Pity poor Janet Yellen, you might say. The head of the US Federal Reserve told the Senate last week that she had been “quite surprised” by the collapse of oil prices since mid-2014. And she added that the rise of the US$ was similarly “not something that we had expected” (you can see the testimony by clicking here).
But then you might wonder why she doesn’t have people on her staff whose job is to seek out different viewpoints? Or, indeed, why she didn’t apologise for these critical mistakes and offer to review the Fed’s methodologies?
Instead, she claimed that the mistakes didn’t really matter, and that the Fed’s policy was still correct. In other words, the Fed is still convinced that it is right, and anyone who disagrees with them is wrong. This suggests it is still failing to learn the lessons of the past, as I discussed in July:
“Previous chairs of the US Federal Reserve had a poor record when it came to forecasting key events:
- Alan Greenspan, at the peak of the subprime housing bubble in 2005, published a detailed analysis that emphasised how house prices had never declined on a national basis
- Ben Bernanke, at the start of the financial crisis in 2007, reassured everyone that at worst, the cost would be no more than $100bn
“So we must hope that current chair, Janet Yellen, has better luck with her forecast last week that: “Looking forward, prospects are favorable for further improvement in the U.S. labor market and the economy more broadly”
My concern is that markets are telling us that something is very definitely not right in the Fed’s models. This is surely the message of the chart above, showing the performance of the Tokyo and Shanghai stock markets over the past 3 months. Suddenly, and quite unusually, both are moving downwards together, despite occasional rallies (eg today in Tokyo):
- Somebody is doing a lot of selling, as both markets are down over 20% in this short space of time
- The sellers desperately need cash, and they keep selling – Tokyo went into into freefall on Friday, falling 4.8%
Who might these people be? In Shanghai, they are perhaps property developers, desperate for cash to support their investments. In Tokyo – Asia’s largest market – they are perhaps oil-based Sovereign Wealth Funds responding to cash calls from governments with urgent bills to pay.
And then we mustn’t forget that the yen has suddenly jumped by an astonishing 8% since the start of February. Somebody must really need a lot of yen in a hurry, to cause that jump in the currency. Presumably the money came from selling stocks in the US and Europe – helping to cause the downturn these have seen since the start of the year.
We should all be very worried when moves of this size take place in major Asian stock markets in such a short space of time. And the yen, after all, is the major currency in Asia after the dollar.
These moves are further evidence that the cracks are opening the the debt-fuelled ‘ring of fire’ created by the central banks with their stimulus programmes. We can only guess where they will next appear.
WEDNESDAY UPDATE: Reuters reports major selling of US government debt by China and Japan. This would help to explain the surge in the value of the yen.
WEEKLY MARKET ROUND-UP
My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:
Brent crude oil, down 70%
Naphtha Europe, down 66%. “Naphtha price volatility in line with Brent”
Benzene Europe, down 58%. “Trading was limited due to the IP Week event in London”
PTA China, down 46%. Market closed for Lunar New Year holiday”
HDPE US export, down 42%. “Domestic prices for export material remained stable this week”
¥:$, down 11%
S&P 500 stock market index, down 5%
