Last week it was reported that Paul Tudor Jones was overheard openly implying (paraphrasing) “The Fed. should be terrified of the stock market value relative to the underlying economy.” This in turn prompted a response when the Fed’s vice chair Mr. Fischer was queried for a response and replied “We’re not terrified.”
Fair enough, then again, it’s only April.
The real issue at hand is not the response given by the Fed’s V.C.(after all what is he going to say.) No, the real near comical aspect of all this is just how matter-of-fact and “all-seeing” they believe their arguments to be. One would think with what is of public record from their “assessments” to their “reasoning” as to why they chose a death grip to the zero bound, to then suddenly once the election results were not only found the courage to raise, but decided to raise twice within 90 days while basically shouting from the top of the Eccles building that not only were more raises on the table, but also the balance sheet.
The problem for the Fed. of late has been – no one has been listening, and basically, no one’s cared.
This (in my opinion) is what truly terrifies the Fed. And if you watched both their tone and tenor, along with their arguments, as to why now, not before, not any later, but right now was the time to go full-bore on raising rates and cutting the balance sheet, you could see the real reason behind it: They were (are?) terrified of loosing all this new-found power and adulation.
For nearly a decade (yes, it’s been that long) the Federal Reserve along with central bankers everywhere have been the ones in near complete control of the global economy via their differing iterations of QE programs. And what do we have to show for all this economic “wisdom?” Let’s use the Federal Reserve of Atlanta’s Quarterly GDP report for a reference of efficacy shall we? But first, a little history…
Back in days of yore (circa January 2017) The above report for Q1 was estimated at being around 3%. One would think that figure to be a good sign, especially when the Fed. had just raised rates at their Dec. meeting only 30 days prior. Although 3% is still anemic, one will take any signs of “hope” where one can get it I guess particularly when the Fed. Chair via her presser expressed further hiking was all but inevitable, and at a far faster pace, than anyone presumed.
To reiterate: With a GDP estimate in-and-around 3% one could argue (although I would not) that the Fed. postulated with their brethren in other jurisdictions that the economy was indeed “on track” for sustainable and further GDP growth, which warranted raising rates. At least, that’s what you heard if you listened to any communiques via the Fed. and/or the main stream business/financial media. The messaging and tone of it was unmistakably in unison.
How does that same GDP estimate stand today with revisions? Surely it must be at least the same if not even higher since the Fed. felt embolden to raise rates again for the second time in a mere 90 days (March meeting.)
The result for Q1 GDP estimate now stands at a whopping: 0.5% (that’s not a typo, nor was I handed the wrong envelope.)
But not too worry, after all, how much lower can it go? I mean, in April that is, for there is only one more revision to go (on the 28th.) Or, maybe I’m typing too soon? We shall see I guess, and sorry for that sudden feeling of anxiety you may have had. That’ll come all too soon enough I’m afraid. After all – it’s only April.
Below is an important distinction far too many forget…
“You know what the difference is between an Economist/Analyst, and a Business Owner?
When a Business Owner makes a prediction on his or her business and predicts wrong; the business could wind up in bankruptcy. When the Economist/Analyst makes a wrong prediction; they just make another prediction.”
I’m reiterating the above for this reason: The Federal Reserve is not only the ultimate cadre of economists/analysts, but what needs to be pointed out most prominently is this: It’s not only endowed with the capability as to print (e.g., create money ex nihilo) and replace any losses when wrong. There is also no personal recourse at risk for its members; whether it helps, or hurts, an economy other than what conferences, dinner parties, or “institute” they’ll be invited to attend during, or after they leave.
So it was from this perspective I thought it all but comical when the Fed’s Vice Chair responded with the rebuttal, “We’re not terrified” adding my two-cents: Of course not – it’s not your money that’s at risk – and – it’s only April.
So yes, maybe the Fed. isn’t “terrified.” However, with that said, what we can only presume is that at least one of these ever metamorphosing “doves to hawks” and back again depending on “market” conditions is more than a bit concerned as was displayed when none other than N.Y. Fed. president William Dudley had to suddenly take to the media as to calm what could only be described as the beginnings of a possible unrelenting torrent of unwinds within the bond, and currency markets, along with any subsequent accompanying hedges.
What was the catalyst for this sudden taking to the airwaves?
What the definition of “pause” was. (No, that’s not a joke, sorry too say.)
Did I mention this is all beginning to happen in April?
Seems funny how suddenly the “markets” only 30 days hence since the March hike (mind you – the 2nd in 90 days) are taking to reacting to any Fed. speakers words once again. It seems like only yesterday (it was only March) when the Fed. seemingly couldn’t get the “markets” attention. Not even with two rate hikes in 90 days and posturing for even more. So much “more” that none other than “Mr. Courage to print, and print some more” former chairman Ben Bernanke took to the keyboard as to show his concern if the Fed. was truly talking the game for balance sheet reduction with his opinion of (paraphrasing) “I hope not.”
Here’s how the former Chair described any balance sheet reduction ideas. To wit:
“First, to minimize the risk that unwinding the balance sheet will disrupt markets and the economy, the best approach is to allow a passive runoff of maturing assets, without attempting to vary the pace of rundown for policy purposes. However, even with such a cautious approach, the effects of initiating a reduction in the Fed’s balance sheet are uncertain. Accordingly, it would be prudent not to initiate that process until the short-term interest rate is safely away from the effective lower bound.”
So let’s take the above observation at its word: Does one think if that was a prudent observation via the former Fed. Chair with all his acumen pertaining to the Fed. and policy initiatives – that talking, insinuating, and proposing a reduction this year in concert, or, as a primary tool to be enacted when the effects of 2 rate hikes within 90 days have yet to be filtered, and their ramifications manifest within the economy as prudent or advisable?
Regardless of your feelings about the policy itself, just weigh the above in context from a business standpoint. Can you see where “policy error” could be the most terrifying expression to yet be felt in the economy based on the above? Especially – since it’s only April? (again keep in mind Mr. Bernanke penned that piece way back on January 26, 2017. I’m not sure if the internet had yet been invented back then.)
Why should this be of concern? Hint: Today (as in April) the Fed. (once again) has suddenly needed to sprint to the airwaves with near immediacy as to parse the definition of verbs once again, or else, all heck appears about to break loose. (See above’s bond, and currency scenario for context.)
Why might that be you ask? Great question, let’s start here…
For those who don’t remember it was only a few months ago when this current incarnation of Fed. board members that were so vehemently dovish back in Oct/Nov of 2016 suddenly morphed into a virtual squadron of “Hawks are Us” insinuating no room for misinterpretation directly after the U.S. election results.
The switch was unmistakable and the Fed. itself has been doing everything within its vocal cords as to prove that switch had indeed been made. The March hike was that de facto moment to any who thought otherwise.
That was until what appeared as the Fed’s cover-for-courage (i.e.,Trump-reflation, hopium trade) showed to be DOA.
Now, with all eyes refocusing back onto the Fed. and its raising of rates into the reality of an anemic, if not near recessionary economy, it would appear suddenly the Fed. feels the need to send out speaker after speaker in a “he said-she said” ever-growing conflicting narrative of “hawk vs dove” parsing spree for where the Fed. currently stands for the further raising of rates, and more.
Don’t take my word for it. All one needs to do is listen, read, or watch any current Fed. communications over the last 30 days or so. We’re back into parsing verbs and their meanings once again. (see the afore-mentioned Mr. Dudley’s latest for clues.)
Oh yeah – and it’s only April.
Speaking of April, I haven’t even mentioned the sudden “retiring” of two members out-of-the-blue: One for reasons not elaborated (e.g., Mr. Tarullo), the other, for reasons I can only surmise the Fed. wishes needn’t be elaborated (e.g., Mr. Lacker’s admission he leaked market moving data.) Did I say, “It’s only April?” This is also the reason why I used the term “this current incarnation.” After all – it’s only April.
Again, let’s go back to where this supposedly all stood back in and around January of this year. You know, when all that “economy is awesome”-ness was emanating from a confident FOMC rate hiking squadron of hawks deciding it was not only time to raise, but rather, it was time to raise, and raise some more. Has anything else happened since then?
Hint: Now with Article 50 triggered in the U.K. and Brexit all but a done deal. We now have the elections in France and a possible Frexit on tap depending on the outcome. This alone could be the beginning (as well as encouraging from the growing chorus of EU partners who also want out) for a possible (if not inevitable) complete and utter dismantling of the E.U. leaving the ECB (European Central Bank) and its ever so “ebullient” Mr. Draghi precisely where? And with what? To do what further “whatever it takes” exactly?
And I haven’t even mentioned N.Korea, China, Russia, NATO, a reverse in the $Dollar, and a whole lot more.
Did I mention: It’s only April?
With all the above for context it is also quite possible all the continuing soft data surveys falling in unison are nothing to worry about. Let alone be “terrified.” It’s also quite possible the old adage of “Sell in May and go away” is nothing more than an old traders tale not worthy of anything more than a “flip of a coin” for relevance. So why worry? Let alone – be “terrified”, right?
It’s also quite possible that the Fed’s front-running any possible fiscal stimulus emanating from congress might have been a little premature, if not over zealous. Especially when intertwined with calls of “balance sheet reduction” as not just a possibility, but rather, a probability now that it appears all the “stimulus” the Fed. appeared to be front-running is all but DOA.
It’s all quite possible any thoughts for concern are far too overdone. I mean: What else could go wrong, for the above is sooo 2017 already, is it not?
Sorry, I almost forgot: It’s only April.
© 2017 Mark St.Cyr