As we approach the Fed meeting expect markets to get more volatile. While the odds favor a move, it isn’t a sure thing until it is actually done. We found out last week what happens when forward guidance turns out to be forward misdirection. All those traders who thought they had a sure thing, who assumed that Draghi wouldn’t dare disappoint the market, got whipped. Whipped good.
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.
In the short run this will probably lead to dramatic and unexpected change in financial flows. Over the longer run, a much-overlooked problem emerges. Simply put, it is highly unlikely that market rates will respond as the Fed moves its target rate upwards; in this case, the FOMC will have lost all control.
No, Ben S. Bernanke will be someday remembered as the world’s most destructive battleship admiral. Not only was he fighting the last war, but his whole multi-trillion money printing campaign after September 15, 2008 was aimed at avoiding an historical Fed mistake that had never even happened!
Goldman's 3 key reasons for China's "surprise" rate cut: i) Activity growth weakened meaningfully after a brief rebound in 2Q; ii) Outflows re-emerged and drained liquidity; iii) Equity market has been falling very rapidly. The conclusion: "These cuts are positive moves which are much needed to support the economy and market. But they are unlikely to be sufficient by themselves."
As asset bubbles are in the way of the Fed’s policy, a decline in stock prices removes the equity market bubble and enables the Fed to print more money and start the process up again. On the other hand, the stock market decline could indicate that the players in the market have comprehended that the stock market is an artificially inflated bubble that has no real basis.Once the psychology is destroyed, flight sets in.
The PBOC set the Yuan fix 0.08% stronger - the biggest 'strengthening' in 2 months, which is interesting because The IMF's confirmation of a delay to Yuan inclusion in the SDR basket to Oct 2016 (pending a year-end decision) asked for more flexibility. For the 3rd day in a row, The PBOC injected massive liquidity (120bn today, 110bn yesterday, 120bn Monday). Shanghai margin debt declined for a 2nd day in a row and Chinese stocks look set to open weaker.
Now that the PBoC has created a situation where it’s forced to prop up the yuan via open FX ops just about as often as it’s forced to prop up the SHCOMP via China Securities Finance, concerns are growing about liquidity and a severe tightening of money markets, prompting the PBoC to inject hundreds of billions in emergency funding.
Just hours after the PBOC announced a modestly "revalued" fixing in the CNY, which curiously led to weaker trading in the onshore Yuan for most of the day before a forceful last minute intervention by the central bank pushed it back down to 6.39 it was the local stock market spinning plate - which had been relatively stable during the entire FX devaluation process - that China lost control over, and after 7 days of margin debt increases the Shanghai Composite plunged by 6.2% in late trade, tumbling 245 points to 3748, just 240 points above its recent trough on July 8, a closing level some 27% off its June peak.
The last time the Fed tried to exit a period of massive balance sheet expansion coupled with ZIRP - back in 1937 - its strategy completely failed. The Fed tightening in H1’37 was followed in H2’37 by a severe recession and a 49% collapse in the Dow Jones. This is the ghost of 1937 and it is about to make a repeat appearance.
The Shanghai Composite is on the verge of 5,000 and has more than doubled in the past year but this may just be the beginning. The reason: if the Chinese stock bubble bursts, that will be the beginning of the end of the greatest con game in history.
The Fed stimulates absolutely nothing but the media’s descriptions of it and the various economists and their models that depend solely on them being successful in doing so.If recessions are emotional and irrational pessimism as the monetary textbooks believe, then QE and ZIRP are just right sort of “happy pills” to push emotions back to the “right” direction.Is it any wonder the economy is in danger of sinking toward catastrophic failure?