It is simply a perfect confluence of events when yesterday the Federal Reserve told us in the afternoon that things were getting better just after the package delivery giant Federal Express had told us in the morning that the economy was worse than thought. Suffice it to say we trust the Federal that has to deal with the real world. Broadly speaking, with the exception of the euphoric Chinese stock market, equities have lost a lot of momentum and breadth is deteriorating as the year progresses. In particular, transportation stocks and some higher quality equities are off meaningfully from their highs in the U.S. Bond markets, especially in Europe, have suffered big hits in spite of the ECB QE efforts and global currencies are suffering renewed bouts of volatility as investors try to come to grips with the difference between what common sense tells them and what the central bankers doth mandate.
Market participants seem to be quite tired of hanging on every utterance from a central banker and the central bankers are tired of being in charge because that requires them to accept responsibility for efforts that are just not working. Policy failure is causing all of the deciders and their cheerleaders to describe the current soft economic environment as much stronger than the numbers are suggesting so they can deflect criticism and keep the fantasy alive. That is leading to higher rates, hurting rate sensitive sectors like housing.
The strong dollar was already a big enough problem for earnings. The Fed would like to tighten policy just so that it has room to reverse course if the economic situation worsens. Otherwise, it will have completed a cycle without ever really refraining from the emergency measures of zero rate policy. That alone speaks volumes.
We think policy exhaustion has taken over markets and economies globally. Problems ignored are not problems solved. The leadership is turning to familiar as well as stranger antics to try to return a sense of normalcy to a highly abnormal landscape. After being given billions more in debt assistance over the last few years, Greece has failed to make a scheduled payment to the IMF. Deposits at local banks are cratering and the economy remains a basket case. Greek bond prices now suggest a restructuring is nigh, though another extend and pretend is always possible. Even if yet another lifeline is thrown to avert near term drama, the reality is that Greece needs to leave the Euro and lenders must accept more losses on a few hundred billion dollars of debt. Anything else is just gamesmanship and delay.
We are all tired of the “Greece is saved headlines” because we know a painful restructuring will have to occur at some point, but the deciders won’t let it happen because they would have to take more losses. Instead, many of the parties involved would still like to act as if a default and Euro exit would not be a big deal while the ECB quietly slips a few billion more euros to Greece as if doing that might one day magically solve things.
It is a fantasy.
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