, falling margins, and elevated durables investment have historically signaled an elevated risk that an expansion is nearing its end... and puts the probability of a US recession within 3 years at 76%. Of course, you do not need to worry, because Janet Yellen said this is not true (though failed to provide here reasoning).

The mainstream media is increasingly suggesting that we have once again entered into a 'Goldilocks Economy.' The problem is that in the rush to come up with a 'bullish thesis' as to why stocks should continue to elevate in the future, they have forgotten the last time the U.S. entered into such a state of 'economic bliss.' You might remember this: "The Fed's official forecast, an average of forecasts by Fed governors and the Fed's district banks, essentially portrays a 'Goldilocks' economy that is neither too hot, with inflation, nor too cold, with rising unemployment." - WSJ Feb 15, 2007. Of course, it was just 10-months later that the U.S. entered into a recession followed by the worst financial crisis since the 'Great Depression.'

Keynes is dead – unfortunately his etatiste nonsense didn’t expire with him. Meanwhile, the long run is catching up with those who have so far failed to die.

"Friday’s employment report clears the way for the Federal Reserve to raise short-term interest rates by a quarter-percentage point at its Dec. 15-16 policy meeting, ending seven years of near-zero interest rates."

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.

"Like most turns in the credit cycle, it is uncertain exactly when the bottom will fall out of corporate credit markets, but the catalyst is likely to be an unexpected major event, perhaps even a single company getting into trouble. While we have been bearish on high yield for over a year now, we didn't think the conditions were yet ripe for a collapse. Now they're ripe."

- Ellington Management

But just like in 2008, the “experts” at the Federal Reserve are assuring all of us that everything is going to be just fine.  This is the exact same kind of mistake that the Federal Reserve made back in the late 1930s.  They thought that the U.S. economy was finally recovering, and so interest rates were raised.  That turned out to be a tragic mistake.

"Given the surge back towards the all-time highs in the S&P 500, we think that the best might be over for US equities and that indices might range trade more in 2016. We have downgraded US equities to neutral. This takes our overall equity weighting down to neutral, in many respects an extension of what we’ve been doing for most of this year as richer and richer asset markets, against a global background of economic risks, have made us more cautious."

They aren`t about to stand for a strong dollar in a world where it is a competitive advantage to devalue currencies from a multinational profits, tourism and global trading perspective.

Having yesterday explained how The Fed is "devoted" to Americans' interests and how "excited" she is to raise rates, Janet Yellen is set to face the Joint Economic Committee of Congress today... to explain to them how - in her mind - everything is awesome enough to hike rates, despite Chinese stocks crashing again, carnage in commodities, a revenues recession, plunging EBITDA, a collapse in US manufacturing, housing rolling over, and auto sales fading (light vehicle incentives up 14% YoY). Following the renewed volatility in markets, thanks to Draghi, the question is will Yellen be a little more hawkish given the room the ECB has given her?

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Yesterday's market swoon which unwound all of Tuesday's gains on concerns about a hawkish Fed and fears about terrorism in the US, are now completely forgotten, and have been replaced with the latest daily round of pre-ECB euphoria, driven by hopes that Mario Draghi will announce even more dovish details to Europe's Q€ 2 than just a 10 bps rate cut and a boost to QE more than €10 billion, both of which have been already priced in.

The resistance to such an awakening is understandable if still lamentable. If recession is truly the looming assurance, as it increasingly appears, that would mean not just the end of the recovery but the end of “accommodation” as a given force. In other words, Janet Yellen and the OECD start backwards from their endpoint because of their unshakable faith in monetarism, a faith that actually defines how they think an economy does work (and how they produce the core assumptions in their models); should that path from here to there completely unravel, so, too, does their assumed power and philosophy.

The global Central Banks have literally bet the financial system that their theories will work.  They haven’t. All they’ve done is set the stage for an even worse crisis in which entire countries will go bankrupt.

We are talking of course, about the infamous RRR-hike of 1936-1937, which took place smack in the middle of the Great Recession.