Monetary Policy

The poor jobs report weighed on the dollar, but the greenback recovered as the session progressed.  It is not clear the jobs report was a game changer.  Stay tuned.  

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

In addition to the Fed's credibility, one other privately-controlled organization that has seen its credibility completely crushed in recent months is the Goldman economic forecasting team (if not the team that "forecasts" Fed monetary policy, simply because Goldman controls the Fed and tells it what to do; as such what Goldman "thinks" the Fed will do is usually ironclad) whose Jan Hatzius "for what it's worth" forecast above trend growth for the US economy in 2014.  So, "for what it's worth", here is Goldman jobs report post-mortem (in a parallel report Goldman just cut its Q3 GDP forecast from 2.0% to 1.9%), in which the bank admits that the report was a disaster, and that as a result "we now see action at the December meeting as a close call."

In business, the 80/20 rule states that 80% of your business will come from 20% of your customers. In an economy that is more than 2/3rds driven by consumption, such an imbalance of the "have" and "have not's" impedes real economic growth.

With China markets closed for holiday until the middle of next week, and little in terms of global macro data overnight (the only notable central banker comment overnight came from Mario Draghi who confidently proclaimed that "economic growth is returning" which on its own is bad for risk assets), it was all about the USDJPY which has seen the usual no-volume levitation overnight, dragging both the Nikkei higher with it, and US equity futures, which as of this moment were at session highs, up 7 points. The calm may be broken, though, as soon as two hours from now when the September "most important ever until the next" payrolls report is released.

How many of us are bored to tears with the Fed’s Hamlet act on raising rates, and yet have been staring at this debate for so long that we have convinced ourselves that we have a meaningful view on what will transpire, even though it’s a decision where we have zero investing edge and unknowable risk/reward odds. The hardest thing in the world for talented people is to avoid turning a low edge and odds opportunity into an unreasonably high conviction bet simply because we want it so badly and have analyzed the situation so smartly. In both poker and investing, we brutally overestimate the edge and odds associated with merely ordinary opportunities once we’ve been forced by circumstances to sit on our hands for a while. Investment discipline suffers under the weight of dullness and low conviction in at least four distinct ways here in the Golden Age of the Central Banker...

The signs of deflation are now flashing all over the globe and the possibility of an associated financial crisis is now dangerously high over the next few months. Our preferred model for how things are going to unfold follows the Ka-Poom! Theory, which states that this epic debt bubble will ultimately burst first by deflation (the "Ka!") before then exploding (the "Poom!") in hyperinflation due to additional massive money printing efforts by frightened global central bankers acting in unison. First an inwards collapse, then an outwards explosion.

"The system failed in 2008/09 and rather than allow a proper creative destruction cleansing, policy makers have been aggressively propping it up ever since.  We think the end game is that when the next global recession hits, then QE/zero rate world will be re-appraised."

But the question remains whether financial condition concern should manifest itself through unemployment and inflation dual mandate forecasts or be a separate consideration all together? To me, the danger in the latter is it turns central bankers into traders and market timers and that is something they are unlikely to have trained for

Good news! Bad news is again great for stocks, and overnight we had just the right amount of bad news from Japan, China and Europe to send stocks surging on the first day of the final quarter.

We know that the corporate credit bubble has been highly disturbed, but the action in mREIT’s these past few days more than suggests that risk perceptions systemically are being affected. That all ties back to funding considerations, as the collapse in REM may be investors selling ahead of liquidity problems that are still building and expanding. In other words, there may be a growing sense (not unlike inflation breakevens) that the corporate pricing problems are going to break out in short order beyond just junk (and beyond what already has).

With the fiscal picture looking increasingly precarious and confidence collapsing, we bring you the latest from the frontlines of the EM meltdown. In short, Brazil is falling apart at the seams. Now, who wants tickets to the 2016 Olympic Games in Rio?

"financial markets are NOT yet pricing for a recession, rather they are merely flirting with the idea. I suspect this largely reflects faith/hope in policymakers within market participants. The events of the past few weeks, both going into and after the most recent BOJ and FOMC meetings, should give those heavily invested in policymaker faith/hope a lot of food for thought...  the next Fed “put” is not likely until the S&P 500 is trading in the 1500s at least (so more likely to be a Q1 2016 item rather than Q4 2015); and in terms of what the Fed could do, clearly QE4 has to be in the Fed’s toolkit"

When a lot of Keynesian cowbell doesn't work, the only cure for the deflationary fever must be more Keynesian cowbell which explains why Japan is about to double down on Abenomics, and why the ECB will almost invariably expand PSPP now that the deflationary boogeyman is back in Europe. Indeed, S&P is now out calling for ECB Q€ to last for nearly two years longer than originally planned and for the size of the program to be expanded to a Dr. Evil-ish €2,400,000,000,000.

"They don't understand the treacherous path they are going down. God knows where this is going. It's very dangerous and could be disastrous."