This is an excellent nuts and bolts look at credit inflation and deflation here in the US. From Doug Noland, at Credit Bubble Bulletin, via davidstockmanscontracorner.com:
The Federal Reserve is flailing and global currency markets are in disarray. Notably, the Brazilian real dropped more than 10% in five sessions, before Thursday’s sharp recovery reversed much of the week’s loss. This week the Colombian peso dropped 3.0%, and the Chilean peso fell 3.1%. The Mexican peso dropped 1.9%. The Malaysian ringgit sank 4.5% for the week, with the South Korean won down 2.7% and the Indonesia rupiah losing 2.2%. The Singapore dollar fell 1.8%. The South African rand sank 4.4% and the Turkish lira fell 1.4%. Notably, market dislocation was not limited to EM. The Norwegian krone was hit for 4.4%, and the Swedish krona lost 2.0%. The British pound declined 2.3%. The Australian dollar also lost 2.3%.
Apparently alarmed by the market’s poor reaction to last week’s no hike decision, the Ultra-Dovish Fed this week attempted to slip on a little hawk attire. It’s looking really awkward. On Thursday evening, chair Yellen did her best to backtrack from last week’s FOMC statement with its focus on global issues. The markets are doing their best not to panic.
Securities markets have over the years grown too accustomed to knowing almost precisely what the Fed’s (and global central bankers) next move would be and what indicators were driving the decision-making (and timing) process. Transparency and clarity are hallmarks of New Age central banking. But chairman Bernanke back in 2013 significantly muddied the waters with his comments that the Fed was ready to push back against a “tightening of financial conditions.” Markets celebrated short-term ramifications: the Fed was overtly signaling it would react to “risk off” speculative dynamics.
And for more than two years, global market Bubble vulnerabilities ensured the Fed stayed firmly planted at zero. Meanwhile, the U.S. unemployment rate dropped to 5.1%. Stock prices shot to record highs, with conspicuous signs of speculative excess (biotech and tech!) The U.S. recovery soldiered on, Bubble excesses and imbalances on clear display.
At least to the adults on the FOMC, crisis-period zero rates some time ago became inappropriate. So it’s time to at least attempt a semblance of responsible central banking. There is, however, no thought of really tightening policy. Just a baby-step – or perhaps two – so history won’t look back and say the Fed sat back, watched the Bubble inflate and did absolutely nothing. The problem today is that even 25 bps will upset the fragile apple cart.
The global Bubble is bursting – hence financial conditions are tightening. Bubbles never provide a convenient time to tighten monetary policy. Best practices would require central bankers to tighten early before Bubble Dynamics take firm hold. Central bankers instead nurture and accommodate Bubble excess. It ensures a policy dead end.
As the unfolding EM crisis gathered further momentum this week, the transmission mechanism to the U.S. has begun to clearly show itself. While “full retreat” may be a little too strong at this point, the global leveraged speculating community is backpedaling. Biotech stocks suffered double-digit losses this week, as a significant Bubble deflates in earnest. It’s also worth noting that the broader market underperformed. The speculator Crowd hiding out in the small caps on the thesis that these companies were largely immune to global maladies must be feeling uncomfortable. The small cap universe is a dangerous place in the midst of de-leveraging/de-risking.
To continue reading: New World Disorder
