Talk about a wild roller coaster ride. Yesterday, the Dow plunged 230 points, and then rallied back into the plus column before it fell again, to close down 100 points for the session.

The backdrop to this craziness was the Federal Reserve minutes. In their last gathering, the Fed has not decided whether to hike rates in September, even though there is huge internal pressure to do so…as soon as possible. 

“However, some Federal Open Market Committee (FOMC) participants expressed the view that the incoming information had not yet provided grounds for reasonable confidence that inflation would move back to 2 percent over the medium term and that the inflation outlook thus might not soon meet one of the conditions established by the Committee for initiating a firming of policy.”

-Fed Minutes

However, once Wall Street stopped cheering about another rate hike, it delayed the sobering realization of just how flaccid this recovery has been and how it has started to sink in again. Hence, the short-lived rebound. Making things even more complicated is the role of China’s economy in future Fed decisions.  We jeer at their problems and dance on their economic grave; however, we could be celebrating a more difficult economy in America.

The Fed is saying that we are importing deflation and that it could be infectious. In fact, at the center of its worries, the Fed cannot get a handle on inflation. While you might wonder why they would want inflation, remember we are talking about good old-fashioned inflation that begins with consumers having too much money and chasing too fewer goods. Would you like to have too much money?

The real deal is that the Fed has failed miserably. Back on August 8, 2007, the Federal Reserve balance sheet was a whopping $869,000,000,000. Fast forward to July 29, 2015, and those assets swelled to $4,480,000,000,000. To put this into proper perspective as a percentage of the U.S. Gross Domestic Product (GDP), Fed assets have never been higher.

• 1937 23.0%
• 1945 20.2%
• 2011 19.0%
• 2015 25.5%

There’s the question of what happens when the Fed tries to off-load all these ‘assets,’ but there’s also the risk-taking, falling so flat that no one has to consider shutting down the entire operation.

Deflationary Death Spiral

Yesterday, crude oil took another 4% hit, taking the commodity to a six-and- a- half- year low. The latest move happened after a report on higher inventory, but the overall move seems to go beyond supply and demand.

Crude is a global commodity, but it’s also influenced by the strength or weakness of the dollar. Then, there are your basic technical factors- in this case, a broken chart that suggests $40 must hold next.

Another factor for the Fed to consider is the rapid sell-off in the junk bond market. Typically, this is a market that trades in isolation, but some big players are saying much more pressure shouldn’t be ignored.

Moreover, I wish the Fed was not a factor; but they are, and in the wrong way, because their actions help stall the recovery. It would be great for the economy and the market if they got out of the way. It is not because it’s a sign that the economy is doing better, but it would unleash fence-sitters and business decision-makers to put money to work rather than guessing on the next tick in rates. 

Today’s Session

The Dow Jones Industrial Average opened lower and has already declined over 140 points. The Nasdaq and the S&P 500 are quickly following, down by similar percentages. We have a lot of economic releases coming out today including the Jobless Claims report. Initial jobless claims inched higher in the week ended August 15^th to 277,000 after coming in at 273,000 the prior week. We will be sure to touch on this more, as well as on other releases, in the afternoon note.