Monetary Policy

Superficially one gets the impression that they aren’t really trying to “explain” anything to the hoi-polloi, since it all sounds remarkably uncoordinated. To the extent that the messages are contradictory, they merely reveal the literal impossibility of central planning – neither Dudley nor Evans can possibly know at what level short term interest rates should be set.

We call on central banks to abolish their zero interest rate policy (ZIRP) framework before more harm is done. In our assessment, ZIRP is bad for all stakeholders and may even lead to war.

"Rate cuts should not be seen as goodies that the RBI gives out stingily after much public pleading"...

Following on from a weak Europe and US session (despite late-day heroics in China last night), Fed confusion and commodity-complex counterparty-risk-concerns have sparked further turmoil across AsiaPac in the early going. Noble Group (asia's Glencore) is crashing, down 6.7% at the open. FX markets are seeing outflows send CNH below CNY for the first time since July and crush Thai Baht to its weakest since Jan 2007. Equity markets are in trouble with Aussie stocks hammered (driven by a plunge in Miners) and Nikkei 225 down 1000 points from Friday's highs. Asia credit markets have spiked to 2-year wides. China injected another CNY40bn and strengthened the fix (by the most since 9/2) for 2nd day in a row.

The solution is not to let politicians redistribute the wealth from the rich to the poor. Crony capitalism must be replaced by true free market capitalism, practiced with integrity, fairness, principled conduct, intelligence, and high moral standards. Profits generated by corporations are not evil, but seeking profits at any cost to society is reckless, shortsighted and immoral. Capitalism without capital is destined for failure. When corporate CEOs, Wall Street bankers, and shady billionaires exercise undue influence over the financial, political and judicial systems, their short-term quarterly profit mindset and voracious appetite for riches override the best interests of the people and create a sick, warped, repressive society. Today our system is in the grasp of psychopaths whose hubris and myopic focus on enriching themselves will ultimately be their downfall.

Today's most popular hedge fund strategy among institutional investors globally is "Alternative Global Macro Funds". Also known as a “go anywhere” investment style, active managers employ opportunistic trading tactics across asset classes, financial instruments, and geographic regions. Like many liquid alts, global macro funds grew rapidly following the financial crisis as investors looked for strategies that could diversify their portfolios in the midst of volatility in the global marketplace and historically high sector correlations against the S&P 500, thereby improving their risk-return profiles. Ultimately, success in this classification resides in selecting the right active manager given the strategy’s wide dispersion of returns.

Absent some entirely magical economic developments, Janet Yellen looks set to be an unlucky Fed chairman. There is a growing risk that the fabric of the financial system may start to unravel during her tenure. Today’s investors are not exactly a lucky generation. Assuming they’ve survived two precipitous declines in stock markets in the course of a decade, they’re now faced with overpriced stocks, overpriced bonds, overpriced everything.

The Fed’s policy of forward guidance and radical transparency is not working. It turns out that letting the market peer over its shoulder as it makes monetary policy sausage is, in some ways, worse than the opaque process that existed prior to the arrival of Bernanke and Yellen. It pulls back the curtain and shows the human, error prone side of the Fed. Every time the Fed’s dots move, it is an admission of failure and undermines the very confidence it was trying to inspire.

A TECTONIC shift has begun in the markets, if they no longer respond to the Fed's efforts to boost them, then it is GAME. SET. MATCH. for the Fed and its policies.

The global Bubble is bursting – hence financial conditions are tightening. Bubbles never provide a convenient time to tighten monetary policy. Best practices would require central bankers to tighten early before Bubble Dynamics take firm hold. Central bankers instead nurture and accommodate Bubble excess. It ensures a policy dead end -  the faltering global Bubble has progressed beyond the point where Fed rate policy has much impact.

Over the past few years no institution has had more consequences beholden to their words than the Federal Reserve. So much so one could reasonably argue in response to prevailing circumstances their communiques overshadowed most others; including presidents and other leaders. The problem today is; in their effort to bring more clarity via press-ers, and more as to what might be transpiring behind the doors at the Eccles building, they’ve now communicated more confusion in the last two weeks nullifying all previous efforts. In our eyes it seems to be working exactly the same as its other policy outcomes: adding confusion, uncertainty, and having the exact opposite of intended results.

"What we have had is a jobless recovery in the US and so the Fed could not afford to cause another depression by raising interest rates. QE4 will be their next move, which is now much more likely than a rate hike."

The divergence theme is likely to strengthen in the week ahead.