Janet Yellen

Perhaps it was the public shaming of Iceland's diametrically opposite approach to 'dealing' with its bankers, or perhaps Janet Yellen needs a distraction from her own 'Fed Leak' problems, or finally perhaps Carmen Segarra's 2013 whistleblowing over the cozy relationship between Goldman and The New York Fed was just too conspicuous to brush under the carpet. Despite Bill Dudley's insistence that The New York Fed is not a subsidiary of Goldman, The NY Times reports, federal prosecutors are preparing to announce a criminal case this week against a former Goldman banker suspected of taking confidential documents from a source inside the government.

Eurodollar curve captures the mechanics of Fed expectations in a simple way. Away from the very front end, the curve dynamics is displays a rather rigid structure where a single risk premium parameter explains bulk of the spreads movement in different sectors of the curve. Typically, in anticipation of Fed hikes or cuts, the market makes up its mind about the terminal Fed funds (Greens) and begins to price in the rates path around that. The more aggressive the initial hikes are, the less they will have to do later

Doing as Yellen and her counterparts demand is the biggest risk of all. The Yellen Doctrine requires that central banks be both correct and able, abilities that have been (and can only be) in utter short supply. Her view would show more proactive and effective central bank management where only reactive and impromptu, last minute white-knuckling has abounded. Central banks have been in the past year only holding on for dear life, which is where obscurity has been their benefit. In the end, however, it will bring about their own downfall as it only serves to make matters worse. Yellen wants the central bank to be viewed as almost godlike, but they continually reveal themselves weak, deceptive and ineffectual; eschewing all long run sustainability in order to just make it through one day at a time.

The powers that be have lost control. After almost a century of playing the Wizard of Oz, the curtain is disintegrating. Institutions to ensure control, stability and prosperity are failing. People and markets were not to be trusted and most of these institutions were established to protect against such freedom. Bureaucrats, central planners and big governments were to be the answers for a better world. The damage of nearly a century of this nonsense is suddenly becoming evident. Things fall apart is characterized by institutions that no longer are trusted or believed in.

One of the more tedious drivellers of popular economic thought is former Treasury Secretary Larry Summers.  He’s smarter than you and he’ll make sure you know it.  There’s hardly a questions he doesn’t know the answer to.  So, too, there’s hardly an answer he doesn’t know the question to.

Given what the Japanese have been subjected to in the past two and a half years of QQE, it is nearly criminal to suggest they need only more of it. None of it has worked as promised and stated, so what might have changed? Absolutely nothing except the arrangement of qualifiers and excuses that litter the same shared central bank speech delivered over and over of late. Kuroda says “robust”, Yellen proclaims “strong”, and both only confirm they live not of this world’s economy.

Global Capitalism is trapped in its own Prisoner’s Dilemma; fourty four years after the end of the Bretton Woods System global central banks have manipulated the cost of risk in a competition of devaluation leading to a dangerous build up in debt and leverage, lower risk premiums, income disparity, and greater probability of tail events on both sides of the return distribution. Truth is being suppressed by the tools of money. Market behavior has now fully adapted to the expectation of pre-emptive central bank action to crisis creating a dangerous self-reflexivity and moral hazard. Volatility markets are warped in this new reality routinely exhibiting schizophrenic behavior. The tremendous growth of the short volatility complex across all assets, combined with self-reflexive investment strategies, are creating a dangerous ‘shadow convexity’ that will fuel the next hyper-crash.

This is why the system is heading for another, far larger crisis than 2008.

"Yellen is doing this with the blessing of the President because he doesn’t want to have a recession - or worse- in his administration. I’m a developer, I’m not complaining from my own standpoint, I’m just saying that at some point, you have to raise interest rates, you pay nothing. They are trying to put the recession - and it could be a beauty - into the next administration."

There are two parties to robbery – the taker and the takee. We have seen what happened to the victims. They are too busy picking through trash bins to go to the Walmart website. But what about the takers? They are busy too – lobbying… eating foie gras and caviar… and offering to save the world with increasingly radical monetary policies. It is time to undo the Fed’s control of the financial system. Let takees get the interest they are entitled to. And let the takers get what they’ve got coming to them.

The “smart money” and by that we mean the more informed, aware and prudent investors and institutions internationally continue to have an allocation to gold and or add to existing allocations. The less informed continue to not understand or disparage gold and focus almost solely on gold’s short term price action rather than gold’s long term attributes as a hedging instrument and a safe haven asset.

Bernanke and now Yellen have created an environment just like the Roaring Twenties. What came next wasn't pretty

Never in history has the US entered a recession when rates were this low. And it spells serious trouble for the financial system going forward.

“In a world where the value of paper money is affirmatively aimed at being degraded by central bank policy, it’s kind of surprising to me that gold can’t catch a bid...I like gold. I believe its under-owned. It should be a part of every investment portfolio, maybe five to ten percent."

We think the market may have gotten ahead of itself, accepting the narrative that the Fed will raise rates as many other countries ease. We believe the market is gradually realizing that the Fed is far less flexible than it hoped it would be, thus causing a re-pricing of expectations. We don't think this will necessarily change the Fed's "desire" to pursue an exit. This re-pricing of expectations may have profound implications for the U.S. dollar, and with it, the price of gold.