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The Fed's "Alarm Clock" Went Off 6 Hours Too Late: What This Means For Stocks And Bonds
Not only did the Fed miss its window of opportunity to hike rates, but it did so at the worst possible time, launching the first tightening cycle in 11 years just as US manufacturing entered its first recession since the financial crisis, just as the credit cycle entered its slowdown phase, and just as the default cycle is picking up, first in the energy sector one year ago and now spreading to all other industries. In fact, if the Fed had an alarm clock set to ring at 2:30pm, it hit snooze so many times, the alarm went off at 8pm according to Citigroup, "or possibly even later." But as the chart below shows, while the Fed's credibility will be crushed as a result, the Fed's woeful alarm timing will have dire consequences for both equity and credit returns.
Here is a different perspective on the $4.5 trillion question: where in the credit cycle is the US economy, courtesy of Citigroup.
Typically rate rises start when profits are growing faster than debt and when companies are still deleveraging. This is around “half-past two” on our leverage clock2: 1994 and 2004 both fit this pattern. Now, with companies having been leveraging up for the past four years, and net debt/EBITDA in both Europe and especially the US at its highest non-recessionary level ever, it feels more like eight o’clock, or possibly even later (Figure 2).
What does being 6 hours late to your own rate hike party mean? The two downward facing red arrows in the left chart explain everything.
The rest follows logically, with Citi admitting that as of this moment "we have had all the improvement in growth and in profits we are likely to get." However, the best part is when Citi's Matt King, head of credit strategy, openly mocks "equity investors."
This is why we think the historical pattern of “credit spreads do well when central raise rates” is a poor guide in present circumstances. Credit spreads do well when the economy is recovering, and when profits are improving. This time around, it seems likely we have had all the improvement in growth and in profits we are likely to get. Indeed, the decline in the past few quarters’ EBITDA, and now in the last quarter’s US EPS, makes us feel dangerously close to the normal tipping point at which even equity investors realize that leveraging up is unsustainable, and credit and equities both sell off in a mutually reinforcing spiral. With industrial production growth negative, you could argue that the global manufacturing sector looks like it is in recession already (Figure 3).
And since Citi is taking the hammer to even the faintest of silver linings, there goes the "service and non-energy recovery" one which as the note clearly explains has led to deep internal fractures between the various strategist groups at the bailed out bank.
The bull case is that services are doing better, and that that worry can be confined to energy, basic industry, and emerging markets. It is also a much greater concern in the US than in Europe, where the index composition is very different, and the recovery is at a much earlier stage. This underlies part of our preference for € over $ credit, and indeed our credit and economic house forecasts generally.
But there is at least a real risk – visible in our commentary, but not in the headline forecasts – that problems spread. The profit downturn is not just in the energy sector. The equity rally has become increasingly narrow: as our equity strategists like to say, “Bull markets narrow; bear markets broaden.” And the fact that credit analysts everywhere are on the lookout for “the next VW”, “the next Glencore”, “the next Abengoa” may through the magic of investor psychology actually contribute to their creation.
The good news for the Fed is that not only can it lower rates now, having shown it can heroically raise them to 0.25% even as its balance sheet remains at $4.5 trillion, it could even push them negative around the time it announces that QE4 (and perhaps 5) will target the $2 trillion or so in junk bonds.
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The entire charade may be brought down by Russia/China at anytime, if needed.
Fed didn't remove any liquidity so the "rate hike" so far is complete bullshit.
A bunch of heavy hitting donors mentioned that they didn't have enough wealth yet and needed another round of asset crushing that takes what little the middle class has left. Between that and letting foreigners soak up all of our hard assets at low cost, we should be setting up for a second Revolution within 10 years.
I put this on the Secular Investor’s thread, but it is apropos here as well…
The Fed did not reduce reserves at all. It initiated reverse repo’s which look to me like a street corner shell game.
More banker skullduggery... not only is the whole world awash in FRN’s, but the Fed might not even be able to unload even a part of its mountain of toxic, worthless “reserves”.. so it resorts to shell games.
They want those FRN’s back out there in attempt to boost inflation.
That's another feather in the cap for gold which is neither a Ponzi bankers “asset” or “liability” (except in India where they are failing to make it both).
And another tidbit to bolster Mike Maloney’s contention of gold to the moon...
Notoriously misleading and unreliable Chinese reporting.. gold stockpile very likely to dramatically exceed official amount.. possibly even enough to gold back the yuan.
If gold goes to the moon, it will have proved to be a hedge that allows China to pretty much write off their western currency reserves.
And hopefully so! I'd much rather take my chances than year after year of sinking intot he abyss!
++++
Yours has fairly well been my position too, and I think it goes a long way to explaining the otherwise irrational behaviour of U.S. foreign policy in certain strategic 'hot spots' around the globe. That said, the economic 'knee-capping' option is essentially the equivalent of a 'first-strike', and given the seriousness, both Russia & China I believe will only select said option if it looks as though a permanent 'boxing-in' event/s are about to take place - i.e., Ukraine, Baltic states, and the South/East China seas. I believe both major Eastern power are content to select the 'New Silk Road' option first, and simply let the West strangle itself, but as we both know, the Neo-Con policy agenda will have no part of anyone separating themselves from the dying grip of Western hegemony.
Very unfortunate.
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Its almost like they are trying to bring it all down.
Too much stupidity to attribute it to stupidity.
you have to be careful when they start with
all this time warp stuff, the next thing you
know you're pouring yourself bourbon at
10 am..
The whole what used to be system has been raped,robbed,screwed,twisted,stolen from,cheated,distroyed, etc...
All by a small group of private Banksters, endorsed by Con-gress.
Yet the dim-witted voters keep right on voting for them, to continue said ass raping!
Free of prosecution.
See Some Bankers Say Some Prison
Better late than never is common spew. Not in this instance ducky!
If you have not gotten your money out of this stock market yet you are really a dumbass !!
Debt has to keep increasing faster than GDP to maintain global industrial society. That may explain the Fed's delay in part. And this rate increase thing is temporary, very temporary.
Nobody seems to notice that NOBODY except CBs are now buying US treasury debt.
Don't you think this might be a factor?
https://thinkpatriot.wordpress.com/2015/10/27/ignoring-the-absolutely-in...
https://thinkpatriot.wordpress.com/2015/11/10/a-measure-of-propagandas-p...
I suspect either aliens or canadians are behind it.
Pizza hut Drivers have PhD's so I guess we shouldn't be too dissapointed. Raising rates years ago while also doing QE would have made too much sense. Maybe equity returns would have been less but rates could be at least 2-3% now and there would be no need to blow the thing up now.
The U.S. has $164 TRILLION FIAT debt dollars in DEBT today! We are all toast! This rate increase was 100% all PSYOPS!
WWW.USDEBTCLOCK.ORG US GOV. UNFUNDED LIABILITIES $100 TRILLION + US TOTAL DEBT $64 TRILLION, IE EVERYTHING EXCEPT UNFUNDED LIABILITIES. ADD THEM BOTH UP $164 TRILLION OF DEBT THAT IS NEVER, EVER, EVER, EVER EXPLAINED TO THE DUMB AZZ AMERICAN PEOPLE!
guess thats upsetting to you.
seems you are in the anger phase of grieving. that's where i was 3 years ago. it will pass, hold tight to your friends / family.
The Fed and Keynesian economics are a failed economic hypothesis. CBs were created only the provide the State with unlimited dollars for (also) failed socialism policies. The economic system is unsustainable and will collapse upon itself, and sooner than we think. The main problem is - and has been - too much (unproductive) debt. Debt matters. No really. “Late” or “early”, a quarter point rate hike at this point is completely irrelevant, just like the Fed and all the other CBs, and serve only to enrich their masters.
“You cannot spend your way out of recession or borrow your way out of debt.” - Daniel Hannan, Member of the European Parliament
"There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved." - Ludwig von Mises
“I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the Bank. ... You are a den of vipers and thieves.” - Andrew Jackson, 1834, on closing the Second Bank of the United States; (unabridged form, extended citation)
http://mogamboguru.com/Writings/2015/MGEN_011515.html
In Case Anybody Asks, We're Freaking Doomed
January 15, 2015 ?By: The Mogambo Guru
So hold onto your hats, because here it is. The fabulous and wonderful thing to do is the same thing that other people have always done to successfully escape the economic calamity, and have always done over the last 2,500 unbroken years full of dirtball governments borrowing themselves into bankruptcy: They bought gold and silver, the ultimate money and asset.
http://bawerk.net/2015/12/11/how-peak-debt-constrain-the-fed-from-moving...
How Peak Debt Constrain the Fed from Moving Rates Higher
by Eugen von Böhm-Bawerkon December 11, 2015
Since most added debt in the US economy, or the world for that matter, is consumptive in nature it adds nothing to the capital base and must therefore be repaid from legacy asset which were once put into productive usage. However, as the non-productive share increases relatively to the productive part, the system naturally comes under strain and will eventually reach debt saturation through capital consumption.
This process can be seen through different metrics, such as the fact that it takes ever more debt to “create” an extra unit of GDP, or the falling velocity of money; as more money get diverted toward unproductive debt servicing, less will be available for productive investments. That in turn, duly lowers GDP growth. Stated differently, lower velocity of money suggest the economy has reached debt saturation. If that’s the case, monetary policy becomes impotent. True; central bank balance sheet expansion may create the illusion that it isn’t, but that’s only because it helps to maintain funding for unproductive debt, which otherwise would be liquidated. This can only go on for so long though as avoiding consequences of reality is never a long term solution.
The fact that US money velocity has dropped to 1930s depression levels is indicative of how skewed, or mal-invested, the US capital structure has become; only liquidation of debt that cannot fund itself will cure this.
Several central banks across the globe have tried to escape from this predicament by raising rates without prior debt liquidation. They all had to reverse course as debt saturated economies cannot cope with higher rates without a proper clean up. Refusing to acknowledge, or failing to grasp, that unproductive debt cannot be funded forever, higher interest rates quickly diverted too much resources away from sustainable economic activity, putting pressure on growth and thus forcing central banks to cut rates soon after they tried to raise them. When the pool of real savings are not there to support the economic structure, all monetary policy can do is to temporary sustain the unsustainable. However, as times goes by, and capital consumption continues, economic stagnation occurs even at ZIRP, NIRP and QE as all these tools can do is to redistribute capital.
http://www.peakprosperity.com/podcast/86788/lacy-hunt-world-economys-ter...
Lacy Hunt: The World Economy's Terminal Case of Debt Sclerosis
In danger of dying from too much debt
by Adam Taggart
Sunday, August 24, 2014, 11:54 AM
Dr. Lacy Hunt: That's a very well taken point. We're taking on some productive type of debt. We're investing in oil and gas exploration, we have some investment in plant equipment, new technologies; we have some infrastructure expenditures that we're financing with debt. The problem is that the consumptive type debt, the speculative type debt, is three or four times greater than the debt that we know will generate a cash stream to repay principal and interest. The difficulty that we have here is exactly the problem that occurred during the 1920s. We lived far beyond our means; we took on a lot of debt. It was the extreme over-indebtedness which set up the 1930s. It was the extreme over-indebtedness of Japan during the 1970s and 1980s that led to their panic year in 1989. It's extreme over-indebtedness in the U.S. in the first part of this century, and in Europe as well, that set up their difficulties. Once you go through this period of over accumulation of debt or under saving, you can look at it in either terms, then the negative outlook is basically baked in the cake. That's really where we are and we don't have a will to get out of it. We have to rely on tough fiscal policy decisions and strong political leadership, and that's just not an option in the U.S., Japan, Europe or anywhere.
We cannot rely on more credit, more debt to try to restore the economy. The policy makers here are in a bit of a dilemma. We can't move forward on fiscal policy, the decisions are too tough, too onerous for too many people. No one's willing to have shared sacrifice. So we rely on monetary policy with all of its flaws and its negative consequences. And so the economy, in a very important structural sense, is fundamentally weaker now than we were a decade ago, or two decades ago, or three decades ago.
Well I think the evidence is that the quantitative easing failed, both one, two and three. The ten and 30 year yields were higher when the phase down of quantitative three was announced than before quantitative one began. And the academic studies, which are impressive, indicate that the large scale asset purchases actually had a counterproductive effect.
Here's the difficulty, and I think it goes back to over reliance on Keynesian economics. Keynes, before he died in 1946, developed a concept of an underemployment equilibrium in which the U.S. economy would remain mired with excessive unemployment and this was baked into the cake. Unless the government ran large deficits when World War II ended, and that was the only way out. Now remember that Keynes' interpretation of the 1930s was that there was insufficiency of aggregate demand; there was not enough of consumer spending. I think that Keynes was correct in arguing that the Great Depression was due to an insufficiency of demand. But where Keynes failed is that he did not understand that the insufficiency of demand in the 1930s was baked in the cake once we had taken on the excessive debt of the 1920s. What the modern [neo] Keynesians do not understand is that the underperformance that we are experiencing today was baked into the cake by the big run-up in debt in the 20 years leading up to the 2008, possibly the 30 years leading up to 2008.
…we have not corrected the balance sheet imbalances; and as long as they persist, we are stuck in this situation.
The vast majority of the American public, on the left and many on the right will never understand how screwed this country is financially.
6th of January is the release of the December FOMC minutes....A lot will happen before then.
Tyler,
When is this rate cut into NIRP expected?
CC
The Fed, and the damed if you do, and the damned if you don`t crowd.....
Your stupid if you don`t raise rates this time, because you will lose credibility.....
Your stupid for raising rates now, you have lost your credibility......
I`m incredulous........