Financial markets are upside down. Financial repression and belief in the “Fed put” pushed investors further and further out the risk curve over the past six years. Too many asset managers have remained fearful of underperforming peers and benchmarks; a powerful incentive to stay ‘risked-up’. The psychology of bullish, and faith in Fed abilities, have been too firmly embedded in the investor class. Given that markets don’t seem to want to believe that a June hike looks probable, we expect an outsized market reaction to a hike, lower long yields to accompany it, a flatter curve, wider credit spreads, higher market volatility, and materially lower equity markets.
Government mandated fiat currency simply does not work in the long run. We have empirical evidence galore – every fiat currency system in history has failed, except the current one, which has not failed yet. The modern fiat money system is more ingeniously designed than its historical predecessors and has a far greater amount of accumulated real wealth to draw sustenance from, so it seems likely that it will be relatively long-lived as far as fiat money systems go. In a truly free market, fiat money would never come into existence though. Greenspan was wrong – government bureaucrats cannot create something “as good as gold” by decree.
After yesterday's FOMC Minutes, despite a huge dovish reversal by the Fed - one which increasingly puts its "credibility" and reputation at risk - stocks were unable to close green, or even above 2100, for one simple reason: uncertainty with the fate of Greece. Overnight there has not been much more clarity, when as previously reported Greece submitted a 6 month extension request to its master loan agreement but not to its bailout extension, a nuance lost in the annals of diplomacy. But is this the much-awaited Greek capitulation? Or will the Eurogroup reject this too? The answer may be available in a few hours after an emergency Eurogroup meeting due later today. However, as usual stocks are ready to "price in" yet another Greek conflict resolution, and after futures were lower by 7 points overnight, were up 4 points at last check: a rebound which will not correct if the latest Greek "compromise" fails to deliver.
"Our era is a strange one when considering how social attitudes have developed in such a contrary fashion to the rest of history. I think that our forefathers would look upon our current culture with bewilderment when confronted with the fact that our generation has all but abandoned the option of physical rebellion as a tool for social change. I believe a revolution is indeed necessary, a final revolution to remove the influence of the globalist cult once and for all — not only their puppet governments, puppet political parties and puppet despots, but the globalists themselves. Will bad men still exist in this world? Of course they will. But the kind of advanced and well-organized internationlist machine that thirves today will no longer exist. To save a patient poisoned to the extreme, the patient must be purged until his body can recover on its own. The elites are a poison that must be physically removed from the human system."
The politicians of Europe are plunging into a form of ideological fratricide as they battle over Greece. Accordingly, all the combatants - the German, Greek and other national politicians and the apparatchiks of Brussels and Frankfurt - are fundamentally on the wrong path, albeit for different reasons. Yet by collectively indulging in the sum of all statist errors they may ultimately do a service. Namely, discredit and destroy the whole bailout state and central bank driven financialization model that threatens political democracy and capitalist prosperity in Europe - and the rest of the world, too.
Greece’s problem can only be truly solved if large scale debt restructuring is accepted and executed. But that would initiate a chain of events that would bring down the bloated zombie that is Wall Street. And it just so happens that this zombie rules the planet. We are all addicted to the zombie. It allows us to fool ourselves into thinking we are doing well – well, sort of -, but the longer term implications of that behavior will be devastating. We’re all going to be Greece, that’s inevitable. It’s not some maybe thing. The only thing that keeps us from realizing that is that the big media outlets have become part of the same industry that Wall Street, and the governments it controls, have full control over. And that in turn says something about the importance of what Yanis Varoufakis and Syriza are trying to accomplish. They’re taking the battle to the finance empire. And it should not be a lonely fight. Because if the international Wall Street banks succeed in Greece, some theater eerily uncomfortably near you will be next. That is cast in stone.
Greece has been borrowing its way to disaster long enough. For its part, Greece stands at a fork in the road. Syriza can move aggressively to recover Greece’s democratic sovereignty or it can desperately cling to the faltering currency and financial machinery of the Euro zone. But it can’t do both. Now and again history reaches an inflection point. Statesman and mere politicians, as the case may be, find themselves confronted with fraught circumstances and stark choices. February 2015 is one such moment.
The Fed has been supporting the market since the late 1980s. But there is an important difference between the actions of the Fed under Yellen versus Greenspan and Bernanke. In 2008, the Fed allowed Bear Stearns and Lehman Brothers to fail. Given the massive wipeout that followed, this decision is now viewed as a dangerous mistake. Having learned their lesson, the Fed is now rushing in to support the market in response to even routine 20% drops. In this way, the Fed is acting like a value investor who demands a small margin of safety before investing.... Since 2010, however, the Fed has changed tactics. The Fed is now reacting far more quickly. Small market selloffs are followed by immediate responses. By quickly riding to the rescue, the Fed is effectively front-running value investors.
It appears markets are on the verge of learning just how damaging the unintended consequences will be from multiple years of extreme central bank promises now that the Fed has run out of the ammunition to keep the utopian market façade alive. The structure of the ECB QE and the Greek situation make the backdrop considerably more troubling and difficult.
Over the last 100 years the Fed has had many mandates and policy changes in its pursuit of becoming the chief central economic planner for the US. Not only has it pursued this utopian dream of planning the US economy and financing every boondoggle conceivable in the welfare/warfare state, it has become the manipulator of the premier world reserve currency. All this effort by thousands of planners in the Federal Reserve, Congress, and the bureaucracy to achieve a stable financial system and healthy economic growth has failed. It must be the case that it has all been misdirected. And just maybe a free market and a limited government philosophy are the answers for sorting it all out without the economic planners setting interest and CPI rate increases. A simpler solution to achieving a healthy economy would be to concentrate on providing a “SOUND DOLLAR” as the Founders of the country suggested.
Despite tactical, rhetorical opposition to further expansion of the entitlement state by many voices in Washington, and firm resistance by an honorable and principled few, collusive bipartisan support for an ever-larger welfare state is the central fact of politics in our nation’s capital today, as it has been for decades. Until and unless America undergoes some sort of awakening that turns the public against its blandishments, or some sort of forcing financial crisis that suddenly restricts the resources available to it, continued growth of the entitlement state looks very likely in the years immediately ahead. And in at least that respect, America today does not look exceptional at all.
In a larger sense, the Fed is already intervening in the oil sector via its zero interest rate policy (ZIRP) and its unlimited liquidity for financial speculation.Should the Fed turn the dial of intervention up by buying futures and oil-based bonds, it is not a new policy--it is simply a matter of degree. The intervention has been going on in every sector since 2008. The implosion of the oil sector is simply the latest outbreak of consequence following cause.
Despite the authorities' best efforts to keep everything orderly, we know how this global Game of Geopolitical Tetris ends: "Players lose a typical game of Tetris when they can no longer keep up with the increasing speed, and the Tetriminos stack up to the top of the playing field. This is commonly referred to as topping out."
"I’m tired of being outraged!"
Every year, David Collum writes a detailed "Year in Review" synopsis full of keen perspective and plenty of wit. This year's is no exception. "I have not seen a year in which so many risks - some truly existential - piled up so quickly. Each risk has its own, often unknown, probability of morphing into a destructive force. It feels like we’re in the final throes of a geopolitical Game of Tetris as financial and political authorities race to place the pieces correctly. But the acceleration is palpable. The proximate trigger for pain and ultimately a collapse can be small, as anyone who’s ever stepped barefoot on a Lego knows..."
America has created a moral hazard for all Americans in that we feel we always have a fail safe no matter what we do because we’ve always succeeded. But so too had every other great dynasty until it didn’t. If we do not force a change in our economic policies we are very close to and perhaps already past the point of no return. I have no witting quip to end this article. The economic landscape we face today is nothing short of dire. And at the risk of sounding overdramatic we either force a policy change, suffer the short term pain and restructure or we and all future generations will live in a very different America from the one our folks left us.