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Salient Partners Issues A "Storm Warning" For The Market
Submitted by Ben Hunt via Salient Partners' Epsilon Theory blog,
Can everyone saying “a 25 bps rate hike doesn’t change anything” or “manufacturing is a small part of the US economy today, so the ISM number doesn’t mean much” or “trade with China is only a few percent of US GDP, so their currency devaluation isn’t important” just stop?
Seriously. Can you just stop?
Maybe if you were making these statements back in the ‘80s – and by that I mean the 1880s, back when the US was effectively a huge island in the global economy – it would make some sense, but today it’s just embarrassing.
There is a Category 5 deflationary hurricane forming off the Chinese coast as Beijing accelerates the devaluation of the yuan against the dollar under the guise of “reform”. I say forming … the truth is that this deflationary storm has already laid waste to the global commodity complex, doing trillions of dollars in damage. I say forming … the truth is that this deflationary storm has driven inflation expectations down to levels last seen when the world was coming to an end in the Lehman aftermath. And now the Fed is going to tighten? Are you kidding me?
Look, I’m personally no fan of ZIRP and QE and “communication policy”, certainly not the insatiable market devourers they’ve become over the past few years. But you can’t just wish away the Brave New World of globally interlocked, policy-driven, machine-dominated capital markets in some wave of nostalgia and regret for “normalized” days. In an existential financial crisis, emergency government action always becomes permanent government policy, reshaping markets in similarly permanent ways. This was true in the 1930s and it’s true today. It’s neither good nor bad. It just IS. Did QE1 save the market? Yes. Did QE2 and QE3 and all the misbegotten QE children in Europe and Asia break the market? Yes. And in the immortal words of shopkeepers everywhere: you break it, you bought it. The Fed owns capital markets today, like it or not, and raising rates now, as opposed to a year ago when there was a glimmer of a chance to walk back the Narrative of central bank omnipotence, isn’t “brave” or “prudent” or “necessary” or any of the other laudatory adjectives you’ll hear from Fed media apologists after they raise. It’s simply buyer’s remorse. The Fed is sick and tired of owning the market, sick and tired of giving interviews to CNBC every time some jobs report hits the wires, sick and tired of this Frankenstein’s monster called communication policy. So they’re going to raise rates, declare victory, and hope that things go their way.
Am I annoyed by China’s currency actions and their adept use of communication policy to shape the Narrative around devaluation? Not at all. This is exactly what China must do to bolster economic growth while maintaining the pleasant diplomatic fiction that they’re not a command economy. What annoys me is the Fed’s apparent hell-bent intention to force a low-level currency war with China AND whack our own manufacturing and industrial base on the kneecaps with a crowbar, just so they can get out of the communication policy corner they’ve painted themselves into.
Three or four years ago, one of THE dominant market narratives, particularly in the value investment crowd, was the “renaissance of American manufacturing”. Not only was the manufacturing sector going to be the engine of job growth in this country (remember “good jobs with good wages”? me, neither), but this was going to be the engine of economic growth, period (remember the National Export Initiative and “doubling exports in five years”? me, neither). Now we are told that we’re just old fogies to worry about a contracting US manufacturing sector. Now we are told that a global recession in the industrial and commodity complex is well contained here in our vibrant services-led economy. Right. You want some fries with that?
So what’s to be done? You do what you always do in a deflationary, risk-off world – you buy long-dated US Treasuries. Stocks down, USTs up. Of course, if you think that the yield curve is going to steepen after the Fed does whatever it’s going to do this week … you know, because the Fed rate hike is obviously an all-clear sign that we have a robust self-sustaining economic recovery and we’re off to the races … then you want to do the exact opposite, which is to buy stocks and sell the 10-year UST. Yep, time to load up on some bank stocks if that’s your view.
What else can you do? You can read the Epsilon Theory note “I Know It Was You, Fredo” and consider ways to make your portfolio more convex, i.e., more resilient and responsive to both upside and downside surprises in these policy-driven markets. The big institutional allocators use derivative portfolio overlays to inject convexity into their portfolio, and that’s all well and good. But there are steps the rest of us can take, whether that’s adopting strategies that can short markets and asset classes (like some tactical strategies and most trend-following strategies) or whether that’s investing in niche companies and niche strategies that are designed to outperform in either a surprisingly deflationary or a surprisingly inflationary world. The trick really isn’t to choose this fund or that fund. The trick is to broaden your perception of portfolio outcomes so that you don’t have a misplaced faith in either the Fed or econometric models.
I suppose there’s one more thing we should all do. We should all prepare ourselves to perform some emergency surgery on the deck of whatever portfolio ship we’re sailing in 2016. Because with a Fed hike the currency wars will begin in earnest, magnifying the deflationary storm already wreaking havoc in industrials, energy, and materials. No sector or strategy is going to be immune, and we’re all going to suffer some casualties.
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25bps ain't shit.
Just said it again, Ben.
Let me say it again: THEY WILL NEVER RAISE INTEREST RATES.
+.25 tomorrow and +200 or more on the DOW..
bizzaro world..
Indeed, started at 6% before the crisis. 8 years later and we're still going downhill.
How do we solve it? By biting the bullet and going into a severe recession and sweating it out.
And that shit would take about 2 to 3 decades but I have kids and when they're adults they might have a shot at a better future.
And if we keep this shit up, we'll be in worse shit anyway without a good outlook.
We should of started bumping it up instead of QE3, but the Wall St. crowd might not of made their bonus. Of course it's all a surprise...if your a mushroom......
The problem (for Hunt) with ripping the band-aid off, having a real recession, and letting the economy restructure is kind of obvious:
Assholes like Ben Hunt running debt infested portfolios would go out of business like they should have in 2008.
Eight years of artificially low interest rates hasn't helped the US. 28+ years of artificially low interest rates hasn't helped Japan. It just allows people like Hunt to avoid the consequences of their decisions.
Please stop calling the lies "debt" -- we all know deadbeats like Krugman and Hunt are never going to pay anything back. Not now, not in 28+ years, never.
Just stop stealing from future generations Mr Hunt. Just stop.
PS -- Consumer credit card rates recently jumped from 21% to 28% (or higher). If your portfolio is so feeble and weak that 25bp would kill it, then you shouldn't be in the financial business.
25bp doesn't matter Ben. Go get a job where you actually work.
Stop complaining you moron, you can not say you're "not a fan" of zirp, but then complain about rate hikes.
USA is the cleanest dirty shirt in the shit storm, BUY BUY BUY stawks!!
Amerika, fuck yeah!!
The fix is in, and
the USA is the Mob with its hit men.
Actually, the dirtiest dirty shirt.
You know what I am "tired of" asshat? Bankers and financiers being grossly overcompensated because of the access to FREE money created out of thin fucking air with no real risk, no real work and no real collateral requirement.
Fuck these useless overpaid middlemen between the printer/computer and the producer/consumer in the real economy.
Yes, the FFR is irrelevant as we really need to execute the fucking middlemen!!!
BitCoin, Baby! Stops this shit Fiat Fiasco FLAT.
Two of my former employees went to work on crypto currencies back in 1997. One for JPM and one for GS, both guys were very good programmers.
Yeah, jump right in there.
Like any other hedge, playing in this area (and I have) implies some risk, but don't think you have a chance in hell against the big fish (especially in the absence of any real rule of law). The government controls the powergrid and the net and the courts, the primary dealers and the Fed own the government.
Good thing Trudeau is our leader up here. If anything falls apart all we need to do is to escape to Syria and come back and we will get a nice place to stay, a job, food, healthcare, and we won't have to pay for anything.
my belief is..they won't "Lift-Off"
i wish and hope they will just so i can see if all the ZH folks are right(over the Fed Experts)
there is just to much volatility going on now for them to do it(this will be their excuse)
by not doing it just prolongs this can down the road
just do it...drop that other shoe
lets gets this over with..i'm curious of the results if they did(nothing more,nothing less)
What manufacturing and industrial base is the author referring to...the one they've already shipped to China, Thailand, India and Mexico...the only thing still made here, are the mountain of lies told by the gubbermint and the media whores.
We're #1, we're #1...
Don't forget about the financial "products"...
And isn't the US still the #1 death merchant?
I got nothin' from the crystal ball. And the Magic 8 Ball says, "Ask again later."
oh nos!
"thurn und taxis uber Warning" kwatsch...
No. I am not kidding you.
Yellen is going to raise because she still "thinks" she has control over the situation, similar to the way that Bernanke was at the beginning of his term when he let Lehman fail. Just as Big Ben quickly realized after Lehman how fast the "economy" can deteriate, Yellen will learn this lesson soon enough as well..
The FED knows we are in a way to big bubble. A 0,25% hike is what they think will cause a small downward push to the markets to defalte it slowly.
If the markets go green, another rate hike is in play.
If it crashes, they'll allow it to crash untll PE's hit the 12,5 to 15 range.
They just hope that when they slow the bubble that earnings won't crater also and that's their current game I think.
I don't think they raise because they would come to the same conclusion they came to each and every time the rate issue came up during the past several years.
There is a reason they didn't raise the last time, and the time before it, and the time before that, and so on.
Why does anyone believe that they will change their tunenow. Their game has been one of jawboning for a big reason, That reason still exists.
Yesterday and today's rally might not be a relief rally but rather the news of no rate hike having been leaked to JPM and GS.
the yuan is used in more transactions than every currency except the dollar and euro(one and the same). it is still less than 4% but is growing really, really fast. while the euro is an adjunct to the dollar the yuan is a genuine competing currency. the yuan is decoupling from the dollar peg because the value of the dollar is out of whack with the shifting demand for the yuan. the dollar is currently very strong because of the seignorage advantage as the reserve currency.
the real question is what happens to the dollar as demand for it wanes? at what point does the value give way to the new dominant currency? is it a function of present demand? and/or % of forex. does a devalued dollar expose itself in the equity markets? as in btfd? or watch out below?
i wish they would hurry up with ww3 so there would be less confusion.
The yuan seems just as doomed as the dollar.
keep their end game in sight....single currency world market....it all makes perfect sence...
That's for after the big war.
They will not raise rates again until the dollar disappears and is replaced by another currency.
DOW up 500 tomorrow.
Gold up $15.
Oil up $1.25.
Then it's DOW down 2000 in January.
Now silver...
The Fed and other central banks may want to maintain CONTROL and willing to cause a painful reset in order to do it.
25 bps is a rounding error.. BUT you mix that with the defacto tightening that the Yuan devaluation has contributed and yeah... some companies are gonna shit the bed. They should have been laid to waste a while ago.
Let er rip.
Ben Hunt: "Maybe if you were making these statements back in the ‘80s – and by that I mean the 1880s, back when the US was effectively a huge island in the global economy – it would make some sense, but today it’s just embarrassing."
Maybe if you were writing your stupid comment back in the 80s, when Japan started this failed ZIRP/QE policy nonsense, it might make some sense. Back then, we didn't have 28+ years of proof that it doesn't work.
But today, its just embarrassing for any asshat who took an economics class to claim a few more months, or years, of stealing from savers to prop up zombie banks is going to work.
Just stop making an ass of yourself Ben Hunt. We tried your dumb idea for 8 years now. The Japanese have been trying it for 28+ years. It doesn't work.
It is insane to keep doing the same dumb thing and expecting a different result.
And if normalizing interest rates puts assholes like you out of business? So what? You were supposed to be out of business in 2008.
5 basis points...or 1 basis point per month for a year.
I love zero hedge, but i do get a kick out of all the complaints about easy monetary policy and yet when the fed is actually going to take minute baby steps to tighten, the complaint becomes "this isnt the time!"
Fuck it. There isnt going to be a time for Gods sake. if you believe sooner or later we are going to have to take our medicine then lets take our medicine and get the show on the road.
Aah! Just a scratch https://www.youtube.com/watch?v=zKhEw7nD9C4
Ill tell you what you need to do to become wealthy. Fuck the stock market. Become a plumber or an electrician. You jnow, those people who most in the necktie corporate casual world look down on. People who make stuff and work with their hands. They make a steady living and although might not be millionaires intwo years, many of them do very well. Besides, plumbers will be in high demands as everyone in the markets shits their pants when they find out they are actually broke. Shitting will commence. Plumbers will be called and money will be made. Real money. No shit.
The good thing about the sky, you cnat tell if ots falling or not. This seems to keep mnay of you dolts posting on here quite busy. Although, i do agree that at some point, the piper is gonna want paid, you guys freak out about every little thing that happens. If walmart put socks on sale it vecause china is printing money and we are going to be theirt wolrd status and china will rule the world. Well...i bought socks.l.l............china is still crap. Everything still traded in usd. So whats up?..
Most of you have no clue. Bit, it is fun to guess and try your take on economic spin. Devalue this, yields up on that, currency swap this....nothing you talk about creates any value. Just hot air. Sorry. But that is the only fact i see. Prove me wrong. Is there gonna be a sock sale soon?