What never ceases to amaze me about investors is their utter disdain for logical explanations of economic occurrences. It seems to be that logic is often forgone for euphoria, this feeling that “the good times can never end.” Maybe that logic is NOT as widespread or dispersed as I once thought. The older I get the more market experience I have, leads me to believe that investors are perpetually ignorant, and certainly forgetful. I can’t really attribute one specific human trait that perpetuates this theory about investors, but I am sure it’s a whole host of things. However I can safely now, include investment managers into this loop as well. Maybe managers are a bit more arrogant, a bit more complacent to their own inadequacies and that’s what leads them down paths of destruction.
We have talked at length on the sinking Dollar and at Davos the “Mnuch” stated that “the weak dollar is good for the U.S. as it relates to trade and opportunities.” Gee thanks Mr. Secretary, but what do you guys really mean? We will tell you what it means…it means that the FED cannot have its cake and eat it too. It cannot on one hand raise rates and on the other have sit- idly by with an ever sinking U.S. Dollar.
Now all econ fundamentals aside, one should be asking, why is the dollar moving lower when our rates are moving higher. Shouldn’t that make our debt more attractive on yield a level vs another countries debt? One would think but in a central bank, in a globally coordinated central bank world you have to realize that the central banks are not working independently but in unison. We will dig deeper into that at another time, but the crux of the statement is every nation cannot be an exporter and when countries go to war with their currencies; the outcomes globally are usually disastrous and swift. Are we there yet? Yes we tend to think we are and how long the markets will continue to ignore this is anyone’s guess. Anyway the problem with the FED raising rates coupled with the U.S. fiscal support, means a whole bunch of debt is going to have to be swallowed and higher rates have to attract such unwilling participants.
The last decade will go down in the history books as the decade the central banks hijacked global financial systems and decided that it’s in everyone’s best interest to work together. That is, obviously until it is not. Who will be the first to balk? Our guess is the Chinese. They have the most to lose, domestically and internationally and it’s why they have been so reticent in shoring up their gold reserves and trying to internationalize their financial exchanges. However their underlying distrustful fiscal policies and their too good to be true WMPs, no not WMDs of the good ole Bush era, but potentially a synonymous acronym none the less as these WMPs will be like economic weapons of mass destruction. WMPs are Wealth Management Products, which basically package deposits and attract buyers with higher rates of interest, we hate to say it, but they sure do look a bit Ponzi in nature. Then again, isn’t the entire leveraged, rehypothecated, fractional reserve system, exactly just that? So let’s get to some other market news this past week:
JPM commented upon this and gave us this nice chart below. When we looked at this chart what stood out to us as odd was that the Pension Funds have flat lined their bond purchases, seems a bit odd considering the fixed payment obligations they have. This made us think pensions have been overreaching for yield for decades and in return receiving massive convexity risk. none the less we feel that if Pensions decide that equity risk is too much, we could see some massive reallocation into bonds and lower yields would beckon and equities will have a few less fools, anywhere here is the chart:
Last week saw an FOMC meeting that was widely anticipated as having no change to its interest rate policy and that was certainly the case. As for balance sheet reduction, that is to commence in October. The size and the scope of this rebalancing is not noteworthy because we truly figure the FED will merely adjust this as time moves to the left. Its miniscule to say the least and we really don't see it as having much of an overall impact as much as it seemed to be more of a credibility tool. Remember their balance sheet currently sits at some $4.4 Trillion so $5 billion a month in roll off, well you get the picture. One item that stood out and one that did a number on the short end of the yield curve was the fact that 12 members expect a rate hike in December, with just 4 expecting rates to remain unchanged. We suppose there was a little bit of everything for everyone as near term hawkishness was followed by longer term projections showing Fed Funds around 2.75%, couple that with their 2% inflation target, showing a benign growth projection. Speaking of inflation or lack thereof we have this juicy chart which we suppose, depending on your income bracket, the bottle may seem half full or half empty of inflation:
As we labor along these summer trading days, awash in great anticipation of the next FED policy move, we can't help but bring to light some of the driving facets behind the equity, bond and currency moves. We believe that our readers must understand the simple fact that central banks are the biggest driver, not only as to the daily direction of bets placed, but as to the overall trends in general. We heard for years how the plunge protection team didn't exist. We heard for years that dope Steve Liesman, that FED butt kissing media spinning journalist tell us that the central banks don't directly affect the markets. Now after 9 long years of ZIRP and $15 Trillion dollar major central banks balance sheets (not including PBOC), the markets are as frothy as ever. We hear bubble talk after bubble talk, bonds are in a bubble, equities are in a bubble, Bitcoin is in a bubble.