Tuesday, February 23, 2016

THE FED IS CLUELESS AND PUSHING ON A STRING.......

THE FED IS CLUELESS AND PUSHING ON A STRING

Market forces are taking the upper hand" for now. That may be a good thing if you are short 'risk assets' (notably equities): as the steam is released from the pressure cooker, asset prices will deflate once again. It's the sort of scenario Bernanke might be terrified about, as the 'progress' of QE will be undone.

"Nations are not ruined by one act of violence, but gradually and in an almost imperceptible manner by the depreciation of their circulating currency, through excessive quantity." 

                                                                                                                                                     
Nicholas Copernicus 1525

A Yellen Fed may rightfully say that it's not their job to keep equity prices high, and that she is more concerned about the labor market. That's all well and good, except that the so called recovery was, in our assessment, largely based on asset price inflation fueled by Fed syupidity. As such, when asset prices plunge, it also provides a headwind to the real economy.

Mr. Draghi at the ECB and Mr. Kuroda at the Bank of Japan (BoJ) may well see that and try to counter what they may perceive as an alarming development. Yet, we feel it's the Fed that's the biggest elephant in the room (it's the issuer of the worlds reserve currency and given the amount of global dollar credit that's been raised since 2008, it may effectively be the emerging markets' central bank); in that context, the bazookas of the ECB and BoJ may appear as mere water pistols.

Yellen, if we are not mistaken, may only react in earnest once the effect is felt on the real economy. It also means that what we believe is a bear market will be able to play out in full. Keep in mind also that some of the necessary adjustments in the marketplace will take some time to play out: low interest rates may allow many otherwise unsustainable businesses to stick around until they need to refinance their debt. As such, the adjustment in the oil sector, for example, may take much longer; and it's not just on the corporate side, as the International Monetary Fund (IMF) may be extending loans to governments of oil producing countries, thus also contributing to elevated global oil production.

In practice, the selling may only end when most investors have shifted towards a capital preservation mode. This won't be a straight line, as bear markets can have violent rallies. And not only will the BoJ and ECB not sit idle on the sidelines, but ripple effects may go through the markets as the Fed is gradually coming to grips with reality.

The answer is not in monetary policy. You cannot print your way to prosperity. That path risks destroying purchasing power and a destruction of the middle class. The result will be public resentment, the rise of populist politicians and reduced political stability, even war.

Fiscally sustainable policies are long-term pro-growth strategies that don't themselves blow up the debt. On the cost cutting side, it includes entitlement reform to make deficits sustainable; such a policy is pro-growth because investors are more likely going to allocate money when they see fiscal policy is sustainable. On the revenue side, rather than plow huge amounts into fiscal expansion by the government, the cutting of red tape can go a long way towards unleashing growth. Sadly, policy makers are unlikely to pursue what is necessary , only a very severe crisis will allow them to see the light.



No comments:

Post a Comment