With global central bank policy in disarray following the Fed's now admitted "policy error" of tightening just as the US and global economy are heading for recession, while the rest of the world desperate to cut to ever more negative rates, not to mention Japan's abysmal foray into NIRP, there was hope that this weekend in Shanghai the G-20 would "bail us out" and unveil some miraculous rescue for risk takers at least one more time.
However, as Jack Lew explained earlier today, this won't happen, leaving traders in a state of limbo and cognitive shock - after all if not even the central banks have your back, then who does?
Still something has to happen, or otherwise the world will careen into a deflationary, NIRP collapse and the Fed's 25bps "recession buffer" will have absolutely no impact before the US itself plunged into economic contraction.
One proposal comes from BBG trader Richard Breslow, who like most others, is sick and tired of the constant market manipulation, endless central bank jawboning, and who like us, is hoping that one day markets will once again be free and efficient, not for any other reason but because as Breslow notes, even the average Joe gets it: "if you really want to see people spend and invest there has to be some belief this won’t all end in tears."
His full note:
Parole For Prisoners With A Dilemma
If the U.S. wants to really do some good at the G-20, they should try to get their heads around the concept of embracing a stronger U.S. dollar. That would be showing a commitment to global leadership, both economic and moral, which has been long absent. It’s a bet on a stronger global economic tide raising all boats.
Even the largest economy in the world has been unable (unwilling) to export growth sufficient to generate momentum anywhere else.We’re left with a negative feedback loop where global policy makers are competitively circling each other rather than constructively driving toward the goal of sustainable growth.
Meanwhile, the Fed is desperately hoping to raise rates. Their version of saving for a rainy day. They’re doing so when the rest of the world’s central banks are on a diametrically opposed trajectory. This introduces conflicting volatility shocks into the financial system giving off signals the FOMC can’t interpret.
Their response has been to hide behind data dependence. Yet given the volatility they themselves are creating and the hurried press conferences to address every short-term move, it looks suspiciously like total lack of conviction. After years of driving down price swings they’re winding us all up for a Minsky moment.
Imposed long-term stability breeds bad habits that lead to instability. Sound familiar? Get short some more convexity, nothing can go wrong.
If the Fed really does believe the economy is okay then, for now, let the tightening come from a higher dollar. Do some good for the world, because cycling through “raise”, “on- hold” “maybe cut” is counterproductive.
Take the pressure off countries feeling forced into the horribly misguided policy of negative rates. They’re the biological warfare escalation of the currency war everyone purports to be against.
Everyone is hoping consumer spending will save the day. Main Street to the rescue again. But the average Joe isn’t as gullible as he once was and the personal savings rate remains high and is rising. Get out and buy something you don’t need, your kids can pay for their own education. If you really want to see people spend and invest there has to be some belief this won’t all end in tears.
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