I have warned investors in the past that the Fed's rapid expansion of credit would cause the U.S. economy to enter a period of unprecedented volatility between inflation and deflation. This would lead to violent moves in most markets, especially interest rate sensitive investments. That time has now arrived.
The easy monetary policy from most central banks has led to low interest rate addictions and global imbalances on a massive scale. Therefore, any threatened removal of central banks' liquidity would cause the pendulum to swing intensely from inflation to deflation. Recent communications from the People's Bank of China and Fed (although a parade of FOMC members has been trying to recant Bernanke's comments) have tried to wean the market's dependency on free money.
The problem is markets have become so addicted to low interest rates and liquidity injections that even a hint at preparing markets for the eventual increase of rates caused massive repercussions. Perhaps that is the message plunging commodity prices have been telling us.
In China, the threat of withdrawing stimulus caused their interbank lending rate (SHIPOR) to spike from 3%, to over 10% within a week. This tells us Chinese real estate assets are in such distress that banks do not trust each other's collateral when making overnight loans. Sort of reminds you of our LIBOR market debacle the U.S. suffered through back in 2008 before the S&P 500 plunged 60%. The manipulation of money supply and investments by the Chinese government caused runaway inflation in their housing sector. Now, the attempt at normalization in the real estate market by the new Xi Jinping regime has revealed its insolvent condition and helped send the Shanghai Stock Market down 15% in the last month.
Some countries have just begun the pursuit of record-breaking inflation. In Japan, the Abe regime is not pursing policies that promote viable economic growth; but has instead based a recovery on currency destruction and inflation. Europe has already aggressively tried ...