If we were asked what has happened in recent weeks we would say that “it’s like deja vu all over again.” Yogi Berra was often mistaken for a fool because of numerous funny but insightful quotes like that. However, even lifelong Indians fans like us know the beloved Yankee catcher was far from that. His façade belied his wisdom. The Fed seems like the polar opposite of Yogi right now. It is perceived as wise by many because of some PhDs and political skills, but it is really proving quite inept and confused as it repeatedly pushes markets to the brink of a tightening and then backs off.
Because the Fed would desperately like to “turn the page” on its policy blunders, FOMC members are still trying to stick to the script of QE success by highlighting anything it can find that is going right and ignoring the rest. The media and the pundits seem to be mostly on board, dutifully marching in line. The Fed would like to tighten for no other reason than it is feeling enormous pressure for taking a “command and control” approach to supposedly free markets for seven years without anything sustainable to show for it other than enormous amounts of inflated assets and overcapacity layered atop the unresolved problems of the prior cycle. It wants to be done and it realizes that the political tide is turning against it. Nonetheless, the minutes from the latest Fed meeting convey that doubts remain about the path of future growth among the members even as it once again prepares markets for a tightening of policy that it hopes will be confidence boosting. Confusion reigns.
The news and data is not helping the Fed’s case. It looks like the retail sector is joining the energy and industrial sectors in a pronounced collapse in demand. The Fed’s delusional script is encouraging investors to cling to false hope in equity indices, while fearing the relative safety of U.S. treasuries, which are quite inexpensive relative to the sovereign debt of other developed markets. At the same time, the Fed’s script is causing the dollar to soar to multi-year highs and that is a big drag on global growth in a world craving cheap greenbacks.
Owners of individual stocks and high yield debt are bearing much pain for believing the Fed has any idea what it is doing. Other asset prices, commodities, and economic activity are clearly still mostly rolling over even as the rest of the central banks print major amounts of currencies. Key industrial metals, copper and silver, fall every day it seems. Crude is back near $40 as inventories remain gigantic. Meanwhile, ridiculously bubbly private equity market values are falling hard and it is becoming more difficult to finance LBO’s in the debt markets. Story stocks like SunEdison and Valeant are coming apart at the seams. The only thing left to hold out as “proof” of monetary successes is some heavily manipulated stock indices, Wall Street-enabled auto sales, and a contrived unemployment rate.
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