If one meme has been constant these subsequent years since the great financial melt down of 2008 it’s been: BTFD (buy the dip) Not just some dips – but every dip. And why not? The Federal Reserve had all but assured Wall Street that since its first intervention into the markets and the resulting “risk on” behavior it produced resembling a Pavlovian experiment, it would indeed reincarnate the procedure every-time there seemed to be even the slightest hiccup in the markets. “Emergency monetary policy measures” would indeed be left in place for “an extended period.”
Wall Street didn’t need any secret decoder ring to read the hidden message that laid within. i.e., “The Fed’s got your back so buy, buy, buy!” And they did horns-over-hooves tripling the values of many of the major indexes sending them to never before seen in the history of mankind highs. Even the dot-com era highs were taken out. And all of it, and I do mean – all of it – on fairy-tale reporting of economic measurements. Need an example? 5% unemployment rate signals people are getting jobs. However, don’t pay any attention to the 94 million (and growing) that can’t and – are out of the workforce. All while the food stamp program and other government assistance program roles have swelled to historic levels. Because, other than that: “Everything is awesome!”
The problem with all of this is that it’s now becoming apparent to everyone. The amount of mal-investment along with just how intertwined all the subsequent carry trades and more is becoming frightfully obvious and can no longer be hidden from view. The real problem now facing the Fed. which I believe they themselves did not fully comprehend was the extent in which all of this was: so blatantly obvious. Again: to anyone who truly wanted to look.
Without the Fed’s interventionism – there is (and was) no market. And now with the raising of rates; no one will be able to miss or avoid that fact any longer. No matter how hard they try.
Another of the problems for the Fed. began to express itself when they seemingly became comfortable with this new paradigm and even appeared to relish this new-found fame and power as they took to any (and just about every) media source whenever needed and delivered either sedative policies or, soothing tones with near immediacy as to help quell any and all market fears. Over these ensuing years the frequency of appearance by Fed. speakers across the media has only been rivaled by the grueling tour of some where-are-they-now rock-band. I have a feeling they’re not going to relish this new limelight as they did the old.
This past Wednesday they unwittingly threw back their own curtain and implied, “See, we fixed it. Nothing to see here. The economy is just fine. So – we’re raising rates” to what appeared to be thunderous applause. However, what that motion truly revealed was not some blank or empty space. No, what they unknowingly revealed was a caged monster whose door just came unhinged. The resulting consequences began to bear its teeth Thursday and Friday. Yet, figuratively, that monster is still within the theater. The ensuing days is probably when this beast actually hits the streets, as in Wall Street. Then, all bets are off on exactly what mayhem we’ll see as a result. However, what we do know is this: It ain’t gonna be a present anyone wanted under their tree.
Suddenly we’re finding out (much like cockroaches) when you see one nasty issue – there’s many more just hidden from view. No where is this analogy more fitting then what is currently taking place in the High Yield space. e.g., junk bonds. First there were signs of stress just weeks ago. Then almost overnight (literally) many woke to the news that their “investments” were suddenly gated. Gated as in: Want your money? Sorry, maybe later, if not much later along with maybe not worth that much at all. Thanks for investing!
These are only the first warning shots being fired as to just how precarious, as well as onerous, this debt monster that the Fed. has unleashed might be along with the resulting chaos. For the tentacles of this beast combined with its destructive power is going to give the Kracken a run for its money in my estimation. What we’re not talking about is some monetary policy that can now be moved around with the frequency of some elf on a shelf. That’s fantasy land. This bane tale is currently becoming all too real.
I am now quite convinced that all of this was not only absolutely lost within the halls of the Eccles building rather, what might be even worse is that it seems it may have not even had been contemplated or, thought to be unfathomable by its very creators. I feel I can say this soundly by what I observed during the subsequent press conference given by the Fed. Chair Ms. Yellen on Wednesday.
What absolutely left me slack-jawed was her tone, tenor, and facial expressions during her opening remarks. Usually when one is delivering statements about monetary policy and other matters they tend to take on a tone of mundane, somber, expressionless, drawn out reading from prepared texts. It’s not like you’re going to see entertainment (well, maybe comedy come to think of it but I digress.) These are more or less information dispensing venues. Read the text. Answer any questions. Thanks, see you in a few months. This one was far, far different in what it revealed to my eye.
Ms. Yellen seemed to be almost giddy in her demeanor when delivering the news that the Fed. would indeed raise rates. It appeared as if the act of raising rates was some type of banner announcement where “Mission Accomplished” should be brought up in bright lights and champagne bottles uncorked. I implore anyone who thinks I’m exaggerating to find that conference in any search engine and watch for themselves with a more discerning eye. It truly was uncharacteristic by any Fed. Chair that I can recall. Yes these indications are subtle. Yet, to a trained or informed eye – they are there nonetheless. Noticing subtle variations such as these are required if one is serious about understanding Negotiations 101.
It may sound like something inconsequential however, what I would argue is it shows just how clueless the Fed. truly might have been. The only thing worse is it may show that they truly did believe their own press. e.g., That the economy really was as good as they said (or thought) it was. If that’s the case – then we really are in trouble. Big time!
This act of raising rates was not some seminal event as to mark the economy’s return to health. If one is truthful (although most continue to kid themselves) the Fed. raising rates on Wednesday was more or less an act of desperation as to “get off of zero.” Hopefully, without causing too much stress so that if and when the economy does show signs of stuttering (which it clearly is) the Fed. would then have some dry powder in reserve as to cut once again. Hopefully (once again) instilling the same Pavlovian reaction they’ve come to expect. That’s a far, far, far (did I say far?) cry from doing it because the economy is getting a clean bill of health. Or, “Mission Accomplished” sign off from extreme monetary measures.
Again, I must implore anyone: watch her opening remarks again and you’ll see it clearly. But you shouldn’t just stop there. What you should do is also watch the Q&A. For this too was also quite revealing.
When asked about the possible effects upcoming on bond yields and more some of the questions seemed to just confound the Fed. Chair appearing to catch her off guard like a deer in the headlights. So striking were some of the moments of silence even Tom Keene of Bloomberg™ commented during his show how he was taken aback. I believe the word he used was “stunning.” I have to agree with him. However, I myself was even more stunned on the non-answering answering composition of Fed. speak Ms. Yellen retorted at length. I mean, just how many ways can one use “transitory?” After a while I wished hearing transitory itself had been more transitory.
If we are in fact witnessing the first stages of a blatant, as well as avoidable policy error by the Fed. the resulting mayhem will be far worse than anyone ever expected. And I use the word “avoidable” precisely for that reason. For it has been clear to anyone without a Ph.D in economics; who has just a modicum of common sense; and acquired their education at the school of hard knocks; that this economy was not only far worse off than any of the reporting stated but – was being made that way with the consistent heavy hand of intervention being carried out by the Fed. itself. And this fact is coming to light brighter, and more plainly visible with each passing day. All to what I feel will be the Fed’s horror. Yet, it will be us that has to navigate the real life nightmare filled with debt leviathans and carry trade tentacles rivaling the Kracken for tenacity as well as fury.
This will probably go down as the first time Wall Street will have ever wished the Fed. had indeed left only a lump of coal in their bonus stockings rather, than the surprise they might wake to this holiday year-end. If you want to see a clue about just how much of a bloodbath is still possible in the once highly touted arena of fixed income – just look at Jefferies™.
It’s now self-evident: Winter is not coming…It’s all ready here.
And the Fed. is expecting you to be happy with their latest present. For by all indications expressed they thought long, hard, and decided this was exactly the right gift, at the right time. Just don’t look for any gift return receipt. The exchange window for returns to BTFD once again are currently closed. That’s an option I’m confident they also did not contemplate fully. For I’m sure they felt they knew exactly what they were doing – and the “markets” would be thrilled.
Ho, Ho, Ho?
© 2015 Mark St.Cyr