Monetary Policy

"Yellen is doing this with the blessing of the President because he doesn’t want to have a recession - or worse- in his administration. I’m a developer, I’m not complaining from my own standpoint, I’m just saying that at some point, you have to raise interest rates, you pay nothing. They are trying to put the recession - and it could be a beauty - into the next administration."

Bernie Sanders’s entry into the presidential race has sparked a nationwide conversation about socialism and its potential to remedy the real and perceived pathologies suffered by Americans. The underlying problem with socialists like Bernie Sanders is that they do not actually believe (or understand) in economics at all. As Ludwig von Mises himself has pointed out, socialism is not an economic theory — it is a theory of redistribution.

Capitalism isn’t – wasn’t – the problem. The culprit instead was unsound finance and deeply flawed monetary management. In short, Capitalism cannot function effectively within a backdrop of unfettered cheap finance. Things appear miraculous during the boom, and then the bust discombobulates. Contemporary central bank rate administration essentially abandoned the self-adjusting and regulating market system for determining the price of finance – so fundamental to Capitalism.

"[Putin] hopes that when its ally Iran re-enters the global oil and gas market, Russia will somehow share in the profits, perhaps through new pipelines across Syria. He also wants to stop the Saudis from establishing export routes in Syria. Now that Russian energy supremacy in Europe also is at stake, Putin's determination to resolve the Syrian conflict on his terms can only grow."

What is surprising about Japan is that unlike most of Europe, which has opted to adopt a Negative Interest Rate Policy, or NIRP,  is that Japan whose monetary policy became a basket case years ago - Japan is currently on QE10 - it still hasn't thrown in the "all-in" towel and announced negative rates. This may have officially changed yesterday, when in an auction that flew deep under the radar, Japan sold 1 Year (not 3 Month) Bills at the most negative yield in history, or -0.0418%, nearly doubly more negative the -0.0252% yield on the September 16 auction.

The 2007-2008 financial crash was not a black swan. That is a collective lie propagated by policy makers so they don’t cry themselves to sleep at night. Many different people predicted and profited from the 2008 crisis. It was about the fear of failing banks and crashing markets... but the true horror was the impending collapse of the entire fiat money system that never came to be. That was the true black swan. 

"Since Washington doesn't understand what went wrong in 2007 and 2008, so the Fed, the White House and Congress are recreating the very same conditions for another financial bubble. If it pops, we could replay the same devastating effects as occurred during the first bubble in 1999 and 2000.”

Bottom line: despite being two months backward looking, today's JOLTS report provide the latest batch of weak news coming from the US labor market, which likely explains the ongoing levitation in stocks which have officially given up on the "rate hike is good for stocks" narrative, and fallen back to what has worked for the past 7 years, namely terrible economic news being great news for risk assets.

In the absence of any key economic developments in the Asian trading session, Asian stocks traded mostly under the influence of the late, pre-opex US ramp momentum courtesy of another day of ugly economic data in the US (bad econ news is good news for liquidity addicts), closing solidly in the green across the board, led by China (+1.6%) and Japan (+1.1%) thanks in no small part to the latest tumble in the Yen carry trade, which mirrored a bout of USD overnight weakness. And since a major part of the risk on move yesterday was due to Ewald Nowotny's comments welcoming more QE, news from Eurostat that Eurozone CPI in September dropped -0.1% confirming Europe's deflation continues, should only be greeted with even more buying as it suggests further easing by the ECB is inevitable.

In the beginning of 2008, a US dollar could buy only €0.65 euros. Today, on average through 2015, one US dollar can buy €0.91 euros. With European demographics getting more challenging by the year, and deflation stalking the eurozone, problems don’t seem to be going away for the euro. The crises in Ukraine and Greece continue on without much resolved, and the ECB is continuing on with its QE program. Meanwhile, the Refugee Crisis has created another political distraction that has its own challenges for the people of Europe. Will the shrinking euro be able to revert its course, or is Europe doomed to become the next Japan?

If you needed further evidence that global growth and trade are in a veritable tailspin, look no further than the latest trade data from India, which shows that both exports and imports fell by 25% in September. That's ok though, we're sure it's nothing another rate cut can't fix...

"In many ways, EM is showing similar symptoms to its DM counterparts of weak economic performance and over- reliance on credit. The outcome is what we call the three EM debacles: de-leveraging, depreciation (or devaluation even de-pegging) and downgrades of credit ratings."

One of the main reasons why the BLS has been massively overstimating job creation ever since great financial crisis, is due to the well-known birth-death adjustment, aka the CES Net Birth/Death Model, which quantitatively is shown on the chart below, has resulted in the "addition" of some 5.3 million jobs, that don't actually exist, but are merely modelled by the BLS which continues to assume the same new business creation/destruction dynamics that existed before the crisis. The is a big problem with this fundamental assumption: it is dead wrong. Here's why...

Central banks are fearful and unwilling to normalize but artificially high valuations across asset classes cannot be sustained indefinitely absent fundamental global growth. Central banks are in a prison of their own design and we are trapped with them. The next great crash will occur when we collectively realize that the institutions that we trusted to remove risk are actually the source of it. The truth is that global central banks cannot remove extraordinary monetary accommodation without risking a complete collapse of the system, but the longer they wait the more they risk their own credibility, and the worse that inevitable collapse will be. In the Prisoner’s Dilemma, global central banks have set up the greatest volatility trade in history.

The Federal Reserve is quickly becoming trapped by its own "data-dependent" analysis. Despite ongoing commentary of improving labor markets and economic growth, their own indicators are suggesting something very different. As we have stated previously, while the Federal Reserve may hike interest rates simply to "save face," there is indeed little real support for them doing so. Tightening monetary policy further will simply accelerate the time frame to the onset of the next recession. Of course, the Fed knows this which is why they recently floated the idea of "negative interest rates" out into the markets. In other words, they already likely realize they are screwed.