With all the prognostication of an interest rate increase happening from Fed watchers and certain economists, I feel a sense of Deja Vu for previously expected rate hikes in this business cycle. There was no hike, no easing — just more of the same. What does it all mean?
It’s the economy, stupid.
We’re not recovering. The Fed can see that in its magic crystal ball of financial and economic data. There are even hints of deflation in consumer prices. Oh no, perish the thought of things getting cheaper when people have less to spend!
What about December?
Hiking near Christmas would make the Fed the Grinch Who Stole Christmas! It won’t happen. The next chance is going to be in 2016.
How did markets react?
The Dow briefly turned negative, the S&P shrugged off some of its modest gains and the US dollar dropped. Some commodities are gaining — as they should — because the dollar’s strength was pushing them down. And that strength was built on the rumor of a rate hike.
Where do we go from here?
Expect more jawboning about rate hikes, but a hesitant trigger finger. I don’t think global markets, let alone our own, can withstand higher interest rates. Ultimately, however, the Fed is losing credibility here — and fast.
With Dow futures down over 200 points in the aftermath of disappointingly hawkish tones from the Jackson Hole retreat, China’s markets continue to slip and the global bid for oil is running dry again. Are we headed for another volatile week in markets around the world?
US Stock futures as of 11:48 pm on August 31st, 2015. Image source: Bloomberg.com.
The rout isn’t over; in all likelihood it’s only just begun.
Most investors are still recovering their bearings from the last two weeks of whipsaw market action. I’ve said that I think that this is just the beginning and I am reiterating that view tonight. We are entering a traditionally volatile time of year from September through November as well. I imagine this unfavorable seasonality will exacerbate the underlying fragility of this already unstable stock market here and around the world.
Paper peril ensues
Meanwhile, in the world of currencies, the Asian financial crisis is re-emerging as Malaysia, Thailand, Vietnam, Russia and others see their currencies plunge. China’s devaluation is rippling around the region, shaking confidence in one of the largest regional consumers of exports.
The final result is still evasive
Where do we go from here? What will happen to asset prices? We’ll soon find out. Have an exit plan ready, though, because this is a very crowded market and it could create more disorderly selling on the way back down to new lows. It’s not uncommon that sell-offs lead to a snap back higher in prices before the selling pressure resumes.
I fully expect that we’ve seen the highs of this particular bull market cycle and should fully expect a significant bear market to follow.
These press conferences with Federal Reserve Chairman Dr. Bernanke are becoming more amusing as of late:
“We, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation [..]” – Ben. S Bernanke
Really? On what basis of calculating inflation can one say with a straight face that over the last 30 years inflation has been tame or for that matter stable? Let’s take a look at the 30 year chart of the CRB index, which represents a broad view of commodities as priced in US dollars.
30 year CRB index
Clearly inflation is not under control. However, if the above chart is not enough to make one skeptical of the Fed’s latest remarks, then here’s a 30 year chart of the US dollar index, the currency in which prices are set for all the items we purchase in the United States (and other countries using or pegged to the US dollar).
30 year US dollar index
What one can gather from these charts is that we’re experiencing 30 years of a weakening dollar and extremely volatile commodities prices. Our central bank has the audacity to tell us that inflation is under control, and that in essence one should ignore gas prices, food prices and the prices of other goods which have surged over the last few decades (because all of the official inflation statistics ignore said prices).
I’ve always been a skeptic of the Fed’s press releases and these conferences, but this statement alone is enough to make one’s head spin when put in to context with the charts above. I believe instead that the Fed is claiming inflation is under control as a guise to give them the flexibility to perform more easing should the European contagion come home, or if our own sovereign debt issues begin to become more apparent to bond investors.
Without quantitative easing, twisting (and lots of shouting) our markets would likely have higher Treasury yields, lower equity prices — but people would be enjoying lower prices on food and energy. With the labor market stagnating and the overall economic picture still quite dismal, one has to wonder whether the Fed’s dual mandate of encouraging employment and maintaining stable prices has been abandoned in favor of recklessly supporting the financial system at large, and more specifically US Treasury bond and equity prices. It certainly seems to be the case when objective data is reviewed from a macroeconomic perspective.
Today was an exciting day for global markets. Below you’ll find a recap of today’s most important news. We are not anywhere near out of the woods, yet. In fact I think equity markets are bound to get much worse.
Global equity markets are tumbling:
Banks are getting hit the hardest:
Many EU banks have serious liquidity problems:
The yield curve is flattening, which usually happens before it inverts, signaling a potentially deep recession:
Protests in NYC are spreading:
And more protests are being planned:
I’ll have more posted as I digest and research the events that are transpiring in global markets.