It’s really becoming a bit of a farce isn’t it? I mean the Fed and their increasingly pathetic attempts to fine tune the economy with language.
They released their interest rate statement last night and it was a blatant attempt to have it both ways. They committed to keep rates low for a ‘considerable’ period after QE ends…and then turned around and upped their forecasts for future interest rates rises.
The Fed now apparently expects the official interest rate to reach 1.25–1.5% by the end of 2015 (up from prior expectations of 1%–1.25%) and between 2.75% and 3% by the end of 2016.
This is a dangerous balancing act. The Fed doesn’t want to spook the market by removing supportive language, yet it wants to act tough by predicting a pretty fast rate normalisation path.
That anyone is still listening to these clowns is beyond me. But love it or hate it, the Fed remains the biggest junk dealer in the global market, and what they say doesn’t go unnoticed.
Judging by the currency markets, the focus was on the rather rapid pace of expected interest rate moves (despite the Fed’s assurance that it would take a considerable time). Here’s a chart of the US dollar index again (I showed it on Monday).
Greenback surges again…
The Fed’s interest rate projections sent another round of panic through global currency markets. Despite being ‘overbought’ for weeks (see top and bottom panels in the chart), the US dollar index surged higher. On the flipside, gold, commodities, the Australian dollar and every other non-US dollar asset fell hard.
The greenback is now at its highest level since July 2013. If you recall, this was when markets had their first panic about the beginning of the end of the Fed’s QE policy.
That episode resulted in a deep correction in most global equity markets. But it wasn’t long before the punters realised that QE still had more than a year to run. So the speculation heated up again and it was off to the races.
This time though, QE is ending. In fact, the Fed confirmed overnight the program will end next month. That means no more excess liquidity. It means the Fed will no longer surreptitiously finance the US current account deficit, and for the first time since 2011, US markets will have to get along without any Fed support.
So far, that doesn’t seem to worry US stocks. While the rest of the world looks shaky (especially emerging markets), US indices, such as the S&P 500 and Dow Jones, are still trading around their all-time highs.
But last night, the ‘Fed effect’ wasn’t as strong as it’s been in the past. The major indices initially spiked higher on the Fed’s statement but then sold off, finishing the day only marginally higher.
And here in Australia, the Fed’s shenanigans are not providing any reprieve. In a replay of the June 2013 ‘taper tantrum’, the Aussie stock market is in sharp correction mode.
Does it recover from here like last time? I doubt it. Back then, the QE winddown had only just started. There was still plenty of excess liquidity to go around. In addition, China launched a mini-stimulus around the same time, helping stocks to quickly reverse their losses.
Now, QE is all but over. China is nowhere near launching mega stimulus, and whatever they do, it won’t be about boosting the iron ore price. That game is over.
Where does that leave Australia’s economy, then? According to former Treasurer Peter Costello, not in a very good place. Speaking at some ‘property industry event’ (according to the Sydney Morning Herald) Costello had this to say about Australia’s current mood:
‘We’ve got anxious consumers who are saving money, with real wages falling in a country where incomes have peaked.
‘And they’re distrustful of the political class where consensus is breaking down. We need to work out how to put things back together.’
I always like to hear what a former politician says, because it’s usually much closer to the truth than what current politicians come up with.
Thanks to Joe Hockey, we can compare and contrast…
In response to Costello’s sombre tone, Hockey came out with this on last night’s 7.30 Report.
‘Australia is on the threshold of its greatest ever era. Whatever prosperity we’re going to have in the future, we’re going to have to earn it,’’
I’ll let you be the judge of who’s talking sense and who’s muttering gibberish…
Costello also had some guarded words on Australian property. Reading between the lines though, we think he’s pretty bearish in the short term…
‘He said the "music" of low, short-term interest rates and considerable money printing had to stop, which would cause markets either to tank or to return to more normal growth rates.
‘"It could still be a good time for property if things revert to normal. But there could be a fair bit of hardship before we get there," Mr Costello said.
‘"Between now and then, there will be enormous adjustment in our society. Those that are nimble and those that are quick will take advantage, but it’s being ahead of the curve is what matters."’
I think that means, ‘sell now’.
Whatever he means, he knows property is a major issue for the Aussie economy. That’s why the Reserve Bank is growing concerned. In the minutes of their September meeting, released earlier this week, the RBA made special mention of the risks to the economy of continued house price speculation, which would lead to subsequent price falls.
Unlike the Fed, the RBA has a triple mandate when it comes to rate setting policy. That is, they aim for full employment, price stability and financial stability.
It’s an unachievable trinity, and the RBA is on its way to proving it. Facing a slowdown in the real economy from the slowing mining boom, the RBA cut rates heavily to safeguard employment. It’s cushioned the blow, but the policy also set off a destabilising property boom, mainly centred on Sydney and Melbourne.
Now, they’re scrambling to contain the mess they made. They know it too. Boss Stevens used his past few speeches to talk about the limits of monetary policy. He put the onus back on the government to create the right regulatory framework to promote growth.
Instead of responding intelligently, we get Joe Hockey this week (with an armful of investment properties in his portfolio) denying the bubble in prices (that every other ‘lazy’ analyst around the world can see plainly) and blaming the situation on a ‘fundamental’ demand/supply imbalance.
He seems not to notice that we all know he has the power to immediately alter this ‘fundamental’ imbalance with a few intelligent changes to existing tax regulations.
But no, Big Joe is happy to sit back and collect the unearned economic rents that his own policies shower him with. Best interests of the country? Bollocks.
Australia is heading into its biggest economic slowdown in years…and we have this guy running the books?
For The Daily Reckoning Australia