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Takeaway: A bitter reality check is around the corner for easy-money addicted investors.

The Central Planning #BeliefSystem Continues To Break Down - bear cartoon 01.26.2016

About a month or so ago, hawkish regional Fed heads made the mainstream media rounds (see Fork-Tongued Fed Needs To Get Its Story Straight), talked up the U.S. economy and called for three or more rate hikes this year. Then, a week later, a dovish Yellen dialed back the rhetoric, sounding a cautionary tone on the economic outlook, while reiterating the headwinds we faced would "gradually dissipate."

Investors, addicted to easy-money and Fed soothsaying, took these dovish comments in stride, jamming equity markets higher, while the U.S. dollar weakened and rate hike expectations all-but evaporated. Notice, in the table below, the implied rate hike probability for this year doesn't get above 50% again until December:

The Central Planning #BeliefSystem Continues To Break Down - fed rate hike prob

Following that line of thinking, A few questions:

  • What happens when U.S. economic growth and S&P 500 company earnings brush up against the toughest comps of the cycle in Q2 and Q3?
  • Will U.S. investors finally spiral back to reality, understanding that the Fed's impotent monetary tool kit has failed to arrest economic gravity?

We continue to believe it is going to get nasty in equity markets... 

Click video below to watch.

Evidence?

The central planning #BeliefSystem is already breaking down in Japan where, since the announcement of negative interest rates in January, the Nikkei has declined in fairly short order while the yen has strengthened.

The exact opposite of what they intended.

The Central Planning #BeliefSystem Continues To Break Down - nikkei yen

It's worth noting that central planners are keenly aware of this macro market breakdown. Over the weekend, BOJ governor Haruhiko Kuroda told the Wall Street Journal:

“If excessive [yen] appreciation continues, that could affect not just actual inflation, but even the trend in inflation through its impact on business confidence, business activity, and even through inflation expectations."

Kuroda reiterated "if necessary to achieve 2% inflation target" the BOJ would "not hesitate to take further easing measures."

Okay.

But what makes him so sure anything the BOJ does will actually work?

stay tuned.