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Fed Credibility Crushed - The Aftermath
Despite uber-dovishness, stocks did not play ball with The Fed as it appears we have reached a tipping point in central planning credibility...
"You're just nothing but a dumb bear..."
2016 it is... Dec odds drop to 49%...
Only one thing mattered today... 1400ET and Yellen's bullshit explanation why The Fed will never, ever, raise rates... (note the move in bonds and USD early when Hilsy seemed to leak the decision)...
Notice stocks initially snapped down to bonds early move (blue oval), then decoupled in a QE trade, before stocks plunged...
All major indices closed red post FOMC...
Not pretty...
VXX bounced perfectly off its 50 and 100-day moving average, closing unchanged...
Note the huge plunge in VIX (catching down to equity exuberance after th elast 2 days of hedging) and now recoupled to the downside with stocks...
Investor rushed into the safety of Biotechs!!??
And dumped financials...
EM was bid briefly, then dumped...
Which left the short-end of the curve lower on the week, collapsing across the curve today... biggest drop in 5Y yields since March...
with a dramatic steepenig in 5s30s (up over 6bps today)
The US Dollar was crushed down 1% on the day.. the biggest drop in a month...
Commodities all surged post-FOMC as the dollar dumped with Gold and Silver leading the day...
Charts: Bloomberg
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Friday Free For All????
The FED is dead. Long live the PBOC.
Fed cred. Jumbo shrimp.
RE: Fed Credibility Crushed.
You mean the fall of Communism wasn't proof enough that Central Planning doesn't work? As usual, the average amerikan shlub is the last to figure it out if it happened outside of the USSA.
To the average drone, the only history they remember is who was the last person Kim Kardashians fucked.
ZIRP 4 EVAR
Market is falling hard! Look out!
Long live NIRP (and my stack)
Why is there still an 8% chance of a 9/17/15 rate hike? Is it possible Yeller is gonna jump on CNBC all "syke!!!"
Not even 0.25%. Be very afraid.
There is plenty of central planning going outside of the borders of the US. Average American schlubs aren't the last to figure it out, though the Central Planner shlubs in the US might be.
"The FED is dead. Long live the PBOC."
Sure... Read up about China's banking sector non-performing debt issues. HUGE. Their equity market crash is nothing by comparison to the hazards involved in their banking "system." What a house of cards... We ain't seen nothin' yet.
Sorry. Forgot my /s tag.
Ok
In honor of Issac Hayes...
Freddie's Dead....Superfly !
Stockship away.
Curtis Mayfield. Who is also dead. As is Isaac Hayes.
Lying Yell'n
If she was lyin' any more, a dentist would shoot her.
Two Questions:
Is she fat?
Was she singing?
Now we just wait for the usual thousands of paper gold futures being dumped onto the market when the main exchanges are closed as usual.
No rate hike and yet, stocks finish at their lows while gold soars.
HAHAHAHAHHAHAHAHAHAHAHAHAHAAHHAHAAHAH!!!!!!!!!!!!!!!
A one day pimp slap in Janet's grill. Tomorrow may be unfun.
Drink too much kool-aid and eventually you get the trotts.
Cartel won't take kindly to the gold zip
What credibility? They couldn't lose something they never had.
Not with ZHers. With Dippy.
The Fed had credibility?
Yes, they had credibility ... amongst the hobo folk.
Yep around 1913, for about ten minutes.
WELL - THIS IS GOOD NEWS!
https://www.youtube.com/watch?v=0w6F9w7FBM8
Pay me money to buy a house. I double dare ya'!
100% OFF SALE IS COMING BUDDY!
https://www.youtube.com/watch?v=BRqKpanzDQw
I applaud your chutzpah. Most would have just asked for free Netflix ...
tomorrow is quadruple witching - should be fun.
The biggest liars on this planet had credibility? Baghdad Bob had more than Old Yeller.
THat Baghdad Bob was freaking hilarious. As he said "The American are being crushed and are not at the airport." and the split screen showed M1A1 tanks rolling over the runway. I watched the news more for his announcements than anything.
He was right Americans were being crushed by the banksters. They just didnt know it then.
Prettier as well.
After today I've come to realize that Uncle Scam and the FedRes are totally clueless as to
how to proceed.I could say something trite about Rome burning, but at least Nero
could play the fiddle.
Which leads to the question: Has Obama ever shot par for the course?
That's more of a Reggie question. Oblahblah spends most of his time at the ball cleaner giggling like a schoolgirl.
e_goldstein - The comedy now is really the main reason I'm here. Yours is way up there man. The American people are wide awake, that part of my contribution has ended. Cheers to all of you for all of your time that did the same, globally of all races. I love you all.
Thanks.
Uncle Sam isn't clueless, just power hungry and greedy... just like the Fed. Every day I am more and more convinced TPTB, the elites, the oligarchs, whatever you want to call them, are doing all this to usher in the Great New Feudal World Order. Every step they have taken has reinforced this. Rape the BRIICS, Rape Europe, Rape China, Rape the Middle Class... all the while Bailing Out their Cronies. These fuckers will never stop until their is no one left to rape, and then they will start raping each other. That's when you know the end is coming, when the sociopaths start feeding on each other. Unfortunately, the masses will be litterally starving in the streets before that happens. Plan accordingly.
US Federal Reserve appears to be an organization which colludes with other Banks to Increase Moral Hazard in the USA and specifically in banks and finance.
This is a RICO Violation.
- To Bad we don't have Honest Brokers in DOJ, FBI, SEC, FINRA, FTC, GAO, CBO, FED, Treasury, OCC, FSOC, BCFP, CFTC, FDIC, FHFA, SIPC
- Hey, Mr. yellen if you don't like it here, why don't you move to Europe already.
Where was my 3:30 ramp? How am I supposed to BTFD?
“No Expectations” by The Rolling Stones
Can’t take more stagnation
Their fear of any pain
I've got no expectations
That rates will rise again
Once we were a rich land
Now we are so poor
But never in my sweet short life
Have I been this miffed before
You’re stalking SPY & DIA-monds
They’ve sopped up stocks like swine
And as I watch you cheerleading
I think you’ve lost your mind
The doves are like the car ads
That flash up on my phone
Our doves are like a deer tick
Suck blood until they’re gone
Now QE’s our chief export
I can’t hide my disdain
I’ve got no expectations
That we’ll leave ZIRP again
RUT was predicting this move all day... 4hr RSI was screaming sell the news
The good old days might be back. Next week might be messy
Without question, typical conspiracy theories re: a Fed leak would look at Russell action all week, which was relentless against many technicals, but in truth I think it was the typical low volume algos -- TNA had some of the lowest volume pre-10 opens I've seen, often just 300k shares, and it was turned back just below the 50DMA and Daily Keltner top, a precise machine move. They know bigger firms may have been out, while a lot of smaller trading stops remained (unlike S&P where many big folks stay fully engaged and can smack down exuberant HFTs more easily).
Given this week's odd, difficult trade and tomorrow's OPEX, I may sit out tomorrow (unless there's a clear post-FOMC bias, normally THurs, not Fri). I've worked hard on a simplified entry method that retains much of my method's (over)complexity, but relies more on HRLY charts for most entry/exits. Anxious to get back in the saddle next week, as it's testing out like a dream (with my 'sophisticated' manual look-back:) ). Good luck with the option-pinners tomorrow.
Shimetha bitchessss, or is that to late. Lol
Not too late. It's Shemitah until something horrible happens. Then it's obviously shemitah.
Glad I found some tubes of silver under my Shemitah tree.
Festivus might have to come early this year.
Yep, yellen is a big fail. yellen should be out of this job soon.
All that's left for yellen now is the porn industry.
The bankers love her. So long as they do, she's gold.
She was an excellent choice by the boyz. Only a cad would lynch an innocent looking little old lady..... or so it is presumed.
I dont think its human.
My eyeeeeez!
REVERSAL BITCHEZ!!
Well that escalated quickly...
Rate Hike Hopium
https://twitter.com/sharkybit/status/644587030555529216
GOLD!!!
Everyone knew they were not going to raise rates.
Everyone knows they cant raise rates.
Everything they say about raising rates is B.S. propaganda, they are trying to prevent the Markets from getting over-blown, while not doing anything with rates...
QE4 to infinity might as well been announced.
Yep.
The ZH articles that automatically come out each time a 'decision point' comes up for the Fed are hilarious. At various points in the day, wondering "will they raise rates", "What did X say", plus endless 'analysis', and so on, when in fact, just as you said, EVERYONE KNOWS THEY CANNOT RAISE RATES.
This way of robbing people will continue, and the printed money will continue to flow to more war, more financial abuse, more theft, more corruption, and especially, more occult raping and mind-breaking of little kids by insane elites, in preparation for the next generation of satanic abusers.
Gamblers trying to profit from the latest info should certainly feel safe enough to continue to BTATFH!
Pretty much, I mean even... just...just look at this we went from talking about "Will they raise rates" yesterday to today, "will we have negative interest rates?" lol
I mean cmon.
Its like "o so you aren't raising rates...yea great, uhhhh how about negative rates? that'd be great!"
The world is predictable, one only has to stand back far enough to get a good perspective of things and one will clearly see where this train is going, and its not anywhere you want to endup thats for sure, but until we get there, there are numerous stops along the way that could be profitable if you know when to get off and when to get on and when to go back if you can.
^^
Dre4dwolf - I upvoted. Improved my lot in life by dancing till the music stops. Ya we're new Rome but now perhaps understand the old Roman saying of 'eat, drink and be merry for tomorrow we die.' Hedged too. Sometimes one should remember what is worth fighting for. Or like Zombieland rule 'Enjoy the little things.'
So... if there is no money in bonds, and the dow is down 10% still where will people go for a return?
Physical assets, cash, and money markets (for the 401k sheep who actually can).
I'm even afraid of cash now. What currency won't collapse when the rug is pulled? Even the Norweigans are about to have a housing crash.
Don't over pay for Park Place ot Boardwalk.
Organ sales ... human organs ... lots of money to be made there.
"...where will people go for a return?"
The gun shop?
CNM - Dont worry some of us will help them out. Why you think I chose to evolve and eat pain to learn amd compte? Just to come here and simply hedge? Knowledge is still power and I have something very special for this time. Fellow ZH angel investors can email me at jrines@inboxguaranteed.com .
I am solving a carry cost problem for companies like Google and in this sector of $3B I am the market maker. I waited 15 years and every dog has his day. I will be running an ad at Zerohedge soon, dont want to spam the site with links and besides, have plan and some great groundwork but some marketing material needs polish.
We are going to party like 1999. Blood in the streets and panic is good for some.l with true market solutions to problems.
CNM - Dont worry some of us will help them out. Why you think I chose to evolve and eat pain to learn to compete, ust to come here and simply hedge? Are some of you allergic to making a healthy, honest buck? Knowledge is still power and I have something very special for this time. Fellow ZH angel investors can email me at jrines@inboxguaranteed.com .
I am solving a carry cost problem for companies like Google and in this sector of $3B and I am the market maker of my sector. I waited 15 years and every dog has his day. I will be running an ad at Zerohedge soon, dont want to spam the site with links and besides, have plan and some great groundwork but some marketing material needs polish before advertising.
We are going to party like 1999. Blood in the streets and panic is good for some with true market solutions to problems.
The only ones the Fed would hate to disappoint are the bankers.
So long any bankers still live this will continue exactly as it did today.
US debt was downgraded today.
Did you get the secret email alert?
Just like the Mafia. As soon as pressure is allowed to build for Bank Reform:
- Downgrades across the Bond market
- Banks call in Loans
- Bonds sell off at discount
- Bond Crisis is here.
So the Press plays ball, DC Plays Ball, State Leaders Play Ball, and status quo prevails till it can't any longer.
I invested today as if a downgrade was announced.
I hope you did.
Thanks. No, I'm just not that sophisticated.
I understand options, but not futures and don't have access to FX Trades.
Chuck - Ya got that memo a couple years ago looking at hstoric charts of 1956. I told my father in law to grab his profits and run for 8 months using a strong, fact based case Did he? What do you think he did?
Nothing.
the algos have no reference point as the Fed has no cred. ---"the center will not hold"---
Expect the ccp to let go of the reigns of its markets tonight as payback - leading to some further aftermath in the US tomorrow.
The Fed has not had any credibility for quite some time. The move away from the dollar and, more importantly, treasuries by the rest of the world is already happening. The real interst rates are negative already for the average Joe while the spread between the Federal funds rate (the bankers get) and the government paper is actually growing. Shit behind the scenes (mainly trade) is getting exponentially worse. Get your tribe in order and get ready becuase broke governments will be looking for all kinds of "creative" ways to stay funded. Pay attention to your property tax bills and I suggest video taping any and all encounters with law enforcement, civil forfeiture will only increase as local governments get (more) insolvent.
The Concept of Stewardship of the World Reserve Currency should be better known in the USA & Europe.
Why have a Central Bank if the argument wasn't about moral hazard, taking on too much debt, inflating the supply of Dollars?
- Really everyone should be asking why have a Central Bank?
- And we can easily create our own stocks of cash dollars in the many regions of the USA in case of bank runs, so that isn't part of the argument.
Can't wait to hear Peter Schiff's take on this.
Wouldn't a comprehensive Economic plan for the Domestic Economy prepared by the US Congress be far more effective and efficient than handing it all over the the Private Federal Reserve Stock Holders??
- It is not like the USA has actual defined policies any more anywhere.
- USA is run by School children.
I prefer that all planners be stripped of their authority.
Stocks crashed because they are pricing in the fact that EVERYTHING IS FUCKED.
"Dow+50%" doesn't sound fucked to me.
Depends on several factors--
when you entered the market
how long it took to rise 50 percent
the true inflation level during the time of that rise
whether you can exit with your gains or find yourself trapped with a paper profit that cannot be monetized.
They rushed into biotech because they needed their meds.
The market is anonymous:
It does not forgive, it does not forget
Crowd funding for Xanax samples?
They got an hour of bump and an hour and a half till unchanged (before closing lower) on a meeting that it seemed everyone was waiting for. If they want to give the market a shot in the arm, it looks like it'll take nirp or helicopter dollars.
Every time they get less. Shouldn't be much longer now.
Have to agree.
I thought they would go for it and turn the strong dollar against any competitor.
What a bunch of ball less idiots.
Now they should do their meetings in a public toilet. At least Janet can grab a big black sharpie and write the minutes down in the stall.
That's about all the audience she deserves.
They said QE was going to reduce Velocity.
I don't understand QT Theory about why they didn't want Velocity of Money Stock to increase since they said they wanted Inflation.
So US Velocity is at an all time low I guess.
Business Dynamism is very low, older businesses are stable, young ones close down more than open up. Monopolies are the rule, but they are transnational so their profits can be spent else where, have foreigners do the work, and deposit profits off shore.
- EBT Cards are the rule, 150 Million are on Welfare
- But they don't like small businesses and have no policy for protecting the middle class or shoring up the middle class or building small businesses, streamlining, simplifying, standardizing to make taxes, accounting, and finance easier... and to make Rules easier
- Coup, Treason, Sedition, Fraud, and mass attack on culture, education, property, wealth, and they give away our sovereignty in 6 different ways including globalization and open borders/open hoarders... while giving away our technology, jobs, middle class and privatizing our commons
But we aren't allowed to have Money Velocity or a Congress that take responsibility for the Middle Class and the future of our Jobs.
Coup.
- To Bad we don't have Honest Brokers in DOJ, FBI, SEC, FINRA, FTC, GAO, CBO, FED, Treasury, OCC, FSOC, BCFP, CFTC, FDIC, FHFA, SIPC
The Fed target for inflation should be ZERO (as in Zerohedge).
The 2% target sounded good when we had 14% inflation. Who would have thought we could get to less than 2% without changing the way we measure.
And now they are in their own House of (Distorted) Mirrors, and cannot find the exit.
The less paper currency you have the better you will be.
MV = PT (the Fisher Equation)
Each variable denotes the following:
M = Money Supply
V = Velocity of Circulation (the number of times money changes hands)
P = Average Price Level
T = Volume of Transactions of Goods and Services
Read more: What Is the Quantity Theory of Money? http://www.investopedia.com/articles
- I just don't get it, seems like we want Velocity
High 1981 of 3.5, today 1.35.
https://research.stlouisfed.org/fred2/series/MZMV
M1 Money Multiplier
2015-04-15: 0.723 Ratio (Already in Crash territory in 2000, fell off a cliff in 2008)
Bi-Weekly, Ending Wednesday, Seasonally Adjusted, MULT, Updated: 2015-04-23
https://research.stlouisfed.org/fred2/series/MULT
If you look at the Discontinued version you can see growth in the Ronald Reagan Era, but nothing after to compare.
M1 Money Multiplier (DISCONTINUED SERIES)
Since the repeal of Glass Steagall, the Fed has no idea what the M's may be. So they're relying instead on "data points." That is, throwing shit against the wall and seeing what sticks.
Teeth - Ya the private Central Bank 'The Fed' lies its ass off to serve its own interests. This is why a private corporation should EVER control a nations currency:
"When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes. Money has no motherland; financiers are without patriotism and without decency; their sole object is gain."
Napoléon Bonaparte
I disagree with the decision, but understand the reasons for it - the FED just recognised the disruptive potential of its decision making beyond the US, now including EMs.
It is interesting - and it opens a whole new world of possible interpretations to the FED next moves.
I think it was overall a wise decision. all things considered - but it is also clear that the effectiveness of FED moves is far less than what it is believed... so many years of almost free money, and still no inflation.
There is something broken - and I suspect it is the bank's role, and the legislation about the banking system.
If on one side the FED provides all this money to banks, on the other side it also restrict them from providing "risky" credit, which at the end means the money the FED pours in the system stops at the banks. I am sure the banks would love to offer easier loans - but they cannot, by law...
I wonder what would happen if the banks were allowed a bit "easing" as well...
Anyway, all this mess for nothing - the S&P finished just 0.67% under... Let's see what happens tomorrow. Apart from expiration day, it should be BAU, but I wonder if it will be like that...
Just my two cents
Have a great evening
It was the only fucking decision they could do.
cuz an 84 month used car loan just isn't aggressive enough for you?
Those FED scumbags had me hopping all over today. Finally +2.7% for the day.
It is fun to be back into the gambling market. As long as the markets don't stop and Scottrade goes belly up everything is awesome.
Bitcoin $233.96
damn! that escalated quickly! and i was waiting for the S&P at 2040-2050 to tripple my short..
Pop goes the Ponzy Scheme
Economics is actually science.
The Federal Reserve? A bunch of people that get together, offer up their observations and opinions, and they they come up with precise numbers from those opinions.
Imagine twelve of your friends, without thermometers, getting together at the end of each day to talk about what they thought about today's high and low temps, today's humidity and % cloud cover, and then issuing a forecast for tomorrow.
That is how the Federal Reserve is operating.
Oh yes, they can destroy your savings as well. But that is just a side effect.
"Economics is actually science."
But produces predictions less accurate than weather reports because the theory they base their models upon is simplistic garbage fed with far too few data points and manipulated data at that! But they're allowed to run the f'ing world with it because it tells both bankers and governments, the forces actually in control, what they want to hear: You can print and borrow your way to prosperity!
THat is because the predictions are not from true economists, but soothsayers.
Economics is a science to the end that it comes to the conclusion that human beings are too stupid and corrupt to decide what the price of something ought to be outside of the arena where they have skin in the pricing game, either as buyers or sellers who may purchase or sell, or not, according to their own immediate self interest. In a free market, that is. The price of money, above and beyond all others, is the one that should not be gamed.
Economics is only science in a room full of children with crayons.
Economist on opening a can on a desert island: assume a can opener.
EJmoosa - NO. Imagine you and your friends know it will be 110 degrees tomorrow because they control the sun. The folks that join the party think it will be sunny and 90 tomorrow. A little warm but still BBQ weather in there minds. This is a model empire that captued the world. The only outcome they can't control for proft is the final BBQ of WW3.
Spimone bitchez.
SPIMONE!
US equity markets and real estate have become addicted to the ultra-cheap money being supplied by the US FED (aka US taxpayers) since the 2008 financial crash. This has now gone on so long that no really knows what the actual “value” of these assets should be. Thus, the large daily movements (“volatility”) in the Stock market. Yellen seems to think this fine.
The price is real because 0% interest is the new norm.
Isn't that what "law of Islam" requires...?
I am trying to find words that rhyme with graphs...laughs? giraffes? hmmm, thats about it.
Don't blame the Chinese for doing it.
"The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates."
Obama's Recovery In Just 9 Charts http://www.zerohedge.com/news/2015-09-16/obamas-recovery-just-9-charts …
Is this Related to the Economic Stats and Data we see from the FED, BEA, BLS?
- REPORT: Widespread fraud at Census Bureau...
- Sex, fraud, retaliation...
- CENSUS: 46.7 Million In Poverty...
- USA Has Taken In 24X More Migrants Than Pope's Home Country Of Argentina...
- 40X more than Mexico...
- FATHER: Mexican Cartel 'Executed' My Son in AZ Convenience Store...
- Antidepressant Deemed Unsafe for Young People After Reanalysis...
- Suicide risk much higher than previously thought...
- IRS REVOKES NONPROFIT STATUS OF VET GROUP THAT HOSTED TRUMP...
- Federal Air Marshals Under Investigation for Filming Sex With a Prostitute While On Duty...
- White House Push For Immigrants to Become Citizens -- Before Election...
The non-decision of the fed reminds me of something my dad would say about a haircut..."can't really tell weather it was a good one or not for a few days. In this case we will be able to see the damage in a week or so.
The fed are enablers.
Reports the Financial Times:
The FED can never raise rates. They are terrfied of losing ocntrol of the bond market!
how do you crush nothing? that is what
their credibility is founded upon. fiat
holy shit.....
debt IS money
nothing IS something
NIRP IS, like, totally positive
QEternal in 3,2,1.......
for our children, doncha' know !
The FED had no credibility to begin with. I don't get how their so-called credibility could have been crushed if they had zero credibility before the rate hike announcement?
zero credibility = zero credibility + crushed zero credibility still equals zero credibility
And soon to be negative credibility.
exactly!!! There's no such credibility
A ponzi is a ponzi. Thinking it has credibility is delusional. No rate hikes ever. Now can I set up a Wall Street shingle and charge the miscreants $1000/hour for giving good advice?
Fuck Ben.
Algos just trying to shake people out at the end of the day. Puxatony Janet scared of her own shadow. They aren't raising at Christmas, they aren't raising in January after a weak Christmas season, they aren't raising in March when Q1 GDP has been so weak lately and then they won't raise before the election - that gets us to 2017
We are following the same Japanese Kamikaze dive as the Japanese(keep those down grade coming)...Bonzi!
Perilous times call for bold moves. Putting some academic grandma in charge of taking the necessary chances meams that any measures taken will not be on time, on target, or in a sufficient quantity.
An unwillingness to dare even a teeny tiny quarter point rise in these circumstances is a frank admission of doom and intellectual paralysis.
History will enshrine Yellen in the same hapless, frightened pantheon of leadership as Barack Obama and Hillary Clinton.
Too bad for us and everyone around us.
The tocsin we are about to ring is not an alarm signal; it sounds the charge on the enemies of our country. To conquer them we must dare, dare again, always dare, and France is saved! Georges Jacques Danton 1792Mm, yep. Perfect quote.
The two foremost revolutions coming out of the Enlightenment were the American and the French. But it was the French that set the pace for those that were to follow. Bringing in a new regime that is far worse than the old, that has been the pattern ever since.
The American Revolution was an outlier. An anomaly, unlikely to be repeated even in America. Especially given the sound of the jackboots marching ever closer...
what credibility?
FED lost all credibility long time ago even became an enemy of the middle class and working people about 35 years ago.
Now it lost credibility among fix income Wall Street crowd by implementing anti-American, disastrous policies even for millionaires. The policies subservient solely to the inbred class of global oligarchs and billionaires.
And all of it showed up today at FED.
To see how the global demand for commodities will at the end for FED from its torpor see this:
https://contrarianopinion.wordpress.com/economy-update/
and
https://contrarianopinion.wordpress.com/2015/01/28/liquidity-of-blood-sw...
As I have said many times in these comments. The Fed will not raise interest rates until Obama is out of office. They will raise them once a conservative gets elected to pass blame on conservatism.
No rate hike before QE4. Spoos forever!
According to Macquarie Research:
https://app.box.com/s/hx16540dwpct4uj5h5iohxsa4197zozd
Time for a policy U-turn?
Back to the future: British Leyland
From conventional QEs to more unorthodox policies…
- As discussed (here and here), we do not believe that investors are likely to benefit from acceleration in growth rates, trade or liquidity and indeed on the contrary, negative feedback loops from EMs to DMs imply that neither would be able to support global growth. Secular stagnation is the key explanatory variable (here). The deflationary pressures from overleveraging, overcapacity and technology shifts can be either allowed to work through economies or the public sector needs to continue resisting via expansionary policies.
- Since ’08, monetary policies were doing most of the lifting with limited participation by fiscal authorities (bar China). In other words, in the absence of either private or public sectors driving higher velocity of money, it was Central Banks that were supplying incremental liquidity to preclude contraction of nominal GDP and avoid stronger deflationary pressures. However, marginal utility of incremental injections has been declining (witness much lower impact of recent ECB’s QE and increase in BoJ accommodation since Dec ’14).
- Part of the reason for monetary stimulus fading is that supply of US$ remains low. Global economy continues to reside on a de-facto US$ standard and current incremental supply is almost non-existent (depending on definition growing at +2%/-1% clip vs. average since ‘01 of ~15%). In other words, due to lack of recovery in the US velocity of money and lack of QEs, global economy is not getting enough US$ to continue leveraging.
…as efficacy of conventional monetary QE is questioned
- At the same time efficacy of continuing with conventional QE policies is being challenged and not just by independent observes but also ‘insiders’ (such as recent SF Fed paper). As velocity of money globally continues to fall, conventional QEs have to become exponentially larger, as marginal benefit declines. If the public sector is not prepared to step aside, what other measures can be introduced to support nominal GDP and avoid deflation?
- There are several policies that could be and probably would be considered over the next 12-18 months. If the private sector lacks confidence and visibility to raise velocity of money, then (arguably) the public sector could. In other words, instead of acting via bond markets and banking sector, why shouldn’t public sector bypass markets altogether and inject stimulus directly into the ‘blood stream’? Whilst it might or might not be called QE, it would have a much stronger impact and unlike the last seven years, the recovery could actually mimic a conventional business cycle and investors would soon start discussing multiplier effects and positioning in areas of greatest investment.
British Leyland failed, but it might work at least for a while
- British Leyland (formed from nationalized British car companies in the late ’60s) destroyed its automotive industry but for a time it provided employment and investment. Central Banks directly monetizing Government spending and funding projects would do the same. Whilst ultimately it would lead to stagflation (UK, 70s) or deflation (China, today), it could provide strong initial boost to generate impression of recovery and sustainable business cycle. It could also significantly shift global terms of trade (to the benefit of commodity producers) and cause a period of underperformance by our ‘Quality & Stability’ portfolio and improve performance of ‘Anti-Quality’ screen. What is probability of the above policy shift? Low over next six months; very high over the longer term.
This article totally confuses me. I was lost after the first two words of the title.