Janet Yellen’s astonishing letter to the Speaker of the House, Paul Ryan, is a sign that the central bank is panicking over the fact that Congress is unhappy with the job it has been doing.
Greenspan’s phony disinflation success led to the Fed’s embrace of fully mobilized and massively intrusive monetary policy in the guise of the Great Moderation and the wealth effects theory of financial asset levitation. In due course, Greenspan’s self-aggrandizing but purely experimental forays of massive central bank intrusion in the financial markets were supplanted by the hard-core Keynesian model of Bernanke and Yellen. Alas, they operated under the grand illusion that a domestic wage and price spiral would tell them when the domestic GDP bathtub was filled to the full employment brim, and therefore when to lift their foot from the monetary accelerator. It never happened, and they never did. The era of Lite Touch monetary policy was by now ancient history.
There is “a barbarous relic” in our global monetary system. It is the U.S. dollar: the worthless, monetary relic of an empire in decline.
On Wednesday morning a new national poll revealed that 54% of Americans rate the economy as 'poor', but instead of focusing oin that, Becky Quick quizzed Marco Rubio about his 'lack of bookkeeping skills,' Carl Quintanilla posed questions about homosexuality and fantasy football, and the astonishingly incompetent John Harwood expressed doubt about Donald Trump's 'moral authority.' The interaction between the candidates and the CNBC moderators revealed the yawning gap between the bubble world at the intersection of Washington and Wall Street and the hard scrabble reality of economic stagnation and political alienation on main street America.
Paul Volcker announced his intention to squeeze inflation out of the system soon after he became Fed chairman. Too bad he didn’t save a better system. Not many men can resist the appeal of free money. Americans proved they were no better at it than others. Falling interest rates and the paper dollar gave them a way to impoverish themselves – by spending money they hadn’t earned. They took the opportunity offered to them. They borrowed and spent... and drove the entire world forward at a furious pace. But now that stage is over.
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.
"Mainstream America with their 401Ks are in a similar pickle. Expecting 8-10% to pay for education, healthcare, retirement or simply taking an accustomed vacation, they won’t be doing much of it as long as short term yields are at zero. They are not so much in a pickle barrel as they are on a revolving spit, being slowly cooked alive while central bankers focus on their Taylor models and fight non-existent inflation."
In the end, whatever the Feds announce at 2PM NY time today should not affect your long-term outlook on markets as neither of the two possible decisions will significantly alter the future fate of global markets. Instead, the most important thing to understand is the massive fraud that is systemic in the global financial system and to allow a deep and complex understanding of this fraud to drive your investment decisions.
The destruction of honest financial markets by the Fed and other central banks has created a class of hedge fund hot shots that are truly hard to take. At length, both the epic bond bubble and the monumental stock bubble so recklessly fueled by the Fed and the other central banks after September 2008 will burst in response to the deflationary tidal wave now cresting. Needless to say, that eventuality will be the death knell for the risk parity trade. It will cause the volatility seeking algos to eat their own portfolios alive. Leon Cooperman and his momo chasing compatriots will soon be praying for an event as mild as October 1987.
The Jackson Hole gathering may end up providing at least some clarification, but not even close to the manner in which everyone seems intent on inferring. With Janet Yellen’s notable absence, there isn’t the same sort of celebrity about what would have been the media hanging upon every word; that is, after all, what the Federal Reserve has become, not an organ of stability or even expertise but a public relations effort aimed squarely at trying to convince everyone possible that it is. Given the unique circumstances at the moment, the real issue is not whether they might raise rates but just how much systemic misdirection has already been revealed even to the least attentive of people.
Every Federal Reserve Chair since 1979 has faced a notable challenge in the first 12-20 months of their tenure – something akin to capital markets “Bullies” hazing the new kid at school. Paul Volcker had the 1979-1980 Iranian oil shock/recession, Alan Greenspan the 1987 Stock Market Crash, and Ben Bernanke the 2007 Financial Crisis. Their responses shaped market perceptions about Federal Reserve priorities and set the stage for the remainder of their tenures, from Inflation-Fighting Volcker to Save-the-World Bernanke. Now, it is Chair Yellen’s turn...
The rise of populism is not just a U.S. issue. Globalization and deregulation, especially with regard to the open adoption of new technology and work structures, is increasingly being called into question. As we have discussed previously, there is increasing potential that major political and economic changes will emerge from this vote. The emergence of Donald Trump and Bernie Sanders is a reflection that the populists want a change in the direction of American policy. We will be watching closely to see whether any serious changes result.
"John and Volcker discussed all the pitfalls of Keynesian and monetarism and Volcker didn’t rule out an eventual collapse of the dollar and second deflationary depression. I remember Volcker asking John when he would begin dropping short term rates and John commented that rates would have to drop soon or else the economy would fall off a cliff. It’s interesting that it wasn’t long after our session that rates started to come down. John Exter spelled out his scenario for Volcker and warned him of how badly the Keynesian experiment would end if it went on for an extended period of time. Volcker just sat there and listened and showed his concern."
Do you remember when real reporters existed? Those were the days before the Clinton regime concentrated the media into a few hands and turned the media into a Ministry of Propaganda, a tool of Big Brother. The false reality in which Americans live extends into economic life. Last Friday’s employment report was a continuation of a long string of bad news spun into good news.
We would like to believe that a period of peace and prosperity lies ahead of us. Unfortunately, the facts do not support this panglossian assertion. If history repeats it is more likely that we see hyperinflation and the sharp devaluation of paper and digital currencies in the coming years, given that no experiment with money printing has ever had a positive outcome.