Yellen chickens out – again!
So much for the Yellen’s promise to be “data dependent” in its interest rate policy! With core inflation above the Fed’s forecast range, unemployment well within its longer term target range and private sector job and average wage growth offering no rational support for maintaining the near zero interest rate environment, Yellen’s decision to hold rates unchanged makes no sense. This however assumes that either she is not the one actually making the decisions or that the long tail of potential derivatives losses parked in many of the so called repaired investment banks are so catastrophic that there is never and will never be a return to normality this side of a reset.
So what does this mean to grunts like us.
First, it means that if the hangover is so fearful, we will all have to party-on a little longer and continue to borrow our way out of debt. In the very short term this means more liquidity and more asset inflation. For equities it also mean a rotation back into the cyclicals that have been sold down heavily ahead to recession fears in the first quarter of this year. On this theme we have added a stock to out model portfolio (FedEx) to take advantage of this rotation.
Longer term however, it confirms what we had feared most. That central bank monetary policy of trying to borrow their way out of debt has gone beyond the point of no return and that only the nuclear option via the currency markets are will be able to restore discipline. Like an out of control property developer who only knows how to borrow and buy, this is a strategy that is inevitably going to lead to a currency crisis. That is particularly scary however is that with most CB’s having gone ‘full retard’ including NIRP, there is not an obvious safe haven, at not amongst the main fiat currency blocks.