A New World Starts Today

The world changes today if the FED does as expected and raises interest rates.  It is not the little quarter point raise, it is rather the change in FED posture, a posture that started way back in 1994 with Alan Greenspan, a posture that has led to numerous bubbles and unintended consequences yet to be felt.

Our current FED Chair, Janet Yellen, a no doubt good economist, but probably not a good common sense, thinking outside the box Fed Chairman, like Paul Volcker, who by the way did not have a PHD in economics, has stumbled into a real dilemma thanks to former Chairman Bernanke.

Her Dilemma is:

Fess up… or

Continue the game..

What would fess-up contain? for starters..

1) First, assert that the Central Bank balance sheet expansion started by Greenspan in 1994 was a major mistake.  The Global balance sheet ballooned from 2 Trillion to 21 Trillion today, up 10.5 times, Global credit ballooned from 40 Trillion to 225 Trillion today, up 5.6 times.  And for comparison, US GDP between 1994 and 2015, up 2.4 times.

2) What does this mean, the funny money went to asset price expansion not real growth, the first wave of correction for this funny money factor has been the prices of oil and manufacturing inputs, we still have the correction of other assets in front of us.

3) Second, she could assert that the QE1 program was effective in allowing individuals and companies that were out of sync with the real world in 2007-2008 to have some breathing room.

3) Third, she could flatly state that the Bernanke’s QE2 and  QE3 programs were a big mistake, they have added deflationary pressure to world economies by sidestepping growth.

4) Fourth, she could state that her goal is to get the US Central Bank to unwind these programs that started in 1994.

Will she do any of this?  NO, she will continue the game.

So what does this mean for us? We see a period of big volatility over the next few years, because like it or not, what started in 1994 is going to be unwound.  It is just a question of how, will it be because of:

  1. Global Debt issues,
  2. Sharply rising T-Bond prices for a while as a deflation blowout occurs,
  3. Eventual rising interest rates as a search for liquidity develops,
  4. Political movements that jump into the mix.

We plan to address all this in a much more active manner than we have during the Great Recession and its aftermath.  More on this path soon.

 

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