The obvious highlight of last week was the long anticipated rate hike out of the FED. The move was highly anticipated and certainly priced into the Fed Funds markets and the FED did not disappoint. They raised the target range ceiling to 1.25%. We aren't truly in agreement with the move as we feel the data does not support their decision. That is unless they are targeting asset prices and feel that they need to stem the tide of appreciation and speculation. The FED has long said that they do not target asset prices but rather opt to maintain their dual mandate of price stability and maximum employment.
We do know one thing is certain, that each rate hike raises the subsidy to the banking sector and considering a 1.25% cap, this means an extra $30 billion a year to those banking institutions. We find it very curious as to why the FED is still using IOER. We have yet to hear a plausible answer and we can't fathom a reason why they would reduce their balance sheet while still paying this subsidy. If there are any persons out there privy to such an answer, we would love to hear it. The fact of the matter is and for us, we view this hawkish FED tone as nothing more than misdirection. They aren't really changing the landscape that much as their overseas cohorts are still heavily printing to the tune of around $200 billion a month. This is absolutely ludicrous and we aren't really sure why the media doesn't question the FED's motives just a little bit more. As we have written many times the central banks work in coordination and for the FED to hike rates and to contemplate a reduced balance sheet is nothing more than trying to regain credibility. For us its mere conjecture, a theory based loosely upon reality and more so on the hope that nobody notices the wizard behind the curtain. We laugh at the distortions all of this crazy central banking has created and it has made us look at the entire financial landscape as if anything and everything is possible. Meaning arguments can be made for asset prices to continue to sky rocket and arguments can be made for them to collapse. So how does one position themselves given these uncertainties? Well, that's the Trillion dollar question.
Given this central bank manipulation it has forced us to contemplate the quantity theory of money lately or this equation M x V= P x T. The Fed thinks that it can control such variables to neutralize any undetermined negative out come. We beg to differ and we feel that no matter what level of aggregate monetary base the FED creates, it will not be able to shift the left side of the equation. Meaning if the FED increases M2 it will not necessarily spill over into an increase in nominal GDP. What if the equation does not take into consideration the fact that an increase in M2 might not equal out to an increase in nominal GDP? What if the money created just sits in the coffers of the already ultra wealthy to await a better optimal investment environment? What if the financial game is no longer zero sum? Has the FED not contemplated such a scenario?
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