Janet Yellen

We have been discussing the widespread belief in "the narrative of central bank omnipotence" for a number of months (here and here most recently) as we noted "there are no more skeptics. To update Milton Friedman’s famous quote, we are all Bernankians now." So when Saxobank's CIO and Chief Economist Steen Jakobsen warns that "the mood has changed," and feedback from conference calls and speaking engagements tells him, there is a growing belief that the 'narrative of the central banks' is failing, we sit up and listen.

The difference between 2007 and today is back then these were largely sub-prime loans and overvalued real estate mortgages, vs, today's entire global bond market bubbles from Spain and Greece to the United States.  

The job market is tightening, and by any normal measure interest rates should be following suit and rising as well regardless of whether the US Dollar also strengthens. 

There is something seriously wrong if the Federal Reserve cannot raise the Fed Fund`s Rate a measly 100 basis points after 7 longs years of ZIRP.  Seven years is an entire business and economic cycle!

Those of you who thought volatility was high this past week just wait until the Fed waits to the “Whites of the eyes of inflation” before raising rates.

Carmen Segarra said, “I come from the world of legal and compliance, we deal with hard evidence. It’s like, we don’t deal with, you know, perceptions.”

How ironic. Segarra worked at the Fed.

On Nov. 15, 2010, a letter signed by academics, economists and money managers warned that the Federal Reserve's strategy of buying bonds and other securities to reduce interest rates risked "currency debasement and inflation" and could "distort financial markets." As Bloomberg reports, they also said it wouldn't achieve the Fed's objective of promoting employment. Four years later, many members of the group, which includes Seth Klarman of Baupost Group LLC and billionaire Paul Singer of Elliott Management Corp., explain why they stand by the letter's content...

While we already documented the crash in Japanese stocks earlier, the biggest market development overnight is the plunge in crude, with both Brent and WTI plunging, the latter sliding under $90 for the first time in 17 months, extending yesterday's selloff after Saudi Aramco cut Arab Light OSP in Asia to 2008 levels. Brent drops to lowest since June 2012. This also confirms that the global slowdown whose can is kicked every so often in a new bout of money printing, is arriving fast. That, and the imminent crackdown on today's Hong Kong protest will likely be the biggest stories of the day, even as the spread of Ebola to the US is sure to keep everhone on edge.

There is nothing like the release of secret tape recordings to clarify an inconclusive debate. Actually, what the tapes really show is that the Fed’s latest policy contraption - macro-prudential regulation through a financial stability committee - is just a useless exercise in CYA. Macro-pru is an impossible delusion that should not be taken seriously be sensible adults. It is not, as Janet Yellen insists, a supplementary tool to contain and remediate the unintended consequence - that is, excessive financial speculation - of the Fed’s primary drive to achieve full employment and fill the GDP bathtub to the very brim of its potential. Instead,  rampant speculation, excessive leverage, phony liquidity and massive financial instability are the only real result of current Fed policy.

With Janet Yellen set to remove the 'wealth-creating' nutrients of QE within a month, it appears there is only way left to The American Dream... latch on to a billionaire (or their son or daughter). As a patriotic courtesy to our readers we provide the dummies guide to befriending a wealthy benefactor... everything from their marital status and demographic to the most critical factor for success - where to hang out in 2015 to catch their eye.

The bull case is not the recovery or the economy as it exists, it is the promise of one and the plausibility for that promise. Under that paradigm, the market doesn’t care whether orthodox economists are 'right', only that there is always next year. Other places in the world, however, are running out of “next year.” The greatest risk in investing under these conditions is the Greater Fool problem. Anyone using mainstream economic projections and thus expecting a bull market will be that Fool. That was what transpired in 2008 as the entire industry moved toward overdrive to convince anyone even thinking about mitigation or risk adjustments that it was 'no big deal'. Remember: "The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so." - Federal Reserve Chairman Ben Bernanke, June 9, 2008.

“Money amplifies our tendency to overreact, to swing from exuberance when things are going well to deep depression when they go wrong.”

At the heart of the problem is the fact that the Federal Reserve’s manipulation of the money supply prevents interest rates from telling the truth: How much are people really choosing to save out of income, and therefore how much of the society’s resources — land, labor, capital — are really available to support sustainable investment activities in the longer run? What is the real cost of borrowing, independent of Fed distortions of interest rates, so businessmen could make realistic and fair estimates about which investment projects might be truly profitable, without the unnecessary risk of being drawn into unsustainable bubble ventures? All that government produces from its interventions, regulations, and manipulations is false signals and bad information.

The Fed, by raising its rates and relinquishing its downward pressure on the US dollar, is about to kill off most of the emerging markets. That’s a whole lot of misery in one pen stroke. That’s a whole lot of millions of people who will see their dreams of better lives shattered, just as they were beginning to think they had a chance. It’s how the game is played. The weak must be sacrificed so the strong be stronger.