Cycles or Central Banks? Investment Challenge Needs A Process.

August 27, 2015

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Nomi Prins explains “economic” policy in 2 sentences.

Keith Weiner tears down central bank mythology.

Volatility explosion is a crack in the facade of “economic” policy.

Break-even inflation levels show Federal Reserve policy is inconsistent and incoherent.

Ray Dalio and Charles Hugh Smith explain the dangerous dynamics of interest rates.

Investors have to make a choice. Cycles or central banks?

Investment challenge requires an effective transparent investment process. Keith McCullough explains. 

Understand distortion. Look at Silver. Current “market” prices may tell you less than you think.

Most likely the current correction will take some time.


Nomi Prins explains “economic” policy in 2 sentences.

“Too big to fail is a seven-year phenomenon created by the most powerful central banks to bolster the largest, most politically connected US and European banks. More than that, it’s a global concern predicated on that handful of private banks controlling too much market share and elite central banks infusing them with boatloads of cheap capital and other aid.

Synthetic bank and market subsidization disguised as ‘monetary policy’ has spawned artificial asset and debt bubbles – everywhere. The most rapacious speculative capital and associated risk flows from these power-players to the least protected, or least regulated, locales.

Today’s central bank and regulatory framework socializes losses and risk for populations and privatizes gains for big banks. It is not sustainable –  not for citizens, and not even for bankers.”

Nomi Prins

Keith Weiner tears down central bank mythology.

While Nomi Prins speaks truth to power, 0815currencywar maintaining that power requires a very different narrative. Keith Weiner does a great job of exposing the more familiar narrative as just a set of core myths about monetary central planning.

Mainstream economists tell us that the Federal Reserve protects us from economic waves, indeed from the business cycle itself. In their view, people naturally tend to go overboard and cause wild swings in both directions. Thus, we need an economic central planner to alternatively stimulate us and then take away the punch bowl.”

Volatility explosion is a crack in the facade of “economic” policy.

This grand central bank experiment becomes explosive when natural cycles refuse to comply with the engineering of the central banks. This happens when natural cycles become diametrically opposed to the mandates and delusions of the central bank “scientists”. This is why a volatility explosion became inevitable.

Last week the fastest explosion in volatility in years tells us a great deal about the nature of “markets” and the “economy” today. It is essentially a crack in the facade of central bank mythology.

Quietly, market-based measures of the0815inflationbe anticipated future “inflation” path have crashed. Inflation breakevens in TIPS hedging were as low yesterday as the lowest point from January 14 in the 5-year; seriously lower at the 10s. Even the Fed’s preferred market measure of expectations, the 5-year/5-year forward inflation calculation, dropped to a low not seen since the highly unstable days exactly five years ago, just before Bernanke uttered QE2 to 2010 Jackson Hole.


However, this time instead of easing at0815Deflation_cartoon_02.24.2015_normal this extremely low inflation reading, the Fed continues relentlessly with its tightening policy guideline. Apparently, this time around the same conditions require the exactly opposite prescription! Jeffrey Snider makes a valiant attempt to explain the thinking behind this extraordinary inconsistency and incoherence.

Ray Dalio, who runs the world’s biggest hedge fund, seems to confirm this policy contradiction. Although he accepts the Fed’s policy tightening direction, he predicts that it will just result in a massive reversal to easing. This is usually called a policy error.

Charles Hugh Smith explains that the 0815Central_banker_cartoon_03.03.2015_normalsudden stock market collapse came as the Fed temporarily lost its grip and the real markets staged a protest.

Investors have to make a choice. Cycles or central banks?

This dynamic creates an enormous investment problem. If growth continues to slow as it has been for almost a year, and the Fed tightens policy, the economy will slow at an even faster rate. Forcing the stock market higher in these conditions when S&P 500 revenues are already in decline just looks like an accident waiting to happen.

Investors have to make a choice. Cycles or Central Banks? Who knows what the central banks will do? As yet they show no sign of changing their tune. As explained before, by their own forecasts the Fed is currently below target on both inflation and growth, and neither are moving in the right direction. The basis for tightening is therefore not clearly articulated, to be polite.

The Fed can bend the cycle and “markets” but they can’t break them. Central bank omnipotence is just part of another cycle that will in time reveal their impotence. Only the time frame and tactics are the unknown challenge.

However, whatever happens and however long this struggle continues, you better be ready for when natural cycle dynamics return.

Investment challenge requires an effective transparent investment process. Keith McCullough explains. 

Investors are facing a highly challenging environment at the current time.  It has become unusually unstable which means that a simplistic linear static approach may become a much more unreliable methodology than in the past. Risk management is key to navigating the markets currently and this involves embracing uncertainty, and  effective multiduration and multi-factor dynamic process with an excellent track record of success.

No methodology is perfect and so it is crucial to understand the strengths and weaknesses of any tool. I am a subscriber to Hedgeye (beyond which there is no other financial link) which provides a very effective process and multi-year transparent track record of success. Investors may well want to consider new techniques and strategies in the current environment. This is a very brief introduction to their process, which may provide some valuable insight to evolving investment strategies.


Understand distortion. Look at Silver. Current “market” prices may tell you less than you think.

In natural free flowing markets prices 0815Silver-ETF-Build-vs-Coin-Bar-4-yr-periodprovide an excellent real time guide of value and economic development. However, in current circumstances,  many prices have become astonishingly distort by central bank policy. This is most clearly demonstrated in the silver market.

Investors can’t always change the system but where they have a choice they can still express a strong preference about their level of trust in “public” markets.

Investors also need to ensure that their process incorporates some mechanism that incorporates an allowance for distortion.

Most likely the current correction will take some time.

The chart how stocks have evolved0815Stock-Market-Bottoming following other similar volatility spikes. Clearly, just historically, there is likely more to go as regards a further correction, both in terms of time and price.

Furthermore, policy at zero interest rates has far less fire power, and at this stage much less credibility after 6 years of poor results and very little empirical validity. Lastly, there is a significant risk of a policy error.

A great deal of emphasis should be  placed on risk management at the current time.










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