Friday, January 8, 2016

Banking and Markets in 2016........

Banking and Markets in 2016

The big event of the year past was the Federal Reserve's Waiting for Godot act concerning the fed funds rate. When Godot finally showed up two weeks before year's end, it was in the expected-but-pitiful form of a 25-50 basis point hike — which gives the impression of a possible 50 point rise, but with the way more likely probability of actually sticking to the lowest end of the gradient (and actual overnight lending rates were already a few basis points above zero, so the net was really less than 25 basis points.)

The background of this charade was pretty clear to anyone not brain damaged from the rigors of playing Candy Crush on their phone: the Fed was hiking rates into a wobbling global economy; they were forced to act at year's end or surrender the last shreds of their credibility (i.e. being taken to mean what they say); and they left the door open to retreat in 2016 if necessary. But the damage to the Fed had already been done. They were unmasked as a propaganda machine powerless against the real tides of economy, creating only mischief and misunderstanding, and ultimately undermining all soundness in the relationship between money and real human activity. Anything they do in the election year ahead will be viewed with suspicion, specifically pimping for Hillary Clinton's coronation. And her relationship with the biggest banks is well-understood. So they had to make their grand gesture in December.

Since the Fed raised (hiked is too strong a word) rates by 25 basis points on December 16th, the Dow has dropped by about 3.5%. Indicating a mix of fear of decisive movements and a market awareness deficit regarding the impact of its actions, the Federal Reserve hedged its own rate rise announcement, noting that its "stance of monetary policy remains accommodative after this increase."

The stock markets skidded a little below sideways this year (except for the Nasdaq) which glided up more than 5 percent (techno-grandiosity rules!) — with one upchuck at the end of the summer that was remedied by China bailing out its own janky stock markets and playing games with its currency.

This much seems fairly clear: there won't be many, if any, hikes to come in 2016 unless economies markedly improve (which they won't, or the words would be much more definitive.) Still, Janet Yellen did manage to alleviate some stress over the Fed's inaction on rate rises during the past 7 years, by invoking the slightest action possible with respect to rates.

The Fed's rate move was tepid to say the least, and yes it's possible the Fed moves rates up another 25 or 50 basis points over 2016, but far more likely it engages in heightened currency swap activities with other central banks as a way to "manage" rates and exchange rates regardless.

Gold and silver continued their four-year swoon thanks to repeated massive wee hour dumps of futures contracts before the traders in New York even got out of bed. The charts conclusively show this shady activity, raising the question: why would any seller want to hugely undercut the price of what he seeks to sell by selling into a market where no buyers are present… or even awake? The answer seems to be: to make the dollar appear more firm than it really is.

The many years of ZIRP (zero interest rate policy), combined with the previous accumulation of debt unlikely to be paid back has made it ever more difficult to issue new debt with any likelihood of being paid back. But ZIRP has also nullified the relationship between interest rates and risk. 

In a system unencumbered by central bank interventions, interest rates would have to go a whole lot higher on instruments with such poor prospects. Of course, higher interest rates would only make new bonds that much less likely to be serviced by their issuers, especially governments laboring under Himalayan-scale debt loads. The tension in this equation has been provisionally papered over by the use of interest rate swaps, reverse repos, and other abstruse machinations and derivatives aimed at suppressing true price discovery.

The corporate stock buyback fiesta of 2015 was the perfect example of an anything goes and nothing matters ethos. It happened in full view of everyone, and it happened solely to assure corporate executives that they would enjoy their bonuses and fringe benefits and nobody complained about it. Even so, it barely accomplished anything index-wise. The markets went sideways even with all that insider action because the fundamentals suck and the global economy was obviously sinking into a deflationary contraction.

Fasten your seat belts 2016 is going to be bumpy!





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