The Fed remains fixated on financial-market feedback – and thus ensnared in a potentially deadly trap. Fearful of market disruptions, the Fed has embraced a slow-motion exit from QE. By splitting hairs over the meaning of the words “considerable time” in describing the expected timeline for policy normalization, Fed Chair Janet Yellen is falling into the same trap. Such a fruitless debate borrows a page from the Bernanke-Greenspan incremental normalization script of 2004-2006. Sadly, we know all too well how that story ended.
This week's "Things To Ponder" is focused on things that, in my opinion, far too many individuals are ignoring. Bob Farrell once wrote that "when all experts and forecasts agree; something else is bound to happen." Today, that is the case as much as it ever was. Despite rising geopolitical risks, weak economic data, deteriorating fundamentals and softer internals - the overwhelming belief is "equities are the only game in town." Of course, we have seen this mentality many times in past history whether it was 1929, 1987, 2000 or 2007. While every market peak was different, there were all the same.
How in the world does the government expect us to trust the economic numbers that they give us anymore? For a long time, many have suspected that they were being manipulated, and as you will see below it appears we now have proof that this is indeed the case.
In what appears to be the first real action post-Flash Boys, NY AG Eric Schneiderman will announce at 4pm ET that Barclays will be sued over fraud allegations related to its Dark Pool's preferential treatment of high-frequency traders. As Bloomberg notes, Barclays runs one of the market's largest dark pools. This comes 2 months after the NY AG sent requests for information to various major HFT shops. It seems, just as we noted here, that a potential scapegoat is being primed 'just in case' this 'market' can't withstand the Fed's pullback.
As we wrap up a holiday shortened trading week, there are several things to ponder this weekend. Will the breakout of the S&P 500 of the trading range it has been stuck in since February hold? Is the negative print of GDP in the first quarter simply a weather related anomaly, or something else? Is the decline in interest rates telling us something important? Are the currently high levels of complacency and bullishness in the markets a warning sign? Or, is this just a continuation of the bull market cycle that started over five years ago with plenty of room left to run. "I always thought that record would stand until it was broken?" - Yogi Berra
The temptations of extrapolation are hard to resist. The trend exerts a powerful influence on markets, policymakers, households, and businesses. But discerning observers understand the limits of linear thinking, because they know that lines bend, or sometimes even break. That is the case today in assessing two key factors shaping the global economy: the risks associated with America’s policy gambit and the state of the Chinese economy. It is often said that a crisis should never be wasted: Politicians, policymakers, and regulators should embrace the moment of deep distress and take on the heavy burden of structural repair. China seems to be doing that; America is not. Codependency points to an unavoidable conclusion: The US is about to become trapped in the perils of linear thinking.
Stephen Roach, former Chief Economist at Morgan Stanley, has never been shy to share his opinions about the world and having left the Wall Street firm is even freer to speak uncomfortable truthiness. This brief clip, as Sovereign Man's Simon Black notes, says it all so succinctly... "The market has been distorted by far bigger forces than flash trading. To me, the force that has rigged the market... is the Federal Reserve, not the flash traders."
For all the talk about how High Frequency Trading has rigged markets, most seem to be ignoring the two most obvious questions: why now and what happens next?
“Isn’t it now time for China to abandon the concept of a growth target?”
Indicators of US balance-sheet repair hardly signal the onset of the more vigorous cyclical revival that many believe is at hand. Optimists see it differently. Encouraged by sharp reductions in households’ debt-service costs and a surprisingly steep fall in unemployment, they argue that the long nightmare has finally ended. That may be wishful thinking. Notwithstanding the Fed’s claims that its unconventional policies have been the elixir of economic renewal in the US, the healing process still has years to go. This should not be surprising. Far too many US households made enormous bets on the property bubble, believing that their paper gains were permanent substitutes for stagnant labor income... and appear to be doing the same again.
China was hardly lacking in policy pronouncements in the final months of 2013. From the 60-point reform program issued by the Central Committee’s Third Plenum in early November to the six core tasks endorsed by the Central Economic Work Conference a month later, China’s leaders proposed a raft of new measures to address the daunting challenges that their country faces in the years ahead. But, seen in their entirety, the risk of incoherence has become evident. Given the likely tradeoffs between strategy and tactics – that is, between long-term reforms and short-term growth imperatives – can Chinese policymakers really accomplish all of their objectives?
Yes, the United States dodged another bullet with a last-minute deal on the debt ceiling. But, with 90 days left to bridge the ideological and partisan divide before another crisis erupts, the fuse on America’s debt bomb is getting shorter and shorter. As a dysfunctional US government peers into the abyss, China – America’s largest foreign creditor – has much at stake. For more than 20 years, this mutually beneficial codependency has served both countries well in compensating for their inherent saving imbalances while satisfying their respective growth agendas. But here the past should not be viewed as prologue. A seismic shift is at hand, and America’s recent fiscal follies may well be the tipping point. The days of its open-ended buying of Treasuries will soon come to an end.
It's never different this time. All too often we forget (whether by choice or happenstance) what occurred in the past - missing the lessons from history and, perhaps in an effort to deny the reality, maintaining the status quo that cradles us so warmly every night. In an effort to bring back some of that "memory" - and dispel the inevitable recency bias (and cognitive dissonance) as even the Fed is admitting markets are frothy, we bring you 1999's CNN Special "The New Economy - Boom Without End."
The Federal Reserve continues to cling to a destabilizing and ineffective strategy. By maintaining its policy of quantitative easing (QE) – which entails monthly purchases of long-term assets worth $85 billion – the Fed is courting an increasingly treacherous endgame at home and abroad. By now, the global repercussions are clear, falling most acutely on developing economies with large current-account deficits. But there is an even more insidious problem brewing on the home front - wealth effects are for the wealthy (as the Fed knows too well). QE benefits the few who need it the least. That is not exactly a recipe for a broad-based and socially optimal economic recovery.
The global economy could be in the early stages of another crisis. Once again, the US Federal Reserve is in the eye of the storm. As the Fed attempts to exit from so-called quantitative easing (QE) – its unprecedented policy of massive purchases of long-term assets – many high-flying emerging economies suddenly find themselves in a vise. The Fed insists that it is blameless – the same absurd position that it took in the aftermath of the Great Crisis of 2008-2009. As in the mid-2000’s, there is plenty of blame to go around this time as well. The Fed is hardly alone in embracing unconventional monetary easing. Moreover, the collapsing 'developing economies' all have one thing in common: large current-account deficits. A large current-account deficit is a classic symptom of a pre-crisis economy living beyond its means – in effect, investing more than it is saving. The only way to sustain economic growth in the face of such an imbalance is to borrow surplus savings from abroad. That is where QE came into play...