Feeling nauseous?

The markets rollercoaster continues, such that +/-1% on stocks or currencies is neither here nor there, and even correlations back to the oil price or the Chinese stock markets are shifting by the minute (Nikkei closes up, Shanghai closes down). Getting used to this kind of volatility is good, because it is in fact more normal than what we were used to when massive central bank interventions soothed away all the post-Lehman pain. It doesn’t feel good, though, because it’s hard to pick out what is really going on. You know Blondemoney’s view – the secular shift downwards in the Global Trade and Commodity SuperCycle story – but we are still in a shakedown over the market’s view. For the Fed tonight, expect this to get some airtime:

infl exp FED


Ah, the red peril of deflation. Enough to keep central bankers’ fingers twitching over the “add more stimulus” switch. How can the Fed square this with raising rates for the first time in 9 years? It’s unlikely we will be any the wiser this evening, with only a statement and no press conference on the agenda. We will likely have to wait for Janet Yellen’s semi-annual testimony to Congress on February 10th for a more significant steer.

Looking at that graph, you can see why central bankers are in a bind. After all of that monetary easing; after avoiding another Great Depression in 2009; they are left with inflation expectations plummeting to new depths thanks to a decision on Thanksgiving Day 2014 by OPEC not to cut production, and leave the oil price in freefall. Who knew Saudi Arabia’s political agenda would lead to the precipice upon which stock markets now teeter.

This is the real crux of the issue. We had some renewed easing signalled last week by Mr Draghi, and we may get more from the BOJ and RBNZ this week, along with the Fed making a nod to how financial conditions are now tightening. The concern now is that this does not stop what we have seen in January. The volatility cat is out of the bottle [Blondemoney loves a mixed metaphor]. Or as one Blondemoney reader so delightfully puts it, you can’t put the sh*t back in the horse. The endless rounds of liquidity injections won’t help if the world is realising that things are just different. Even though Blondemoney doesn’t fear a Chinese hard landing, it is patently obvious that China is slowing. As it should be, given its attempts to clean up corruption, and rebalance its economy back towards domestic demand rather than export-led growth. Apple are just the latest company to have reduced sales due to the slowdown in China. You only have to look at the performance of luxury goods, or the top end of the London housing market, to see that China is slowing. We don’t need to rely on their statistics bureau, because these are real companies.

Again, this doesn’t necessarily have to mean doom to everyone else, if domestic economies remain buoyant. But it does completely screw up the inflation dynamic that central banks follow. They should ignore it; hope to see it show up in consumer spending or wages; but deflationary forces are here to stay, in phase 3 of the technological revolution.

So, the Fed are almost a red herring. The scales are dropping from our eyes and we are waking up from Bobby’s Dream into Bobby’s nightmare.

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