Monetary Policy

With Janet Yellen choking back the vomit as she shifted The Fed's stance to a "hawkish hold," markets remain just as confused (and disconnected) as they were after The FOMC's "dovish hold." The problem, as Deutsche explains, is The Fed's reliance on 'conventional' inflation dynamics (and its mean-reversion - higher in this case) as opposed to actual market expectations (which are collapsing), leaving them open to a major Type II policy error -  the risk of rejecting something that is, in actuality, true. The Fed's credibility is teetering on the brink as inflation 'reflexivity' - that is, Fed expectations strengthen the dollar, depress risk in general and commodities in particular, with lower commodities driving headline inflation lower - raises the prospect that the Fed fails to raise rates at all in 2016.

"...there’s an enormous and growing disconnect between the cash and physical markets for gold. This is exactly what we would expect to precede a major market-shaking event based on a physical gold shortage."

Some people will never learn... ever. What is happening today is nothing more than rearranging the deck chairs on the Titanic. The iceberg has been struck, we’re taking on water, and this sucker is going to sink. Game Over.

In considering NIRP, Central bankers are failing to address an even greater potential problem, which could easily become cataclysmic. By forcing people into paying to maintain cash and bank deposits, central bankers are playing fast-and-loose with the public’s patient acceptance that state-issued money actually has any value at all. There is a tension between this cavalier macroeconomic attitude and what amounts to a prospective tax on personal liquidity. Furthermore, NIRP makes the hidden tax of monetary inflation, of which the public is generally unaware, suddenly very visible. We should be in no doubt that increasing public awareness of the true cost to ordinary people of monetary policies, by way of the debate that would be created by the introduction of NIRP, could have very dangerous consequences for the currency.

Holding gold is simply recognition that the Fed’s actions over the last 30 years have potentially severe consequences that pose threats to the value of most financial assets, the almighty dollar and ultimately your clients’ purchasing power. Owning gold is in effect not only a short on the dollar and on the credibility of the Federal Reserve, but most importantly a one of a kind asset that protects wealth.

As documented here and elsewhere, in addition to the Pope and Putin, the third world leader US president Obama is "historically" meeting this week is China's President, and General Secretary of the Chinese Communist party, Xi Jinping. But just like everywhere else, the president is mostly a figurehead for far greater political and primarily financial interests backing him. So who calls the shots in China? The following infographc lays out the key power divisions of political, economic and financial power in China at this moment.

Earlier today yet another "very serious policy maker" confirmed that cash as we know it, may be on the endangered species list - again, a necessary precondition to make global NIRP effective - when overnight former Bank of England central banker, Charles Goodhart, told a London audience that bills such as the Swiss National Bank’s 1,000-franc note and the European Central Bank’s 500-euro note should be abolished, adding this "move that might also prove beneficial by trimming interest rates."

Fed credibility questioned and Yellen sick - Palladium surges 8% - Russia and central banks buy gold - Smart money rebalancing and selling overvalued assets to buy depressed assets especially silver

Yellen just reset the market's expectations, and in fact set the bar for disappointment even higher. As FTN rates strategist Jim Vogel very correctly notes, "financial market risk is calmer this morning, but Yellen actually elevated the stakes with her detailed speech yesterday afternoon."  What does that mean? He explains: "Yellen could be spot on this year but until the hike actually occurs, risk asset volatility veers once again to the upside with respect to US monetary policy."

"By relaxing constraints on other economic actors, central-bank support may create opportunities for them to shirk their responsibilities. In turn, this may render it more difficult for the central bank to withdraw its exceptional measures. The road to central bankers’ hell may be paved with good intentions."

• Global Markets Rebound on Yellen Speech (WSJ)
• Obama and Putin to meet; Syria and Ukraine vie for attention (Reuters)
• Obama to host China's President Xi amid simmering tensions (Reuters)
• Don't Fall for It, Xi! Chinese Take to Web to Scorn U.S.—and China, Too (BBG)
• Yellen Confirms Fed Still on Track to Raise Rates This Year (BBG)... but is still China dependent?
• Abe's New Economic Plan Confounds Analysts (BBG)
• It's All `Perverted' Now as U.S. Swap Spreads Tumble Below Zero (BBG)

The market, which clearly ignored the glaring contradictions in Yellen's speech which said that overseas events should not affect the Fed's policy path just a week after the Fed statement admitted it is "monitoring developments abroad", and also ignored Yellen explicit hint that NIRP is coming (only the size is unclear), and focused on the one thing it wanted to hear: a call to buy the all-critical USDJPY carry pair - because more dollar strength apparently is what the revenue and earnings recessioning S&P500 needs - which after trading around 120 in the past few days, had a 100 pip breakout overnight, hitting 121 just around 5am, in the process pushing US equity futures some 25 points higher at last check.

When you tie the reflexivity problem in with the fact that the excessive use of counter-cyclical policy is leading to the creation of ever larger asset bubbles by effectively short circuiting the market's natural ability to purge speculative excess and correct the misallocation of capital, what you get is a never-ending loop whereby the consequences of unconventional monetary policy serve as the excuse for doubling and tripling down on those same policies.

There is growing turmoil in buybacks that threatens the very fabric of the stock bubble. That was always the primary transmission of the foundation of its current manifestation, corporate debt, into asset prices; especially the huge run following QE3 and QE4. The problem once momentum fades is that investor attention turns toward valuations that were repeatedly ignored before. As long as everything is moving upward and any fundamental downside is completely contained (in perception) as “transitory” then valuations are easily set aside as one form of rationalization. The effect of reversing momentum is for a more honest measurement; particularly by force of change in economic sentiment which is almost always concurrent.