The trading machines went berserk yesterday afternoon as the US Fed rolled out the latest contortion of verbal gymnastics, removing “patient” from their policy statement, and promising that while rate hikes are coming soon ’cause the “economy is getting better”–it won’t be at the next FOMC meeting in April ’cause the economy is too weak to stand even a .25 hike. The US dollar plunged in seconds, taking treasury yields with it (confirming a weakening economy), as the other end of the negative correlation teeter totter–commodities, stocks and other currencies–all went vertical. Another day in the madness once known as rational markets.
This morning patterns are once more reversing, with stocks and commodities retracing, the US dollar resuming its ascent, and treasuries plodding higher unphased by all the noise from the cheap seats. The global financial system is in a mess of unprecedented proportions. Central banks are the chief architects of the present pickle; and still they lead on.
The undoing of central bankers is this: they are too insecure and stubborn to admit mistakes. And so they insist their monetary prescriptions have worked and that the financial system can now move from 6 years of intravenous infusions–not just to neutral–but to tourniqueted capital flows from here.
Central planners desperately need to raise rates to keep their policy narrative going. But in reality, the globe is already in the midst of the largest contraction since the 2008 recession. We have earned this slowdown through decades of waste and excess, amplified by stall tactics to avoid necessary write-offs the past 5 years. Now we have too many things, too many over-valued assets and too little cash and income (thanks to low savings, low wages, low yields and low rates) across every level of the economy from households to governments, pensions and corporations. Some 70% of this debt has been borrowed in US dollars. Intermittent algo-driven frenzies aside, repaying these debts will take years and will continue to weaken demand and fuel the need for US cash in the process.
In the end, the strengthening US dollar serves as monetary tightening even if the Fed does nothing from here. The global economy will proceed with needed rebalancing by hook and by crook, with higher policy rates or not. The Fed has rendered itself irrelevant in everything but name and there is no new wizard to take its place. At last the madness is forced to an end.
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