NFTRH 204 went like this… Crazy talk about the Outer Limits and complete control in the opening segment (It’s All Out the Window Now)
and a serious talk about the DML (Dear Monetary Leader), deflationary
destruction and the Crack Up Boom in the Wrap Up segment. In between
was a whole lot of nuts and bolts functional analysis of the situation.
Anyway, here’s the other half of the bookend…
i2k12 Back With a Bang
Dear Monetary Leader is ushering in a brave new world and we will
have to be nimble and ever in possession of a functional filter or
better yet, bullshit detector. I believe this is it, the beginning of
the end game. It is funny to think that so many months ago this letter
had come up with another one of its little buzz phrases in ‘i2k12’
(inflationary 2012), which I had imagined holding sway in the second
half of 2012 after the deflation scare had reloaded the will of policy
makers to inflate.
Now we are here and I must admit there were times when I was brought
to my figurative knees with respect to that view. That is what markets
do; they humble you and challenge you to be the best you can be. That
is probably the biggest reason I love this so much.
Moving along, I write a lot about perceptions among market
participants and now I am not so sure policy makers even care about
perceptions. I see so many extreme things in so many charts that taken
at face value, would cause me to write RISK IS HIGH… GO CASH.
But then turning away from the technicals, sentiment and macro fundamentals the FOMC statement from last week says “the
Committee agreed today to increase policy accommodation by purchasing
additional agency mortgage-backed securities at a pace of $40 billion
per month” and their actions “should put downward pressure on
longer-term interest rates, support mortgage markets, and help to make
broader financial conditions more accommodative” and… “the
Committee expects that a highly accommodative stance of monetary policy
will remain appropriate for a considerable time after the economic
To which any sane person might question “what if these policies fail to bring about the desired effect this time as they failed to do the first two times?”
Further, we might question whether this is the crack up boom. Now,
we hear about the hyper inflationary spiral every time the 30-year yield
approaches the red line (EMA 100) of the chart on page 4. So why is
the usually evenhanded NFTRH suddenly acting like a raving
inflationist? I would have to say that the biggest reason is the
proximity of asset markets to their recovery and/or all-time highs even
as the Fed panics as if we were in the midst of a deflationary
What I find fascinating is that they are trying to pump asset prices
even further. The FOMC mentions supporting the mortgage markets by its
manipulation of interest rates. Well, here is the Housing Index; it has
something to do with mortgages doesn’t it?
The chart was produced on July 1 for NFTRH 194 and a now modest
looking target of 145 was set. At the time this was just another
indicator to keep us leaning bullish over a very difficult summer as the
rally got going. At the time the target was established many people –
including this writer – wondered how and why it could get to the
target. Now look at it; the thing is going parabolic.
To me, this is exciting, fun, scary… no, frightening all at
the same time. I have been writing for a lot of years now and the stuff
I have been writing about may actually be engaging. Again I am not
smart enough to know whether the eventuality will be a deflationary
unwinding or a hyperinflationary blow out. Prechter and desciples of
von Mises can fight that one out. I don’t need to know the ending
because right now we are on another transition from deflationary to
inflationary and NFTRH rides the interim macro plays. i2k12 is
Yet I cannot get ‘CRACK UP BOOM’ out of my head and it is not just
because asset markets are going up. It is because of the resolve with
which the Federal Reserve seems to have locked itself into its stance.
The game has changed and I sense NFTRH changing with it. That is
because I am changing. Change is good I guess. Let’s play it for all
it is worth and hope that by taking enough prudent action along the way
the fallout will not be as bad as it could be when this macro operation
fails one day.
Meanwhile, the last word this week goes to the lone FOMC dissenter,
Jeffery Lacker – one the bad cops I often refer to on the blog – who in
reality is a relatively sane and ethical person, like Richard Fisher and
a few other lonely official voices.
“Further monetary stimulus now is unlikely to result in a
discernible improvement in growth, but if it does, it’s also likely to
cause an unwanted increase in inflation,” he said. “Unemployment does
remain high by historical standards, but improvement in labor market
conditions appears to have been held back by real impediments that are
beyond the capacity of monetary policy to offset.”