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Fed in a Box -- Right Along With Its Global Central Banker Cousins


Shockingly bad housing data out of the US Friday has the burden of proof back on the FOMC hawks.

Virtually every global central banker (with the exception perhaps of Helicopter Ben himself) has shown that they want to come out and talk hawkish and return to a sense of normalcy with their country's monetary policies at the earliest possible chance. How many have the numbers that will allow them to make that change?

Wish all they want – things just aren't good enough to justify a shift yet

I follow the global forex markets like a hawk on a nightly basis now and have had the pleasure of monitoring central bankers' rhetoric versus economic reality live and in color. Just in the last month, I've witnessed bankers from Australia, New Zealand, Japan, and of course, here in the US all come out in either interviews or speeches, talking up the possibility of being able to step off the gas pedal in terms of their monetary policies. Without fail, however, their hawkish rhetoric was quickly beaten back by their more dovish politicians and colleagues after actual economic data was released that showed the more morose reality of their countries' economic situations.

The Australian dollar, which had been beaten up mercilessly for months previously, went on an absolutely face-ripping tear of over 4,000 pips to the upside on hawkish chatter from the Reserve Bank of Australia's leadership and some (many believe fabricated) hopeful data out of China. That rally cost an awful lot of money for shorts, which admittedly is their own fault for staying in an overcrowded trade far too long. However, not more than 10 days later, the RBA was out, indicating that it really has no justification to raise rates anytime soon as its internal growth rates, a lack of inflation, and continued concerns about China all far outweighed any positives it was seeing from housing, etc. inside of Australia. Naturally, the AUD/USD fell right back down to near the early-August lows, crushing the hopes and the wallets of any undisciplined Aussie bulls (the only reason the AUD/USD cross is ripping today is due to the horrible housing numbers out of the US this morning).

I could run through similar examples of this hope vs. reality scenario with all of the countries mentioned earlier. Here in the US, witness all the Fed governors in recent weeks, talking up tapering and how they then got sideswiped by last week's poor manufacturing and sentiment data as well as this week's tick up in jobless claims and very poor housing data today.

I think you get the point that we all need to take what we hear from politicians and bankers with a big grain of salt. They, like all the other "responsible" bankers globally, want desperately to return to normalcy, as we all do. Unfortunately, they -- along with traders and investors who've profited from this steroidal run in the markets -- may have become unwilling addicts to the medicine they've been pushing on everyone. The stymying of the natural market cycles may be what's prolonging this weird funk that we're in globally, where paper assets continue to appreciate, filling the coffers of the financial institutions while there's no real economic recovery backing up the higher prices.

The other point is my regular public safety message: You need to be very, very disciplined when dealing with the highly levered currency and futures markets affected by this ongoing hope vs. reality dynamic.

Twitter: @seachangereport

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No positions in stocks mentioned.

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