Take a break with the sell tickets down here

2016-01-11 2pm EDT  | 

For the past month, financial markets have been acting increasingly squirrelly. Equity markets have experienced the worst start to a new year ever (from ZeroHedge):

Commodities like crude oil, are flirting with new lows or other ones like copper, have broken through to the downside. Signs of financial stress are everywhere. Indicators like the TED spread (Treasuries versus Eurodollars spread – essentially a measure of the difference of funding in the banking system versus risk free Treasuries) have almost doubled in the last couple of weeks:

Overseas things are even worse. The HIBOR overnight rate (the rate at which banks in Hong Kong lend to one another) spiked to 13.396% last night:

In the space of a few short weeks, we have gone from the bulls incessantly reassuring us how everything would be fine to a delude of negativity about how the world is about to end.

This headline from Bloomberg is typical of the worry cascading through the market:

Why the sudden the flip in markets? Although all the former bulls are blaming China, they are missing the mark. Chinese market stress is merely a symptom of the real underlying cause.

The Federal Reserve has created this environment with their hawkish rhetoric and action. Whether the economic optimists want to believe it or not, the Fed has monetary policy too tight. Think about what is happening; we have a rising US dollar, a monster commodity bear market, absolutely no inflation, and now retreating risk prices. If this isn’t the classic signs of a monetary policy that is too tight, then I don’t know what is.

Now you might argue it was about time the Federal Reserve got some discipline. And that’s fine, I understand that argument. But if you are going to make that argument, you need to acknowledge this policy will quickly usher in the next recession. And not only will the economy slow, but risk assets will plunge. Financial asset prices have been held aloft through massively easy monetary policy. Removing that stimulus will cause a wholesale revaluation lower, much lower.

And this is why the markets have gotten so shaky. They have been forced to accept the reality that the Federal Reserve has withdrawn the punch bowl, and not only that, are threatening to call the cops. All these bulls that thought the Fed would have their back are now suddenly facing a much less accommodative Central Bank.

Although I am bearish, we have now hit a point where there is a very real risk the next move by the Fed will be to ease up on the hawkish rhetoric. I have long believed the Fed would tighten until something breaks. Well, something broke.

These market moves are now on the verge of threatening the entire financial system. Don’t kid yourself about the Central Bankers’ faith in the stability of global financial markets. They know all too well how loosely held this complex science experiment is hanging together. The Federal Reserve wants to withdraw liquidity, but they don’t want to cause the next great global economic meltdown.

We are now dangerously close to this occurring. As I write this crude oil is down 6.7% and the S&P 500 has given up all its morning gains as stocks track oil lower. The deflationary pressures are intensifying at a fierce rate.

The Fed claims they tune monetary policy solely for the US economy, but that’s just not true. One of my buddies [

For the past month, financial markets have been acting increasingly squirrelly. Equity markets have experienced the worst start to a new year ever (from ZeroHedge):

Commodities like crude oil, are flirting with new lows or other ones like copper, have broken through to the downside. Signs of financial stress are everywhere. Indicators like the TED spread (Treasuries versus Eurodollars spread – essentially a measure of the difference of funding in the banking system versus risk free Treasuries) have almost doubled in the last couple of weeks:

Overseas things are even worse. The HIBOR overnight rate (the rate at which banks in Hong Kong lend to one another) spiked to 13.396% last night:

In the space of a few short weeks, we have gone from the bulls incessantly reassuring us how everything would be fine to a delude of negativity about how the world is about to end.

This headline from Bloomberg is typical of the worry cascading through the market:

Why the sudden the flip in markets? Although all the former bulls are blaming China, they are missing the mark. Chinese market stress is merely a symptom of the real underlying cause.

The Federal Reserve has created this environment with their hawkish rhetoric and action. Whether the economic optimists want to believe it or not, the Fed has monetary policy too tight. Think about what is happening; we have a rising US dollar, a monster commodity bear market, absolutely no inflation, and now retreating risk prices. If this isn’t the classic signs of a monetary policy that is too tight, then I don’t know what is.

Now you might argue it was about time the Federal Reserve got some discipline. And that’s fine, I understand that argument. But if you are going to make that argument, you need to acknowledge this policy will quickly usher in the next recession. And not only will the economy slow, but risk assets will plunge. Financial asset prices have been held aloft through massively easy monetary policy. Removing that stimulus will cause a wholesale revaluation lower, much lower.

And this is why the markets have gotten so shaky. They have been forced to accept the reality that the Federal Reserve has withdrawn the punch bowl, and not only that, are threatening to call the cops. All these bulls that thought the Fed would have their back are now suddenly facing a much less accommodative Central Bank.

Although I am bearish, we have now hit a point where there is a very real risk the next move by the Fed will be to ease up on the hawkish rhetoric. I have long believed the Fed would tighten until something breaks. Well, something broke.

These market moves are now on the verge of threatening the entire financial system. Don’t kid yourself about the Central Bankers’ faith in the stability of global financial markets. They know all too well how loosely held this complex science experiment is hanging together. The Federal Reserve wants to withdraw liquidity, but they don’t want to cause the next great global economic meltdown.

We are now dangerously close to this occurring. As I write this crude oil is down 6.7% and the S&P 500 has given up all its morning gains as stocks track oil lower. The deflationary pressures are intensifying at a fierce rate.

The Fed claims they tune monetary policy solely for the US economy, but that’s just not true. One of my buddies](http://www.bis.org/about/bimonthly_meetings.htm) has with all the heads of the Central Banks. There is simply no way that behind closed doors the rest of the world is not complaining bitterly about American monetary policy. Now this doesn’t mean Janet will listen, but eventually we hit a point where the Federal Reserve realizes they have accelerated their tightening pace as fast as it can go.

I believe we have hit that point. I suspect we will get an acknowledgement in the coming days from some high ranking Fed official that the pace of tightening might need to be altered due to global economic conditions. Don’t forget that Janet Yellen was the first Federal Reserve Chairperson to openly discuss the strength of the US dollar and also delayed tightening in the fall because of the perilous global economic situation.

At that point we will get a face ripping rally in risk assets. There are simply too many shorts out there. Don’t forget the biggest one day rallies occur in bear markets.

I believe we have entered a bear market, but that doesn’t mean you should just lean on the sell button with impunity. Take a break from the selling down here and wait for some higher prints in the coming days…

Thanks for reading,

Kevin Muir

the MacroTourist