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Why The Fed's Credibility Is Crashing: The Market's Three Biggest Worries
Early this week, when evaluating the likelihood of a Fed rate hike, we cited RBS' Alberto Gallo who said the "real reason to hike is another one: preventing the debt $-denominated overhangs from building up further – the burst of which would be, in turn, even more deflationary (and the same imbalances resulting from a financial boom can also reduce productivity, as discussed by the IMF). So if the Fed’s mandate is to worry about the medium-term and to target structural issues vs today’s asset prices, the right thing to do would be to hike. This is also what the majority of institutional investors think. But the Fed won’t."
Why not? Because the Fed itself realizes its credibility is fading fast and as RBS also showed as per a recent survey of its clients, a whopping 63% replied that the Fed is losing credibility. In other words, it has little to lose by doing what will erode its credibility that much more.
Yesterday the Fed confirmed this was the case when it once again chickened out of its first rate hike in 9 years and took the easy way out, one which however confirmed to everyone that the Fed is increasingly gambling with what precious little credibility it still has left. As a reminder, if and when the Fed loses all trust, its only recourse will be to print boxes of cash and paradrop them on the population. Pardon, boxes of paper because at that point the US reserve will be worthless.
We are not there yet, but as RBS notes in its follow up note today, "the price action in market today is negative, suggesting increasing worries."
According to Alberto Gallo, the biggest worries are the following:
- The first is that by keeping rates lower for even longer, the EM imbalances the Fed is worrying about will grow even larger, making it harder to exit stimulus
- The second is a question on the value of forward guidance, after the Fed has repeatedly called for a hike and then backed out
- The third is that the Fed may have limited, or no ammunition to react to the next potential shock, and that financial booms and busts may grow even larger over time
Gallo's conclusion:
And as the IMF wrote recently in its World Economic Outlook, these booms and busts have structural – not cyclical – consequences on productivity, following misallocation of capital and human resources to leverage-heavy sectors (real estate, infrastructure), which following the bust create a drag on banks’ balance sheets and in the workforce.
Our US trading desk economist Michelle Girard says the Fed has missed its window, and now expects a first hike in March 2016. Together with our rates colleagues, we expect the ECB to react with more easing, increasing lengthening its QE programme, by year-end.
The world we are heading into is one of increasingly market-dependent central bank policy, and of decreasing returns for bondholders. The investor reaction function has clearly changed from QE-positive to worries about too much easing and its collateral effects.
Back in 2009 - when we commented on the arrival of global central planning - we warned this was coming. 6 years later, after the biggest transfer of wealth known to man with virtually no objections by those being pillaged blind, the cracks in the centrally-planned facade are finally appearing.
Additional thoughts from Gallo in the BBG TV clip below:
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Yellen is petrified.
In retrospect, I wonder if Bernanke now believes he should have started bumping up rates in 2010.
Only draconian measures are left. It is too late for any action to correct this addictive course we are on. If the Fed was a doctor they would be sued for malpractice and doing harm. Our constitution should not allow any institution with such power, especially one without true oversight and audit, to function. Shame on our Congresses, Presidents and Treasury Secretary's who allowed such a potentially dangerous force to exist and bring such harm to common citizens.
I think what the Fed is now trying to convey is that they never did have an exit plan, by design (hence Bernake's comment, "rates won't normalize in my lifetime").........however they may not get a choice at some point.
Saying "FED" and "credibility" in the same sentence is just plain wrong.
Capitulation, bitchez!
The only credibility they ever cared about was with their fellow tribesman. All other credibility could be manufactured through their total control of the mainstream media and buying off Zio-whore politicians - you know, like the pathetic whores pandering to the Jews at the republican debate. Thanks Ann Coulter for pointing that out to mainstream sheeple AmeriKa.
The Fed never had an exit plan, and by the looks of it they may get off the hook easy.
Never before has there been competition for fiat, now its time for plan B (bitcoin).
http://shitco.in/2015/09/17/bitcoins-role-during-the-upcoming-financial-...
The Fed choosing to not raise rates means that they have decided to save the market over saving the currency. It is now going to be nearly impossible for them to stave off the speculative attack.
The Fed has always had an exit plan. It's to make sure wealth "exits" from the people, especially the middle class, to the elites. The New Feudal World Order has always been the plan. It's obvious they are deliberately blowing the biggest financial bubble the world has ever known and will eventually pop it to enslave everyone. The stupid masses will gladly sell out their future, their children's futue, and their grandchildren's future to just keep the govt. freebies flowing. This is ALL by design. The bond market is dead. Home owners are being turned into renters. Savings are being liquidated as interest rates are going negative. When this fucker crashes, stock, pensions, and retirement funds will implode. The masses will clamor for any type of security for the future, and that's when the govt, with their banker overlords will unleash MyRA or somethink like it. Essentially Retirement 0zer0care. A permanent world Serf class will result, and it will be the stupid people that actually will be the ones demanding it.
The constitution hasn't been a factor for some time. They will use brute force and fear going forward.
In answer to your question: "if Bernanke now believes he should have started bumping up rates in 2010 ..."
I respond: Bernanke is rich and getting richer and will never regret anything.
Yellen petrified? Nah. Clearly she is just a talking head with no input into what she actually will get up and say.
Ever wonder why she and Mary Jo White (SEC) are in their respective positions? I think it is because they look disarmingly like daft grandmothers. Then, when they get up and read the script, no matter how stupid or non-sensical it is, no one has the courage to call them on it. All part of the plan.
Crashing?
It crashed a long time ago. Unless Kabuki is valid for you?
Six fingers?! I knew that bastard was a nephilim!
They, the Reptiles Live!
I will go up to the six-fingered man and say, "Hello. My name is Inigo Montoya. You killed my monetary system. Prepare to die."
https://www.youtube.com/watch?v=ElVzs0lEULs
Sixfinger, Sixfinger, man alive!
How did I ever get along with five?
wtf does he have 6 or is this altered?
All the better to fist you/us with!
That was just an ingested baby part poking out.
dollar devaluation cures everything.
Yeah - a 'Scheisse' dollar as 'ole Jim Willie puts it, concurrent with $10k+/oz. gold price could work. Why, I think even that wily agent/asset, Jim Rickards suggested something similar a few years back... But that won't happen until a crisis of confidence forces their hand, well past the point of hiking rates past 20% even.
Credibility? come on as if ever...
What's changed is that now the Bankster 3%ers are admitting it openly. It used to just be tinfoil hat fringes of Wall Street who would say that, and they traditionally and suspiciously never included in such surveys anyway.
Another chart showing 1971 as the start point...
I don't think the Fed's credibility will crash until our currency or our entire economy collapses, only then will the average Joe find out what the Fed even is. Everyone else already knows that they have no credibility and are a giant Zionist trojan horse. I am not sure about the East but in the West there is a inherited hatred of bankers, they know longer understand why but that fire could be flamed pretty quickly with some suffering and a small amount of factual information.
Israel is a British creation. The Balfor Declaration.
http://www.zerohedge.com/news/2015-09-07/bed-despotic-house-saud#comment...
1. The Federal Reserve has no Constitutional authority relative to the original, legitimate Constitution or even the shadow corporate government.
2. Other entities such as China and Russia are clearly circling the wagons to not only damage the Petrodollar but eliminate counterfeit funny money such as the FRN debt instruments printed by the Fed.
2. The United States corporation is bankrupt and merely kicking the can until the big reset and asset backed currencies.
There's three reasons to worry if your only strategy is "Yellen got my back".
If ALL of the money printing fluff was sucked back out how many people would stay long equities, commods, PMs, and real estate?
If they changed the current regime to a sane monetary strategy, something like Ike's balanced budget, not only would it expose that policies of the last 50 years have hollowed out the entire US business and industrial sector, but the military industrial complex would have to be downsized to a quarter of current pentagon budgets. 90% of government outlays would be dedicated to means tested assistance programs (SS, Medicare/Medicaid/unemployment). Consequently, the blame would be so easy to pin on the real perpetrators a walmartian could do it.
No, they will send the dollar into a hyperinflationary spiral because they can obfuscate the criminals to a greater degree, then blame Russia, North Korea and China for the implosion as ridiculous as that sounds. That still won't save them though. The next 10 years will likely be very bloody, brutish and nasty. You couldn't pay me enough to live anywhere near DC or NYC.
They'll try to redirect the blame to an exogenous group or group of factors, then they'll drop the curtains hiding the totalitarian state for all to see. They will resort to fear, then they will start a war.
If they follow that recipe, they will buy some more time, but they will also be doubly fucked. Everybody will be after them.
It is wise now to go into high yielding high risk REITS. It's the last refuge and they are about to explode to the upside.
impossible to lose something you never had
Are criminal mega banker losing respect? I once actually believe in smart people on wall street helping companies grow and growing prople's investments. Now I know they are a bunch of crooks rigging everything they touch and stealing as much as fast as possible....then when it goes wrong...collect $20 Trillion and go back to "GO" I actually know lots of very good people that work there...but the top leaders are veritable criminals at this point. We as well elect the people that do nothing to shut it down. Obama was going to bring change from Chicago to Washington and he did...now Washington is fully as bad as Chicago! The crop of cronies there are now the worst in history
This is why Hyperinflation - loss of currency confidence, is the end-game. Once confidence really starts to slide in earnest, it's just a matter of time.
Yellen's discussion about how they aren't increasing the wealth gap is complete bullshit and they all fucking know it. If they keep pushing the current policy to it's logical end-point, all of the FED leaders, treasury and banking execs are going to be getting thrown off of buildings by the masses. I hope they change course for their own sakes. But it would be kind of fun to watch a modern day Bastille day.
I agree and see the mordern day Bastile materializing already. So many are already "not playing" the Fed's game (at both extremes of the wealth scale) and the simple fact is that the MATH and the LIABILITIES are what they are.
The middle, and the supply lines are not going to hold much longer.
First you need a league of extraordinary men, men of discipline, like masons, free masons, illuninati, hashassins, Knights of Malta, Teutonic Knights, Knights of the Round Table, Knights Templar, Skull & Bones, Secret Ivy League Societies, Chamber of Commerce, PNAC, Neo-Cons, Pullman Foundation, Jesuit Order, Papal Order, SPLC, a Council of Former US Generals or Admirals, a Council of Former US Presidents and Vice Presidents, a Council of Former US Congressmen... Okay that last part made me throw up a little.
Ladies and Gentlemen, with all of these great groups it is clear no one cares for the world or for the USA.
The USA is dead. Thanks for your patriotism and interest in National Defense.
FUCK THE FED
According to the chart, the chump level is still 97%
"Why The Fed's Credibility Is Crashing"
Credibility with whom?
They have never ever had any as far as I am concerned. It can't be with banksters, they are them. The general public?
Nah, most would not even know who or what they are!
The un-fed should be audited, and shuttered, Congesss can do it, but they will not.
So we are screwed.
Why yes, just a bunch of standup guys, just ask Brooksley Borne, right Mr. 5 finger discount aka (Mr. Bubble)?. Your Disgusting.
s/
here is the real problem. as zirp causes market distortions via leverage over an extended time pension funds and other buy and hold institutions overpay for securities. as this continues it will eventually force the fed to buy worthless securities to prevent widespread bankruptcies. they have effectively transferred the rot from worthless corporations and hedge funds onto the public balance sheet and rewarded the maggots at the expense of the honest. this condition will continue until the usa's festering rot becomes worse than china and japan combined.
Suurrre......,the fed is going to hike rates in March 2016 during an election year. Yeah right.
this is how they got their start https://www.youtube.com/watch?v=pkYNBwCEeH4
The FED can raise rates after Bernanke dies.
Yeah, the USA has become the UK, Japan, and India.
But don't look to the FED or Bloomberg to help create 30 Million good paying jobs for our poor or middle class.
6 years or 16 years of low rates doesn't realize the changes from job cuts, imported goods, and outsourcing producing Nabobs, Trading Giants with no Patriotism.
- "2.3 million answer Indian state's post for 368 menial jobs"
"LUCKNOW, India (AP) -- When a northern Indian state announced a few hundred job openings for low-level office workers who run errands and make tea, the response was staggering.
About 2.3 million people applied for the 368 jobs with the government of Uttar Pradesh. Hundreds of candidates with doctorates and other advanced degrees applied for the jobs that pay about 16,000 rupees ($240) a month and require a fifth-grade education."
http://news.goldseek.com/GoldSeek/1442494200.php
Try making up for a past mistake and make another? That’s playing from behind, if you will, and it’s not out of the question if you know the Fed’s history:
1. Not a single post-war recession has been predicted by the Fed a year in advance, according to former U.S. Treasury Secretary Lawrence Summers; and
2. Neither of the last three recessions were recognized until they were already under way.
Incompetent or ulterior motives for policy?
Regardless, here we are with expectations ramped up for a rate hike, as the rest of the world is easing.
What’s notable for investors is that since the 2008 crash, we have not been able to achieve new market highs without central bank stimulus. Full stop.
But it’s only a quarter point…
According to a study released by McKinsey Global Institute in February of this year, global debt has increased by $57 trillion USD since 2008. With such an enormous amount liquidity in the system (M1 money supply near lifetime highs) financial markets are increasingly becoming nothing more than a currency game; and the currency game is a relative one. I print, you print, they print, but who’s printing more and where is capital flowing in and out of? Within this context, a quarter-point rate hike would be much more than simply symbolic.
As we have seen since late 2012, the rise in the U.S. dollar has had major implications on global markets, whether it be currencies, commodities or interest rates. A rate hike would equate to further USD strength and will accelerate the deflationary spiral we have witnessed over the past few years. Raising rates into a slowdown could also place the U.S. firmly on a path to recession in 2016.
Conversely, no rate increase does not meet the expectations set by the Fed and will re-inflate commodities in the immediate term. Arguably, it pulls forward the possibility of QE4 as well.
So it seems the Fed finds itself in a self-imposed conundrum here: make a policy error and raise into a slowdown, don’t raise and openly recognize growth is slowing. Which brings me back to my previous point: since 2008, no new market highs have been achieved without central bank stimulus.
As always, government remains the No. 1 risk to financial markets, and I will change my views as the facts change.
“The Federal Reserve is not currently forecasting a recession.” – Ben Bernanke (January 2008)
Everything in the Fed's "toolbox" is old and rusty. And I'm not pointing fingers, Janet.
The only thing left in Janet's toolbox is a purple vibrator and even it has dead batteries.
Fate the Magnificent
"Push the Button, Max"
103% say f the fed
It will take a huge effort to fix this once it breaks. There will be negative interest rates. Then QE4. Then a money drop. This will not be enough and Congress will finally have to act and create a massive stimulus project that will eventually add trillions more to our deficit and fill the pockets of plenty of corrupt politicians and thier friends. This will tide over the beast for 7-10 years ultimately creating a bubble in whatever the beneficiary of the stimulus is.
I don't WANT the Fed able to "react to the next shock"!!! They got us into the mess in the first place.
First post, test.
Who am I? A guy who works long hours, gets low pay, and is not in the stuck-market. I'm just trying to learn and hope to see a few tyrants faceplant in my lifetime.
Thank you.
Confidence game, all it is all it ever was.
That six finger is photo shop
Yeah. Everybody knows he has seven.
The Fed has credibility???
Yes the Fed still does have credibility. There is a lot of people out there who still believe ZIRP and QEs will be temporary. Yes even with 6 years of ZIRP, there is people still believe in the Fed, but as time goes on with ZIRP and more QEs, they'll realize what the US economy has become, which is a economy that marginal. True a lot of asian countries like China created a lot of debt. The amount of global debt has exploded during the crisis, but what's better, savings and investment, or a debtor economy that runs on consumption and trade deficits. Emerging markets have more potential in 5 year spans. The US I see was being stuck at ZIRP for many years to come until a depression occurs, because this is what ZIRP is suppose to prevent, but it simply amplifies the problems that created the financial crisis in the first place. The Fed is committed to ZIRP.
These two in the video seem to think that the Fed should raise rates near term, or March 2016 to prevent a major recession, sure they may be right the Fed should raise interest rates heroically, but fighting bubbles is long gone now. The economy is in a bubble. You don't prevent bubbles by popping bubbles. The damage is done, so the Fed will try to continue with ZIRP. Janet Yellen seems to think she can keep ZIRP forever. We shall see about that as US economy recieves a lot of investor support.
According to Bank of America Merrill Lynch:
https://app.box.com/s/2x1jqc1901tv8v00mbqnqjfbu8rrqzzp
The HY Note
Global growth concerns spread from us to Fed
A slow moving train wreck
Today’s Fed decision was the second worst outcome for risk markets, in our view. We have written on numerous occasions that if the Fed didn’t hike rates today initially markets would rally modestly before selling off. The realization that global growth concerns are not only real, but very dangerous right now should cause a risk off environment. And with no room to cut rates, we question the Fed’s ability to manage any further slowdown through what would have to be QE4. However, we can’t see how additional quantitative easing will help, as the goals of QE have already played out: the banking system has recovered, rates are low, investors have driven debt issuance and asset prices to uncomfortable levels, and the housing market has recovered enough to not be a concern.
Furthermore, lower rates don’t help high yield at this point. Whether the 10y is at 2.20% or 2.0%, does the asset class really look all that more compelling? Not in the slightest. In fact, outside of hiking while sounding very hawkish, not hiking and sounding very dovish while expressing concern about the global economy may be the worst thing that could have happened today.
We have been saying for months that the global economy is weak and the Fed’s dovish disposition today only bolsters our view. Europe is about to enter QE2 as inflation and growth remains poor. Japan and Brazil were just downgraded. Commodities remain under pressure and we think, at some point, the narrative could turn from a supply driven story to a demand driven one. Domestically it becomes harder to argue that a strong dollar and the lack of inflation can be viewed as transitory and this headwind is continuing to hurt high yield corporates. Manufacturing is uneven, consumer spending hasn’t improved in a year, and 2014 real median income was down 6.5% versus 8 years ago (and down 7.2% from the 1999 level). Although auto sales remain strong, we would expect as much given low gas prices, an aging fleet and the fact that auto loans are one of the few places in the economy where it’s easy to obtain credit.
Additionally, high yield corporate earnings remain incredibly weak, with yoy earnings growth negative for the first time since the recession (even ex: commodities EBITDA growth is only slightly positive). Leverage is at all-time highs (again, even ex- commodities) and the High Yield index is more globally exposed than it has ever been (35% of the market generates 45% of its revenue from outside of the United States, and that doesn’t include Energy, which is globally exposed despite not realizing significant direct sales abroad).
Not only are earnings weak, but there has been next to no capex investment, debt issuance has been massive, and buybacks and dividends have driven equity valuations as CEOs and CFOs, afraid to invest in organic growth, have chosen to buy growth instead. And as a result, recovery rates are 10-15ppt below historical norms and defaults and downgrades are creeping into the market. Although we understand many will say its just commodities, is it really? What started as coal weakness 18 months ago became coal and energy weakness. But it wasn’t really just the commodity sectors, as retail was also already weak. Now it’s the commodity sectors, retail and wireline (but definitely not all of telecom). The situation almost seems unbelieveable, as everything that seems to go wrong is explained as being isolated (AMD, well, of course semiconductors are in a secular decline) and treated as a surprise (Sprint).
In our view, the makings are there for a risk off environment for some time to come. For non-commodity spreads to be 400bp tighter than in 2011 makes little sense to us. Replace Greece for a much bigger problem: China. Replace Washington dysfunction and debt downgrade with uncertainty about monetary policy and EM weakness (though we may see Washington dysfunction very soon between this fall’s budget talks and the presidential race looming). Replace US QE with European QE. Additionally, replace strong earnings growth and margin expansion in 2011 with no earnings growth, a stronger dollar, and higher leverage today. Replace decent liquidity back then with poor liquidity now. And replace the fears of a double dip recession with the potential for fears of a global recession. Though this last point has yet to play out, we think it’s only a matter of time before investors begin to feel as bearish as we do.
The Fed had an opportunity today to hike rates and begin to build a cushion should the global slowdown be so severe it can’t be ignored. Instead, they chose to wait. In our view, this has left them in a predicament as now the rumbles of never being able to increase rates will become even more exaggerated, and when they ultimately do, we think it will be more painful than if they had gone today. We expect as a consequence for there to be more market volatility, more uncertainty around the Fed’s motives and belief in the economy, and therefore more downside risk. Most importantly, however, the acknowledgment of weakness only bolsters our view that we are in the midst of the beginning of the end of this credit cycle, and we warn investors to tread carefully not try to be a hero into year end.
Now is the time that investors need to be managing risk rather than looking for alpha. 1 or 2 names will destroy the performance for what has otherwise been a good set of holdings. Remember what many have forgotten over the last 7 years, credit returns are skewed to the downside. The best case scenario is to earn coupon and the ultimate payment of principle. The worst case scenario is 40, 50, 60 or more points of loss.
We’re in the midst of watching a slow-moving train wreck, and in our view the Fed confirmed as much today.