While the Stock Market is Partying …

There are seemingly always “good reasons” why troubles in a sector of the credit markets are supposed to be ignored – or so people are telling us, every single time. Readers may recall how the developing problems in the sub-prime sector of the mortgage credit market were greeted by officials and countless market observers in the beginning in 2007.

At first it was assumed that the most highly rated tranches of complex structured products would be immune, as the riskier equity tranches would serve as a sufficient buffer for credit losses. When that turned out to be wishful thinking, it was argued that the problem would remain “well contained” anyway. After all, sub-prime only represented a small part of the overall mortgage credit market. It could not possibly affect the entire market. This is precisely the attitude in evidence with respect to corporate debt at the moment…. CLICK HERE for the complete article

The Bank of Canada is under pressure to stop fretting about low inflation after unexpectedly sharp price gains pushed the rate above the central bank’s target, making it more likely the next move in interest rates will be higher.

Statistics Canada reported the annual inflation rate hit a 27-month high of 2.3 percent in May from 2.0 percent in April. Core inflation, which excludes some volatile items like gasoline, rose to 1.7 percent, the highest since July 2012, from 1.4 percent in April.

As recently as last week, Bank of Canada Governor Stephen Poloz had said the underlying rate of inflation, which he pegged at 1.2 percent, was so low it…. CLICK HERE for the complete article

Nearly 92% of economists surveyed this week by the Wall Street Journal expect that our eight-year experiment with unprecedented monetary easing from the Federal Reserve will come to an end at the next Federal Reserve meeting in December. Since we have had the monetary wind at our back for so many years, at least a few have begun to question our ability to make economic and financial gains against actual headwinds. But in reality, the tightening cycle that the forecasters are waiting for actually started last year. Sadly, the markets and the economy are already showing an inability to handle it.

While it’s true that we have yet to achieve “lift-off” from zero percent interest rates, rates have not been the only means by which the Fed has provided stimulus. We also have to account for the effects of…

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As you probably heard by now, Neel Kashkari was named president of the Minneapolis Fed.

Ordinarily, when a regional Federal Reserve bank gets a new president, it is not national news. Patrick Harker at the Philly Fed—crickets.

But Neel Kashkari is something of a celebrity. Most recently, he ran for governor of California. He had some good ideas that didn’t involve raising state income taxes to exorbitant levels. He even beat incumbent Governor Jerry Brown so badly at their only debate that Brown refused to participate in any more debates.

But in the end, it was hard for Kashkari to shed the Republican stigma in California—even as a pro-choice, pro-marriage-equality Republican. He lost, but not ignominiously. Nobody expected a Republican to win in California.

Before that, Kashkari ran equities at PIMCO (a big deal), but most people remember him for being the administrator of TARP, otherwise known as the Troubled Assets Relief Program, otherwise known as “The Bank Bailouts,” conducted under Treasury Secretary Hank Paulson in 2008-2009.

Before that, Kashkari worked at Goldman Sachs.

Pretty good resume for a guy who is 42. I am 41, and I’ve done some cool stuff, but not that cool.

Outside of the resume bullet points, who, exactly, is Neel Kashkari?

Not an Economist

That’s right, Neel Kashkari is not an economist. He is actually an engineer by training, with a Wharton MBA. I’m sure he will fit in great at the Fed (sarcasm).

I can’t tell you how pleased I am that a non-economist will be joining the Fed.

People have spent the last 48 hours poring over Kashkari’s Twitter feed to divine his monetary policy views. Kashkari admittedly does not have the most authoritative voice on social media, sometimes veering off to talk about things like cheap plane tickets on Twitter. I’ve been following him for years and haven’t gotten much out of it.

Suffice to say that Kashkari is probably going to be a hawk. Perhaps not in the mold of Thomas Hoenig or even Richard Fisher, but he is certainly not a dove. Many people also thought Ben Bernanke was a policy dove, but he really wasn’t. He was a registered Republican, and his thoughts on quantitative easing were shaped by his research into the Great Depression.

Kashkari publicly disapproved of Yellen’s nomination. He would seem to have some ideas on how things should be run differently.

Anyone else as Minneapolis Fed president wouldn’t pose much of a threat to the current monetary policy orthodoxy, but Kashkari is something of a celebrity and political lightning rod—someone who has ties to the media, someone with a megaphone who can make things really difficult for Yellen and Fisher. Translation: he is going to be a big pain in the ass.

Of course, outgoing Minneapolis Fed President Narayana Kocherlakota was equally outspoken—the other way. He was the most dovish member of the Fed, most recently advocating for negative interest rates. My sense is that the Minneapolis Fed board of directors accelerated his departure.

What This Means

What it means, potentially, is that we will have one outspoken FOMC member (in 2017) agitating for higher interest rates who will probably get on TV even more than St. Louis Fed President James Bullard. So lots of drama, lots of theatrics, and lots of fireworks.

We will probably also have certain politicians again complaining about the nomination process for regional Fed presidents. That’s three Goldman Sachs alumni in a row.

Some people will call Kashkari a lightweight. I would not underestimate him. (I do not underestimate anybody.) They are going to plunk a free-market capitalist with an engineering degree and an MBA in the middle of all the professors and see what happens.

I do think it is important to note that I have reversed/modified my earlier call that there would be no rate hike in 2017. There will be a rate hike in December, but then none all of next year. The same political constraints apply. I updated my view about two weeks ago in The Daily Dirtnap, after the October meeting. 

But when Kashkari finds himself on the FOMC in 2017, it will be right after the elections, giving the Fed free rein to do pretty much whatever it wants. If the consensus is that the Fed is “behind the curve,” expect them to catch up very quickly.

2017 will be an exciting year for the bond market—and not in a good way.

Jared Dillian
Editor, The 10th Man

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“I guess the definition of a lunatic is a man surrounded by them.” ~ Ezra Pound

Is the Fed playing mind games with the masses or is it simply another version of Britney Spears hit song “Oops I did it again”? Only this time they did not. They keep mouthing off that they are ready to raise rates and then suddenly just before the moment to pull the trigger draws near; some unforeseeable event springs up, and they kick the can down the road again. Two questions comes to mind.

Why the intense focus on what the Fed might or might not do; has the press run out of real stories to focus on. Come on we are talking about a measly 0.25% hike. In the worst of scenarios, this should be treated as a hiccup and not a major tragedy.

Secondly, history indicates that the markets tend to trend higher for up to two years after the first rate hike. Thus, a rate hike should be viewed as a positive event as it would indicate all was well. But perhaps all is not well, and that is why the crowd is panicking at the mere thought of a hike.

We, however, believe that this boring Fed might raise rates story is a non-event and have said so many times in the past.

The Fed is hesitating so much in raising rates because they know that the economy is not really strong. However, what is more, important is they are trying to gauge if the public is buying the nonsense that the outlook is improving via all the manipulated data that is being put out? If they sense that the public is buying this nonsense, then they will initiate a tiny rate hike. To some degree, it appears that the public is buying this nonsense. Whatever move the Fed makes; their ultimate aim is to find a way to embark on another wave of QE. Look at the World’s markets; while the US markets look okay, the emerging markets are taking a beating and its just a matter of time before the contagion spreads to the U.S. The only way to prevent this is to flood the markets with hot money. ~ Market Update Oct 2nd, 2015.

The Fed is still trying to gauge if the crowd has bought into their drug induced theme, which states that all work and no play makes Jack a smart chap. We used to use the word sadly, but is that really the appropriate word to use; if the crowd does the same thing over and over again. Perhaps instead of saying sadly, we should instead begin the sentence with; insanely the crowd appears to be buying into this theme. Is the economy really improving?. ~ Market Update Oct 17, 2015

The most recent jobs numbers masked a dark story. Unemployment held steady at 5.1%, but only 59.2% of Americans have a job. The difference is the unemployment rate only counts people who don’t have a job and are actively looking for one. The labor force participation rate is perhaps a more accurate gauge of the economy. It includes people who’ve given up, don’t want to, or can’t work, and it fell to 62.4% last quarter Full story

If this story is taken at face value, the economy should be in tatters and people should be rioting. Instead, all appears calm; the masses suffer silently and lay the blame on forces they claim to have no power over. As long as they take this approach that is exactly how things will play out. It is, for this reason, the Fed is not raising rates; they know that they have just barely managed to create the illusion that things are stable. They are in no hurry to pop this bubble. While many call the Fed stupid and short-sighted; the truth is that at every twist and turn of the road, they have walked away unscathed. While the gold bugs wait for their day in glory (many have already passed away waiting for that glorious day to dawn), they do not understand that even if Gold moves to 10,000 which it will not, the Fed has, is and will still win the game.

Even if Gold could miraculously surge to $100K it would mean nothing; if you control the printing press, you just push the pedal to the metal and print a lot more and problem solved.

Never get caught up in any battle, for a battle is one of many in a war. The idea should be to win the war and not the battle. Before engaging your opponent, look around, gauge the situation and plan a course of action. The masses are frozen, they bitch and moan about how bad things are, but when push comes to shove, they opt for being shoved, instead of pushing back. In the end, their role as history indicates is that of cannon fodder. Do not feel sorry for the masses and do not attempt to educate them. Should you decide to undertake this unworthy venture, your reward will be a fistful of pain.

The masses are infamous for punishing the wrong person for the wrong crime. There is no such thing as a good Samaritan in the land of investing. A good Samaritan is usually a dead Samaritan and heroes usually have very short life spans. Pay attention to history, you will never see the masters of deceptions or the shadowy elite players move out of the shadows and try to play the role of a hero or a good Samaritan. These roles are created for the masses; they are sold a bag of lies, and they gladly buy into this mumbo jumbo.

No matter what the nuts out there state; the Fed is not hell bent on raising rates, they are not scared or nervous about anything, and they backed into a corner. They have backed everyone else into a corner, and the ones that are scared are the ones makes these idiotic proclamations. The Fed might raise rates, but their goal is to find an excuse that the masses will buy hook line and sinker, to come out with another round of QE. The whole purpose of this experiment is to find out just how far the crowd can be pushed with the proper brainwashing. Right now they are taking notes so that the central bankers of the future can build on these lessons and push the envelope even further. The reason there is no repeat of 1929 is because they took notes and learned from their mistakes. These guys are nefarious geniuses. They give the impression of being impotent, but they are omnipotent. So how do you win? The answer is simple. Throw your silly emotions and bias out of the window and ride on their coattails. End of story.

“It is wrong to think that misfortunes come from the east or from the west; they originate within one’s own mind. Therefore, it is foolish to guard against misfortunes from the external world and leave the inner mind uncontrolled.” ~ Buddha

Tactical Investor where crowd psychology and technical merge seamlessly.