As of today the writing-on-the-wall is that the Federal Reserve will indeed raise interest rates on Dec. 14th. To paraphrase one Fed. official when asked to explain their reasoning earlier in the year, “Others are telling them to just “do it.” And in that reasoning lies the real problem.
For if anyone (let alone the Vice Chair) thinks that in 2016 the Fed. has the control, firm footing, and economic tailwinds as to just “do it” because it needs to be done in today’s climate? Is naive at best – willfully ignorant at worst. The time to “do it” has long past. And this December may be a December to remember. We’ll all know soon enough, I’m afraid.
Speaking of remembering, do you remember Brexit? I know, easy question. How about Greece? Remember them? You may think everything has been solved in both places when looking at the “markets.” How about Spain? Portugal?
You may be thinking, “I can’t really think of anything off the top of my head.” And it’s a fair point. For unless you make the effort to know, it’s near safe to assume you wouldn’t hear of it. Especially if your business world view is only supplemented, or garnered from the likes of CNBC™, where their in-depth business reporting resembles their ratings – unpublished.
Let’s try it with a few bigger nations, you know, just for chuckles.
How about India? Have you heard about their “war on cash” and the absolute pandemonium that’s resulting within its citizenry?
How about China? Have you heard the latest on clampdowns for the purpose of curbing capital flight over the past week? A move to halt capital-flight not seen since Japan of the 80’s? Or, where the politburo needs to be ready to throw the “kitchen-sink” if necessary to curb what may turn into an all out rout should the USD/CNY cross the “Rubicon” of 7.00?
Not too worry you say, for they can control it since it’s “their” currency? Fair enough, just remember: they said that at 6.40, 6.50, 6.60, 6.70, 6.80, 6.90. How’s that make you now feel about 7.00? Feeling lucky? 7’s a charm? I’ll just say this – we all had better hope so.
Oh and just to throw a little cold water on that whole “They can control it” hypothesis I keep hearing from the so-called “smart crowd.” To wit:
Just to make a point: That above headline is from last week. Sooo, let’s move on shall we?
Getting back to a few more “issues” on the global stage happening as I type this. Have you seen where it takes nearly six or more trips to different ATM’s (for reasons they are either empty, broken, or smashed) and waiting in lines for hours to extract as many or enough bills that you can carry – to buy a bag of rice? That is – if your money hasn’t lost any more value by the time you get to the store, and that there’s actually rice to buy when you get there.
No, I’m not talking about the Weimar Republic. No. That’s Venezuela today.
You know what all these issues have in common? Currency. And in-particular: The U.S. $Dollar whether directly or indirectly.
Global trade and the resulting geopolitics are directly linked in one form or another to the U.S. $Dollar. And like it or not (and it would seem a growing chorus of global leaders decisively don’t) directly affects everything we now know or take for granted as the global monetary channels, and trade.
It’s a complicated system, but it can be summed up in one very easy to understand analogy, albeit oversimplified, it is what I consider accurate:
Think of world trade as a car, let’s say it’s a very big car. Think of a large family tightly packed into that car, as the political leaders of the world. All have been on a vacation styled road-trip where everyone’s credit card was not only assumed “unlimited,” but payments were thought to be deferred to who-knows-when. And nobody really cared because interest rates were not only a 0%, some may have even been at negative rates (consider those much like an “introductory offer.”)
Everyone’s happy, and well content until suddenly the latest “gas station” stop doesn’t work out as all the past.
To an astonished group of once happy “vacationers,” they’re all informed after they handed over their cards to pay for all the gas, food, oil, and whatnot. That their cards are now “maxed out.” And, to top-it-off, their first payment is due in just under 2 weeks.
That payment not only carries “interest charges,” but just like most cards in the real world, the interest charges are accrued from day one.
The attendant tries to make the point of, “Not too worry, for it’s only about one-quarter of one percent.” But what everyone fails to realize (except for those who took this all as a “holiday”) that .25% is on tens, if not hundreds of $TRILLIONS of dollars in global trade and sovereign budgets.
This is where the law of large numbers starts to become far more reality than the fanciful idea of “money-for-nothing.”
What makes matters worse is this: The “cards” are held by “The Fed. Bank and Vacation Club.” And the “worse” just keeps getting “better.”
Suddenly panic sets in when it’s realized the “gas station” is also owned by non other than very same, once considered friendly “Fed. Bank and Vacation Club.” As were all the stations prior, as well as those further on down the road.
Can it get even worse for our “monetary vacationers” you ask? Hint: Yup.
It seems their latest travels to the “promised land” where “unicorns” make money hand over fist. And the incontrovertible laws of supply, demand, money, and more are something to be scorned, and laughed at, rather than followed. Has brought them far inland to a desert where they used at least 4 or 5 stations prior to reach this far in, (think of each station a missed chance to hike and normalize rates) and have at least that many to pass and use to come out the other side.
And now they’ve just been informed, they’re maxed out; payments are due in weeks, not years; interest will not only be charged from here on in, but from day one; and they have nothing to show for all this but a bunch of selfies costing about a $TRILLION dollars a pop to generate. (You know, because all that partying/vacationing gets expensive yet seemed “so worth it” when it appeared there were no bills or costs coming due.)
That is how the global world of finance and markets currently stands today. Yes, it’s an oversimplification for sure, yet – it describes precisely where we are currently. Think there’s a problem?
This latest “vacation trip” by global “markets” has all been fostered by the Fed. So many times over the last few years the Fed. did indeed have a firm-footing, as well as mandate (as in not veering into total monetary lunacy) to hike interest rates long ago. But as I stated “long ago” was just that.
Today, currencies world-wide are trying to grasp the near term shock-and-awe of the $Dollar since the U.S. presidential election. The $Dollar has been on such a tear it is quite frankly causing monumental efforts of other nations (think China just for starters) to sell everything not nailed down that’s $dollar denominated, and try to sure up their own currency, budgets, and more the best they can. That is, if they can at all. For that is an ongoing concern for many.
Bond yields globally are now rising, and their “market” values falling at a pace not seen in who knows when. Here are just a few headlines over the last few weeks, and as you’ll read, the term “Bloodbath” isn’t just some term for “clickbait.” If you’re a bond holder, as Bill Clinton once said, “I feel your pain.” To Wit:
Add to all this, you now have Italy (remember them?) about to quite possibly make another “moment to remember” in December and vote for political change reminiscent of the impact that Brexit had on the E.U. e.g., The potential end of the E.U. experiment entirely.
For if Italy votes “NO” everything changes in the global marketplace. And I do mean – everything.
We will know for sure by sometime around 9:00am EST before the U.S. markets open. You will see a more instantaneous reaction in the overnight futures. If you’re in business from the solo practitioner to the CEO of a global concern? Keeping an eye on the Italian referendum and it’s possible outcome to disrupt markets should be high on your “viewing list” this evening. For it has the ability to throw chaos right back into the “markets.” Chaos for all intents and purposes the so-called “smart crowd” believed were behind us. Hint: They’re not. (You can find more information here if you wish)
As for our stranded “vacationers.” Maybe you think I forgot about them and just left them stranded? I didn’t. For here’s where you understand just how much of a “painted-into-a-corner” dilemma the Fed. has done to itself. Again: All of its own doing.
Think of our “vacationers” now sitting in the middle of the desert, and although they now have been able to refuel, and all the other things one does. They now have only enough “fuel” or “credit” to travel to the next “Fed owned station.” Both back – or forward. And they’ve been notified of all the above I iterated and there’s nothing they can do, but think about the possible if not unavoidable ramifications coming at the next “station.”
How do you think they act in either case?
The Fed. attendant says “Sorry, you’re maxed out, so – no service. Sorry!” Or, better yet, “Oh, yeah, they shelved that idea for this time, you’re good to go! You should be fine at the next stop also.”
Would you take the last “shelved” statement as “Phew, let’s party on!” Or, do you think far more will say “If we end up out of here? We aren’t ever going to be in that situation again!” (i.e., Reliant solely on the $dollar and Fed. for credit terms.)
That’s currently where the monetary world finds itself. There’s currently enough fuel in the tank to reach the next “fuel stop” but it’s 10 days away. And nobody knows what further “international developments” will happen during those 10 days, or if their cards will even work.
Although there is one thing for sure: The “attendant” in charge at the next stop’s name – is Janet.
© 2016 Mark St.Cyr