By Mark St. Cyr
Once again, in spectacular fashion, the financial “markets” have miraculously rebounded from the aptly moniker’d “Bullard Bottom” and without pause has traversed in a near vertical assent to recapture the levels where all the uncertainties began. In other words, after all the gyrations over the last 14+ months we are once again only back to the levels (as scored by the U.S. financial markets e.g., Dow, S&P, et al) where the Fed. stood confidently in their economic policy acumen.
Remember those confident proclamations during that time? (paraphrasing) “The economy has recovered quite admirably as to allow the QE (quantitative easing) program to end.” That was a good one, no? Remember what happened next? Nothing, as in the “markets” basically went nowhere up, nor down for months on end.
Sure there were some great headlines made of this path to nowhere as the market screamed sideways in a pattern much like a cardiac reading with blips and spikes that allowed headlines such as “New Never Before Seen In The History Of Mankind Highs!” on a near weekly basis. Yet, although those headlines were true, all they did was mask the fragile, ever deteriorating economy those “meters” were hooked to.
The one thing that never changed during that whole period? The implied fortitude of resolve that the Fed. would indeed strike the path towards normalization of monetary policy and begin raising interest rates away from the zero bound. After all, it was implied at near infinitum: The economy had shown great signs of improvement. e.g., employment at near “full” status and others.
So, with that “mission accomplished” narrative as the wind beneath their wings the table was surely set that in September of 2015 the Fed. would indeed raise rates. Remember what happened next?
Ah yes: China. It seemed just like any prudent U.S. investor or market aficionado might infer; a rate hike here means trouble there. After all, did anyone not understand just how interconnected these “markets” are with currency funded carry trades and more? Oh yes, sorry, it seems the Fed. either forgot or, never realized the obvious inherent risk and consequences. The result?
The U.S. financial markets fell is such a spectacular, as well as, cascading manner that for the first time in the history of the markets all three of the prominent futures markets were halted. Only after stick save inspired shenanigans as those delivered by CNBC™ fame Jim Cramer and his now infamous “Is that a pencil in your pocket or a note from Tim Cook?” reveal did the markets seemingly recover and stabilize.
Then, reality once again set in as the markets collectively held its breath near those lows as it awaited the Fed’s implied: “You’ve been warned we’re going to raise rates.” Then, as the markets reacted to this implied “fortitude” and drifted lower back towards that “bottom.” The Fed. with all its proclamations for faith in forward guidance and clarity did the exact opposite and punted. The result?
Once again in a near vertical assent the markets screamed upwards with barely a respite to recapture the same levels where it all began – again.
Now nearly a year later the Fed. stood poised to do what it said it would. i.e., raise rates. (Talk about mulligans!) So, with data points in hand which the Fed. proclaimed proved their well placed guided hand of interventionism monetary policy had worked effectively, they once again reiterated that they indeed were going to raise rates – and this time they did. The result?
Once again in a near carbon copy of the previous selloff the markets lunged downward in a fashion resembling a luge sled on a one way course. And how and where did the “markets” once again seem to find a stopping point? You guessed it: the “Bullard Bottom.”
And why this level appears so aptly named is for the fact that once again it was non other than St. Louis Fed. president James Bullard who took to the airwaves and threw a Fed. narrative over the decline of prices in oil. Result? (Need I say for I think you are seeing the pattern here.) The decline halted precisely at the level that bears his moniker. But the similarities don’t stop there.
Just like in Aug/Sept of 2015 as the markets began to once again rollover there was an announcement on February 12th. But this time it was not by a Fed. official. No, this announcement came from non-other than one of the Fed’s too big to fail recipient’s of the financial crisis J.P. Morgan Chase™ as its CEO Jamie Dimon announced he was buying 500,000 shares or some $26 million in stock of JPM. It seemed the market took that as “with confidence like that – we should be on board also!” and just like the prior the markets were off to the races skyward. After all, if a bank CEO is buying it surely must be a good time to buy also, right? And so they did.
So, one would garner such a display of “confidence” would give the Fed. the necessary backbone as to follow through on what they’ve implied through their rate hike projections via the Dot Plots. After all, the economic measures they state over ,and over, and over again as their “touch stones” of economic health as well as measurement (i.e., jobs, inflation, etc., etc.) are all within the tolerant values that define “success.” Surely they would continue on their path to monetary normalization. Guess what? Hint: Nope.
Not only did the Fed. punt once again. Both the metrics and language of the press release, as well as, the presser itself given by Fed. Chair Janet Yellen was so convoluted, obtuse, as well as defensive even many of her staunchest defenders or cheerleaders couldn’t make heads or tails out of what should be easily and readily addressable answers.
Dot plot projections that implied 4 rate hikes now imply 2, which to even the most casual Fed. observer now more likely means – zero. All that great data that was used for a “data dependent” Fed? Sorry, no data for you. Well; data that represents the U.S. that is.
You should now infer that all “data” is “international.” i.e., what’s happening elsewhere supersedes data the Fed. keeps repeating its mandated to oversee and foster. (e.g., U.S. employment and inflation.) Again, even some of the most lenient critics of the Fed. were themselves struck by the fact that the once stated goals which the Fed. communicates ad nauseam as desired levels for policy normalization once again decided inaction – as action. When in fact these levels have been either hit or, are within meaningful “mission accomplished” parameters. And when it came to answering about the Fed’s credibility issue? Well, see here for yourself.
All I’ll state for those still confused about Fed. policy is the following: When in doubt – just move the goal posts. Problem solved. In theory anyways. However, isn’t that all that all that economics truly is? e.g., Theory.
However, you know what is no longer theory nor a “data” point that’s fungible? What level the U.S. financial markets are currently trading at.
To now dismiss Fed. policy causation as “correlation theory” is laughable. The markets are now so intertwined and Fed. dependent the observation of whether correlation is causality has been rendered moot. Without the Fed. – there is no market. That’s now a proven fact. Period.
Everything, Every market, every stock, every currency, is correlated and dependent of its very existence or viability as former Dallas Fed. president Richard Fisher once implied: on a “diminutive woman” to play Atlas.
And exactly where are these markets once again? Hint: Right where it all began. Where the Fed. declared “mission accomplished” twice before when they announced QE was over, and where rate hikes were warranted. So, what happens at this third rendition? Is three times a charm? Who knows. All we can do is wait, see, and hope everyone is on the same wavelength the Fed. Chair states it’s on as well.
It’s also quite possible we now have two new concrete “data” points or metrics far more impervious to movement which have supplanted the once Congressional mandated “data” points current Fed. watchers once looked upon as “gospel.” Those data points?
Policy action or inaction is dependent on either a break of the “Bullard Bottom” (i.e. 1800ish SPX, 15,500ish Dow) or surge back to “fortitude central” (i.e. 2050ish SPX and 17,500ish Dow) where we once again stand, and await what monetary dictate the Fed. will deliver next. The only issue now is…
Is the Fed. still on the same page? Reading from the same playbook? Or, even on the same wavelength as the markets? And probably more importantly: with all the missteps and confusing commentary emanating from the Fed. – will the “market” continue to respond as it always has? (Look to the EBC and BoJ decisions of late for clues)
Right now it’s anyone’s guess. And in my opinion, there’s no one guessing more about what to do next – than the Fed. itself.