Rejoice: we may be very close to Fed capitulation

 The moment that investors discern signs of any such Fed capitulation, there will be a massive bear-trap rally in battered global equities – at least until the bulls are hit by the oncoming steam-train of deflating profits.

The broad dollar index is at an epic high, which means slow torture for emerging and frontier markets with $4.2 trillion of debt denominated in dollars.

There is $13.4 trillion of offshore dollar debt outside US jurisdiction (BIS data) with no clear lender-of-last-resort.

Not only is the Fed rushing through jumbo rises of 75 points each meeting, it is also draining global dollar liquidity with $95bn a month of quantitative tightening (QT). It has never done the two together before. 

And it does not understand how QE/QT actually works, as admitted cheerfully by one Ben Bernanke, Nobel Prize laureate as of yesterday.

Monetarists have been warning for months that the Fed model misunderstands the potency of QT. They have been screaming from the rooftops that key measures of the money supply are collapsing on both sides of the Atlantic. 

They fear that the world will careen into a horrible slump unless the central banks ease off soon.

It goes without saying that the policy establishment will never listen to monetarists, laughable sooth-sayers in their olympian (and unfair) view.

Ambrose Evans-Pritchard Telegraph 11 October 2022

https://www.telegraph.co.uk/business/2022/10/11/rejoice-may-close-fed-capitulation/

Markets at risk of ‘disorderly’ sell-off, says IMF

Higher rates and lower growth threaten to expose financial fragilities, according to top Fund official 

In its twice-yearly Global Financial Stability Report, the multilateral lender said the surge in global borrowing costs, coupled with poor trading conditions and souring growth prospects, threatened to unmask the financial system’s fragility.

The report adds to a chorus of warnings that one of the most aggressive campaigns to tighten monetary policy in decades could trigger further volatility and a broad-based sell-off across asset markets.

FT 11 October 2022

https://www.ft.com/content/4d230c4e-4b6f-4ead-a915-16ff1b699eb5

Global Financial Stability Report

https://www.imf.org/en/publications/gfsr