Monetary Policy

When Mario Draghi “disappointed” markets in December by “only” cutting the depo rate by 10 bps and “merely” extending PSPP by six months while electing not to expand monthly asset purchases, the Riksbank, the Nationalbank, the Norges Bank, and the SNB all breathed heavy sighs of relief. And while we doubt the ECB is done when it comes to going "full-Krugman" (as it were), Mario Draghi’s “hawkish” ease did buy his counterparts some breathing room. Case in point: Denmark just hiked.

Once China set the Yuan fixing some 0.5% lower, the biggest drop since the August devaluation, all hell broke loose and unleashed a global selling panic after China's stock market was promptly shut down less than 30 minutes into trading, then European shares dropped the most in more than 4 months as Asian equities plunges, as did US stock futures, the dollar weakened against the euro and the yen; crude plunged to fresh 12 year lows. Gold rose.

Market psychology established in recent years is reversing. Market volatility is rising and will remain pervasive for a while as psychology, the change in direction of Fed policy, and the increases in general uncertainties, will all conspire to shape an environment ripe for sharp spikes in volatility which will be further amplified by rickety market liquidity.

"Though the decision to raise rates was unanimous, some officials expressed concern about lingering low inflation and the stifling effects on the U.S. economy of a strong U.S. dollar and slow growth overseas."

Since The December 16th FOMC decision to hike rates, Gold is up over 2%, Bonds up 1%, and stocks down 3% suggesting the word "error" with regard Fed policy. As The FOMC Minutes are released, traders anticipate confident-hawkishness and a focus on ignoring current data in favor of preferring their own confident outlook:

• *ALMOST ALL FED OFFICIALS AGREED LIFTOFF CONDITIONS MET IN DEC.
  
• *FED: LINGERING RISKS TO OUTLOOK INCLUDED FURTHER USD STRENGTH
  
• *A FEW FED OFFICIALS SAID FINANCIAL RISKS COULD ALTER RATE PATH

January's meeting has negligible probabilities for a rate move but March has 45% chance of a hike and 3% chance of a cut. The apparent unanimity of December's decision appears questionable given the Minutes suggestions of some dissent.

Pre-FOMC Minutes: S&P Futs 1983.25, 10Y 2.19%, Gold $1094, EUR 1.0755, WTI $34.05

Taking away from the government its power of compelling the citizenry to accept money that it monopolistically controls and abuses may serve as an important legal and economic change to force the government and those who live at its spending trough to face the reality of the welfare state’s ideological and fiscal bankruptcy before it is too late to avert a complete collapse of the society.

We are currently in a transitional phase of geo-political-monetary power struggles, capital flow decisions, and fundamental economic choices. This remains a period of artisanal (central bank fabricated) money, high volatility, low growth, excessive wealth inequality, extreme speculation, and policies that preserve the appearance of big bank liquidity and concentration at the expense of long-term stability. The potential for chaotic fluctuations in any element of the capital markets is greater than ever. The butterfly effect - the flutter of a wing in one part of the planet altering the course of seemingly unrelated events in another part - is on center stage.

Look out Stefan Ingves, the 2 and 20 crowd smells blood: "The market seems eager to challenge the Riksbank and there are rumors that many foreign hedge funds are long kronor and see a weakening of the krona after a possible intervention as a good buying opportunity.”

Fed policymakers seem to be of the view that the almost zero federal funds rate and their massive monetary pumping has cured the economy, which now seems to be approaching a path of stable economic growth and price stability, so it is held. Yet, manipulations by the Fed could not bring the economy onto a path of stability and prosperity but, on the contrary, set in motion the menace of the boom-bust cycle. This raises the likelihood that the elimination of bubbles as a result of a tighter stance while good in the long-term for wealth generators is likely to trigger a severe economic slump in the near to medium term.

The one thing executives should have learned in 2015 is that Wall Street can for long periods of time remain disconnected from fundamentals and can swing to extremes. Another lesson from 2015 is that OPEC can no longer be relied upon to set prices. Thus, the debt fueled financing boom in the shale space will most likely never return.  This is especially true now that there are clear signs that the U.S. economy is weakening while the Fed chose to raise the federal interest rates in December. As we move through 2016, expect a rash of bankruptcies tied to this transition to lower leverage, and towards the latter half of 2016 there will likely be a steep fall off of production.

Bill Dudley and the Federal Reserve (Fed), in their efforts to influence economic growth may have created a speculative and consumption driven environment that is crushing productivity growth. Ingenuity, not debt, made America an economic powerhouse. If we are to resume down that path we need the Fed to end their “self-defeating” policies and in its place we must demand ingenuity from them. The Fed, along with government, needs to properly incent productivity. The Fed should start this arduous task by removing excessive stimulus which will take the speculative fervor out of markets and allow asset bubbles to deflate.

The ever-growing number of Americans who are joining the liberty movement are not interested in “reforming” the welfare-warfare state. They also have no interest in “fixing" the Federal Reserve via “rules-based” monetary policy. Instead, this movement is dedicated to auditing, then ending, the Fed and stopping the government from trying to run the economy, run the world, and run our lives. If this movement refuses to compromise its principles, we may succeed in restoring a society of liberty, peace, and prosperity in our lifetimes.

"In America, the idea is that if you work hard and play by the rules, you’ll be rewarded with a good life for yourself and a better chance for your children.” That’s what America used to stand for, and indeed much of the Western world. Freedom. Truth. Hard work and fair play. Building a better life. But those ideals have all but faded now, displaced by a new normal of war, debt, government surveillance, freedom-killing bureaucracy, and a monetary policy that decimates responsible, hard-working people for the benefit of a tiny elite.

Because our macroeconomic policies have false targets and actually incentivize short term strategies the Fed has directly led us off of an economic cliff. Now that the Fed has boxed itself out of any further action, the market is at the peril of a collapsing, breadwinner-job-less and debt ridden economy and so prepare yourself for the largest market ‘correction’ the world has ever faced.