Monday, September 28, 2015

The 'Fed Put' Is Dead.........A MUST READ!

The 'Fed Put' Is Dead

The current surge in dis-inflationary pressures is not just due to the recent fall in oil prices, but rather a global epidemic of slowing economic growth. While Janet Yellen addressed this "disinflationary" wave during her post-meeting press conference, the Fed still maintains the illusion of confidence that economic growth will return shortly. Unfortunately, this has been the Fed's "Unicorn" since 2011 as annual hopes of economic recovery have failed to materialize. However, it is these ongoing views of optimism that have collided with economic realities. HOPE AND OPTIMISM ARE NOT SOLUTIONS!

Yellen's detailed speech initially triggered an out-sized market reaction. Unfortunately, it was mainly due to shallow market depth and weak-hand positions. Yellen's speech should quickly begin to hurt over-priced financial assets. Yellen's speech was the first time I can ever remember a Federal Reserve Chairperson commenting that inappropriate risk-taking might be undermining financial stability. This is explicit confirmation that the Fed's aim of lifting asset prices in the hopes they bolster broader economic activity has reached the end of its useful life. Barring a financial or economic disaster, the 'Fed put' has been put out to pasture.

Going forward, the risk-reward distribution continues to look skewed to the downside. Poor market depth and crowded positions could even cause a meaningful overshoot. Current valuations will likely be challenged further as average operating earnings are already decreasing, and revenue-based valuations currently stand almost 20% above their historical median the next move is likely to be down, perhaps a long way down.

Seven years of easy money has borrowed from the future, indebting many companies and countries globally. The 'new normal' is the best case scenario for the next decade or more.

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.

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