How can I not talk about the Fed? How can I not talk about the daily jawboning? It is all around us. Every. Single. Day.
And it keeps working.
I feel like I’m being reduced to a loon conspiracy theorist documenting the very reality of it. But I’m not. From my perch I’m doing a public service doing it, because the background motivation for why it is being done reveals a deeper and disturbing truth: They are scared, they are worried and they are desperate to keep the balls in the air.
In my view it’s disingenuous to not acknowledge the real impact central banks have on markets and assess the risk implications.
Yesterday the Fed went full circus. It was stunning to watch and I suspect they made a couple of mistakes by revealing things they shouldn’t have.
Not a surprise Bullard wants to see cuts, but it was Clarida and Williams who dropped the bombs. Wait for bad data? Nah, just cut preemptively. A full abandonment of the ‘data dependency’ charade. To ‘influence markets’. Stated straight up for all to see. They are no longer even pretending.
And a stunning admission from Williams: “When you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress.”
It pays to act when you have limited ammunition. A clear acknowledgement of what I’ve been outlining: The Fed, by not being being able to normalize in this cycle, is scrapping at the bottom.
So they want to intervene before things turn bad and hope this will prevent a recession. How? By blowing the asset bubble even higher.
And it worked again yesterday. Stocks flew higher, especially in after hours.
But then the New York Fed came and sheepishly claimed Williams didn’t really mean it, he was just speaking theoretically wink, wink, don’t you know.
Oh please. Nobody believes you. While futures dipped momentarily on the clarification the monkeys came back and bid stocks back up in classic magic risk free Friday fashion.
My take here for what it’s worth? This week economic data actually showed strength in the economy which is paradoxically what the Fed didn’t want to see as it weakened the argument for rate cuts in July. Stocks took the cue and sold off and the 3,000 level was gone, wedge patterns were breaking and we were at the cusp of a failed breakout after tagging the major trend lines.
So if the data kills your rate cut argument what do you do? You declare the data irrelevant and ramp up expectations for a rate cut anyways and jam stocks higher again and save pattern breaks.
Yes it is this banal, but this is precisely what happened and we can see it in the charts.
And there it is:
On Wednesday odds for a 50bp rate cut had dropped to 34%, by the time Clarida, Bullard, and Williams were done these odds had skyrocketed to 71%.
Come on. None of this is an accident.
JP Morgan now expects 12 central banks to cut rates in the next 2 months. The global easing cycle has begun. With negative rates still in place.
What’s all this really tell us? A recession is coming, they know it and they are desperate to prevent it. It also says zero rates are coming back and I suspect, in due time, negative rates. Which means markets will eventually drop despite the current efforts to jam things higher.
But a Fed desperate to jawbone markets higher, to “influence markets” is playing the most dangerous game.
A Fed admitting they have limited ammunition and are openly abandoning their data dependency mantra to stop the business cycle is an open admission of weakness. And a weak Fed may commit the worst sin a Fed can commit: Lose confidence of the market. And once that happens all things are possible:
A chart that complements perhaps the most obvious reality not readily acknowledged:
Without the Fed flip flop in 2019 we’d be at least 15% lower
Without buybacks we’d be at least another 5% lower
Without both sentiment would be on the floor & we’d be in a recession already.
Cumulative effect: $SPX 2,000-2,200.
— Sven Henrich (@NorthmanTrader) July 18, 2019
The Fed has now further raised expectations. Again. Only a 50b rate cut will do, or they risk disappointing markets. They know this hence the New York Fed intervened on its own communication last night claiming Williams only spoke theoretically and academically, hence Bullard came out this morning and mentioned he’s only advocating a 25bp rate cut. Not only jawboning every day, but now re-gaming their own communications daily as well. Where does this farce end?
Who, but dilettantes, put themselves in this policy position? This lot does.
Like it or not markets have turned into a circus and by participating in these markets you have a front row seat.
The Fed has already made itself the daily punching ball of the President and have signaled themselves to be beholden to markets with no backbone.
Make no mistake, we’re watching history unfold:
Folks, we’re witnessing the final grand collapse of whatever credibility the Fed had left.
It’s truly pathetic.
— Sven Henrich (@NorthmanTrader) July 18, 2019
The Fed, so far continues to succeed to interfere at the sight of any dip and markets react to every single dovish communication. Over and over. But by feeling the need to communicate daily and incessantly and now forced to game their own communications the Fed is playing the most dangerous game: Risking losing the confidence of markets. And once it’s lost it may not be easily regained.
To quote Yogi Berra: If you come to a fork in the road, take it. Investors have a choice to make.
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