We witnessed a few things for the start of 2015 in the financial markets that were unlike any previous. The first three days of the new year produced the worst three-day stint in the markets – ever. A meaningless, insignificant, trivial, data point? Possibly. However, when it coincides with other noticeable factors taking place across the financial spectrum It behooves any thinking person to sit up and take notice. (Unless you’re the next scheduled appearing CNBC™ “Everything’s Awesome!” fund manager. Then it’s more like a Servpro™ tag line: Like it never even happened.)
The reason why this sell-off in conjunction with its timing raises eyebrows is its direct proximity to the release of the latest FOMC meeting and conference. Here was where markets were supposed to get their “guiding principles” for how to proceed into the new year.
What they seemed to get was nothing more than gobly goop. The all fearing word “patient” reared its supposed vampire slaying head, but instead of replacing the soothing phrase of “considerable time,” it was added too. This in-turn sent some very expensive headline reading HFT computers, along with some very expensive highly paid fund managers into a “Huh what?” state of confusion.
Was the language (as well as the delivery channel) intentionally meant to cause confusion? Possibly. For if one understands how those in the world of “policy wonk” think: Language and the parsing of it will/should only be interpreted in the way those that are writing and delivering it want it too – at any given moment of time.
So they bend and twist every possible meaning into a statement, rather than wring confusion out. This way when the desired action isn’t forthcoming one can always state, “Oh, well I didn’t intend that to mean this, I meant it to be read as that. See!”
This only works when nobody’s really paying attention. But when people are, and real consequences are on the line (as in billions if not trillions of dollars) confusion, double-speak, and the like sets into action a multitude of unintended consequences which the once “masters of communication” never envisioned.
Let’s put into perspective a few items that’s appeared on the screens for both those at the Federal Reserve as well as all those “Everything is awesome” camped fund managers that owe their 2014 bonuses too of late.
First we have the collapse of oil. Good thing for the consumer. Of course. Good for the economy as a whole? Sure, in some areas of business there will be considerable cost saving benefits. However, in other areas it is beginning to show signs of great stress. Primarily in the areas where the latest true growth of late took place: in the areas affiliated to anything relating to oil exploration of any type. Not only here in the U.S. but globally as well.
The real issue of concern for those at the Fed (which one has to assume they are more than aware of) are the stresses continuing to mount within the High Yield credit market. A market in which they are directly responsible for malfeasance with its proportionate risk-taking.
This is where the demand for yield trade was pushed by a Fed. that was relentless on keeping interest rates at the Zero bound. Now that market along with its inter-tangled web of cross, carry, swaps, you name it derivative trades is beginning to buckle. This is one of just a myriad of concerns that must be making all Fed. participants uncomfortable.
You know what is also a factor in driving down the price of oil separate from the underlying weakness that is truly within the global economy? A stronger Dollar. And guess what’s getting stronger by the week? That’s correct the U.S. Dollar. Why?
Well there are a host of reasons and most of them are nothing more than the equivalent of the old saying “It’s the cleanest shirt in the dirty laundry.” That said it should not be underestimated just how dirty the surrounding laundry can get. Especially if more wide-spread fears come into play. And rest assuredly it seems not a case of “if” fears occurs but we are much, much closer: to when.
Remember, the stated intention of the Federal Reserve’s intervention into the capital markets was to help foster a targeted 2% inflation rate. You know what throws all of that out the proverbial window? A rising dollar. The dollar has gained so much strength over the these last few months it is at levels not seen since the financial crisis began. So much for the omnipotence of a Fed. policy hitting it’s target with precision no? But wait…There’s more! (sorry, couldn’t help myself)
How about that latest employment data? Wasn’t it just the best?! The unemployment rate dropped down to (wait for it…) 5.6%. That’s one of the lowest rates again since the crisis began. A number far closer to (and possibly even sooner) of hitting the Fed’s number of “full employment.”
However, hidden within that report were a few other dirty little secrets. As the number of “Mission accomplished” for the Fed. notched closer, the number of long-term unemployed jumped to its highest in decades. As reported by ZeroHedge™ Record 92.9 Million Americans Not In Labor Force.
However shocking as that number is to any American, it’s probably not as shocking (or panic filling) as another number contained within that report to the very people fueling this economy with KoolAid®.
That number is the one that showed wage growth (e.g. average hourly earnings. a requisite data point in calculating inflation) printed not the expectations for an increase of 0.02%. But rather: a decrease of -0.02%!
All that money printing. All that balance sheet inflation (the only place where true inflation is currently) and the result to show on the final report of the year? A year when QE has now been shelved. It can’t even get a print of flat?! Never mind an increase.
And this data point is essential in helping make the argument that interventionist monetary policies resulted in the desired effect of an omnipotent Federal Reserve. What are we to hear at the next press conference: “Ooopsy?”
Once again we saw Fed. officials take to the airwaves in any way, shape, manner, or form to get a message out that whatever you thought was intended for the messaging from Chair Yellen’s last conference might be “misinterpreted.”
instead of a non-voting member it must have been decided with both the release of the latest minutes in conjunction with the subsequent release of other government data points – it was time to get the word out and proclaim that a raise in rates would be a “catastrophe.” But this time it must be said by a voting member for true accountability.
Once again as the markets showed weakness and didn’t seem to get that resounding “seal of approval” in response to the release of the Fed.’s minutes, non other than a voting member of the committee speaking during a forum in Chicago was reported to proclaim “raising rates would be a catastrophe.” That statement at around 8pm EST sent a highly illiquid overnight futures market soaring. The result was a near 2% rally.
Now let me ask you a question dear reader: Why does one believe the word “catastrophe” was used? Hmmmmm? After all, the very articulated and polished minutes of what members expressed to one another as to set the current policy was just made public.
Where was the argument or verbiage contained within of a voting member stating that the raising of rates would be a “catastrophe?” I thought the verbiage of choice was now “patient.” Unless…
You know you’ve either lost, or in the process, of losing control of the markets ear. Where now one has to resort to playing the HFT headline reading algo sham as an extension of policy control and effect. Which moves us into very dangerous territory in my opinion.
The Federal Reserve is unwittingly placing on full display they have nothing more left in their monetary policy bag of tricks other than to play a very, very dangerous game via “off the reservation” styled comments from both non-voting as well as voting members. That, or the subsequent Hilsenrath release of what they really meant to say was this – not that.
In my opinion, this is an unveiled showing of possible out right panic developing behind the proverbial curtain. Why? Because it seems the Fed. is becoming increasingly aware not only that it’s on its own. But what might be worse is in their realization not only are they up a creek without a paddle, but their once reliable QE paddle will not help is the deluge from more turbulent waters which may be released at any given movement into this once insinuated “controllable” safe harbor. The possible oncoming storms are putting all that thinking once again to the test.
The Euro Zone is once again back on display. And what’s not on stage is what I would venture to guess was a presumed Fed.’s “Ace in the hole” Mario Draghi and his “what ever it takes” bazooka of monetary mayhem. Suddenly it seems no one wants to either hear or see a “Full Monty” by the ECB. At least how it was once first interpreted.
Currently not only has the situation in Greece deteriorated for its argument to stay within the Euro Zone (EZ). But now you are hearing more arguments from those within it of “We’ll be fine. Don’t let the door hit you…” Not something I would guess the Fed. imagined would take place just as it decided it would wind down QE.
And the reports of how Mr. Draghi is viewing the idea can not be rest assuring to the Fed. either I’ll speculate. Especially when it’s now rumored (or more apt to be real) that he wants out of the ECB and wants to return to Italy for a possible political run.
One of those seemingly to be voicing louder (and louder) that the Euro Zone could quite possibly use a shake up in one form or another – is Germany. And what Germany says means a whole lot more too what will, or wont happen in the EZ than what Mario might say currently. Especially if there is a hint (any hint) that he may decide to bolt.
Let’s not forget all the other ancillary data points that are far too numerous to list today. But just one that should be front and center when you’re asked if you want your very own fresh glass of “Everything’s Awesome KoolAid” is everything you’ve been told about China and all their continuing growth.
Remember, China is the repository of preordained data points. Preordained as in “it is what they say it will be. Regardless of factual evidence.” They’re now continually reporting a declining GDP rate. And they don’t care if the numbers are real. Yet, they are willing to print contraction? What does that tell you at first blush? So much for China saving the economy meme I guess.
That one fact stands on its own. Let alone the possibility of outright defaults occurring in sovereign debt in places like Russia, Venezuela, Greece, or a host of others. Yep, nothing to see here. Move along, thank you. Would you like more punch?
In retrospect I guess I do have to agree with the most relevant word put forth from a Federal Reserve official as of late. “Catastrophe” might be exactly what is on the horizon. However, not for the reasons first intended by that speaker, but for the policies they’ve allowed to go on for so long thinking they were the one’s controlling the beast.
The “catastrophe” will be what all of us will have to deal with in the aftermath once it’s realized this monster they’ve created won’t care nor listen to any words its creators speak once the cage door is found unlocked, or unhinged.
That will be where the word “catastrophe” will really find its true relevance as a descriptor.
© 2015 Mark St.Cyr