Friday, February 5, 2016

The Illusion Of Control.......

The Illusion Of Control 

Can we all admit that's what it was now? 

We are being lied to....The Federal Reserve has been telling us how great the economy is and how we are on track for higher rates as it continues to improve. However the markets are most definitely telling us something different.

The stress that the markets are experiencing has not been an overreaction; it is a perfectly reasonable and considered response to a series of real worries which perhaps one at a time would be manageable but grouped together look formidable indeed.

These are very unsettling times made worse by the knowledge that there are few if any weapons left in central bank arsenals. 


After all, does it make sense to anyone that a handful of unelected bureaucrats and economists … holed up in gilded conference rooms in Washington, Frankfurt, Tokyo or anywhere else … could artificially prop up markets and economies forever?

Time after time conventional thinking and the assurances that come with them have proven to be incorrect.

Sure, they could goose asset prices for periods of time. Sure, they could temporarily inflate a handful of credit-sensitive sectors. But when you think about it, the massive amounts of easy money pumped into global markets, the negative interest rates proliferating in more and more countries, and the impoverization of savers worldwide didn't change the underlying problems faced by our economy or anyone else's. They just papered over the problem.

Worse, those measures ensured we would remain caught in the boom/bust credit-cycle trap that has plagued the economy since the late 1990s. And arguably, this last bout of aggressive policy measures created the biggest batch of bubbles yet:

In junk bonds. 

Emerging-market bonds and stocks. 

Commercial real estate. 

Mergers and acquisitions. 

Stock buybacks. 

Initial public offerings. 

Artwork, collectibles, and trophy Manhattan condos. 

The list of wildly inflated assets goes on and on.....

But with each passing day, it becomes clearer that central bankers are losing whatever control they had.

Take the Japanese yen. The Bank of Japan managed to crush its value on Friday by cutting one key benchmark rate into negative territory. But a mere three trading days later, that entire move has been vaporized. The yen soared today as investors came to appreciate the BOJ's "bazooka" is nothing more than a pea-shooter.

Central bankers are throwing new measures out there more and more frequently.

The Financial Select Sector SPDR Fund (XLF) of major banks, brokers, and insurers briefly took out the low from a week and a half ago, while major European financials cratered across the board. The XLF is now down almost 14% year-to-date. The First Trust NASDAQ Global Auto Index Fund (CARZ) just sank to its lowest level since April 2013 (excluding the August 24 crash day), putting its YTD losses at a shocking 16%.

I think part of it is that central bankers are throwing new measures out there more and more frequently. They're also hitting the speaking circuit almost every day, trying to "clarify" how markets should interpret and react to what they're doing. To me, that smacks of panic.

Another reason for the loss of control? The markets know this stuff doesn't work. Inflation breakeven rates. Treasury-yield spreads. Commodity prices. High-risk bond prices. Currencies. The economic data, itself. They're all signaling a global economy that's facing a widespread downturn and widespread deflationary pressures … DESPITE six-plus-years of so-called "stimulus."

Bottom line: Wild volatility and crazy swings in everything from stocks to bonds to currencies make it abundantly clear that the illusion of market control is getting thrown out the window.

Why do normally intelligent people fail to see risks and opportunities that are subsequently so blindingly obvious? 


No comments:

Post a Comment