Fed out of step with world: Will it end badly, again

Decouple?

In the beginning of the financial crisis they were trying to tell us that the sub-prime problems really did not matter and even if it did it was a U.S. problem. They said that even if the U.S. banking system had some issues it was ok because Europe and China had decoupled from the United States and regardless of any U.S. problems the rest of the world would be fine.

That mindset set the stage for one of the biggest bull-runs in commodity history. As Europe raised rates while the United States was lowering rates it created a run on the dollar and a rush out of dollar based assets and after a period of twisted delusions and record rallies we saw an epic commodity crash.

Now we are on the other end of that story. The Federal Reserve in their FOMC minutes seemed to suggest that they were closer to a rate hike than some had thought. The Fed seemed shocked with “greater than anticipated” improvements in labor market conditions even with sub-par labor utilization and wage growth. The minutes also stated that inflation had firmed and expect that it could even hit their lofty 2% goal.

Yet with weak data in Europe like last night’s Eurozone manufacturing and service activity and weak inflation data it seems that Europe won’t be in any position to raise rates. Japan also saw softer data than anticipated, raising the big question whether the United States can ignore Europe, Japan and the emerging markets as they head towards an interest rate increase.

Now we are seeing that decouple word again. There are many that are saying that it won’t matter if we raise rates because we have decoupled and we have to worry about U.S. interests. Where have we heard that before? 

So bring on the lonesome dove Fed Chairperson Janet Yellen, how will she face her fellow struggling central bankers and try to explain her new policy? Already the dollar is soaring dragging down gold. Stocks are rallying yet oil seems at least for the short-term still reeling from yesterday’s Energy Information Administration report.

The EIA lent support as they reported that U.S. commercial crude oil inventories fell by 4.5 million barrels. Total motor gasoline inventories increased by 0.6 million barrels last week, and are in the middle of the average range. U.S. crude oil refinery inputs averaged over 16.4 million barrels per day during the week ending Aug. 15, 204,000 barrels per day more than the previous week’s average. Refineries operated at 93.4% of their operable capacity last week. Gasoline production decreased last week, averaging about 9.2 million barrels per day. Distillate fuel production increased last week, averaging over 4.9 million barrels per day.

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