As I type this the “markets” are once again sprinting higher to the highest levels of 2016. At the rate they are going it’s theoretically possible we could take out the all time high by lunch. After all – “it’s a great time to buy stawks,” no?
Everyone seems to have been caught off guard by Janet Yellen’s speech at the Economic Club of New York™. Why this is so alludes me. The reason? This is a gathering of “her” people. i.e., Wall Street. Too think she would intone anything of a hawkish nature at this highly publicized event was ludicrous. Especially after her comments at the latest FOMC presser where she defensively professed prudence in choosing inaction – as action, once again.
However, there was one striking change in both tone and demeanor from that conference of only a few weeks ago to this one: The palpable ebullience displayed by all..
The difference was absolutely striking. Lots of grins and smiles everywhere which also included not only the Chair woman herself, but especially from her colleague N.Y. Fed. president William Dudley who introduced her. Again, don’t take my word. Find a rerun on-line in your search engine of choice and see for yourself. One thing is very, very, very, (did I say very?) apparent. There wasn’t a dry eye in the house. I’d wager tears of joy flowed like the cocktails: freely and frequent.
The dulcet tones that caused such bliss? I believe there were two verses followed by a table thumping chorus that stood out far above any others. (and if not for cameras the participants attending might have stood up on the tables and danced in unison.)
The first verse contained the words everyone with a month ending quarter wanted to hear when it came to where the Fed. stands on raising further (if at all) “proceed cautiously.” The second was a reiteration of “international developments” was first and foremost. “Data dependent” not so much. However, it was the chorus, that too my ears was really the highlight for Wall Street. It’s when Ms. Yellen stated:
“Financial market participants appear to recognize the FOMC’s data-dependent approach because incoming data surprises typically induce changes in market expectations about the likely future path of policy,…” (You can read the transcript in its entirety here. And I suggest you do as to draw your own conclusions)
Why would such be as I implied “a thumping chorus?” Here’s how I put it in a recent article that many brushed aside as coincidence not causation. To wit:
“The “markets” and its real players (i.e., HFT’s along with their headline reading algo’s and stop running programs etc., etc.) not only know this. I believe – they now know how to front run it with deadly efficiency.”
Now some will say “It was a private event, you can’t compare the two! You’re just nitpicking.” And that’s fine, it’s a fair response. However, being someone who has made speeches for a living, and, has had to be the bearer of bad news or directives that many participants in the audience were surely not going to want to hear (even if they had too.) I can tell you from first hand experience participants have quite the clue on what the tenor and tone of what you’re about to say before you ever hit the podium. And my speeches aren’t released beforehand unlike the Chairwoman’s was with a released transcript prior. (And the markets took off higher in unison precisely when that transcript was released. Coincidence? Or HFT, headline reading algorithmic front running causation? You be the judge.)
Don’t let that point be lost, for it is a very subtle yet important insight for those looking for clues. Do you think that audience would have been all smiles and laughter before, during, or after had she been there to reiterate any of the “hawkish” commentary coming out of subsequent Fed. officials at other venues over the past week or so? Again, truly ponder that point for it’s not as trivial of an insight as it may seem at first blush.
(On an aside. For those wondering if I’m trying to be coy when using my own example inferring they were probably the local bridge club, as opposed to, some conference or meeting on par with the participants at some “Economic Club” as to negate my thesis. All I’ll say is at one in particular that fit that bill, the “participants” in attendance were the C-suite of many a national brand; with global reach and markets; with annual sales in the multi-billion dollar club. I say this only for clarification – nothing more. So take it as you will.)
I’ve heard analysts and many others of late comment how this Fed. official, or that Fed. official has said this, when they just did that! Hawkish tones from this one, dovish tones from that one. I’m sorry, there shouldn’t be any more confusion. If you’re up around 2050ish SPX you’re going to hear “chirps” to give an illusion that maybe, just maybe, the Fed. might move towards normalization. i.e., As I’ve stated previously “fortitude central.” So expect it. However: At 1810ish SPX? Welcome to that other term I coined “capitulation central.” Here is where the only thing you’ll hear is how good (green) the Fed. is going to turn all that bad (red) with its toolbox of __________(fill in the blank.) Rinse – repeat.
However, I will say there has been one defining point from The Chair she first iterated at the latest FOMC presser, and reiterated once again at this latest speech. Personally I felt this would remain an unspoken truth rather, than openly admitted to. This point and moment was when Ms. Yellen, in fact, set the tone as for anyone who was truly listening (and Wall Street was all ears!) that the Federal Reserve has decided via its own directive and initiative: to put its U.S. congressional mandated directives (e.g., employment and inflation) secondarily to “international developments” whenever it decides. And it has decided that time is now.
To my ears – this was brazenly breathtaking in its implied scope and reach, with implication that are now truly up for grabs in everything we once took or believed to have known in both free markets, as well as capitalism itself.
This is not some misunderstanding or confused inference on my part. This point has been realized (and the list is growing) by many with far more gravitas in the world of finance than I have. If you now listen, read, or watch many a financial pundit, what you are now hearing is their own astonishment at the realization Ms. Yellen declared by both current policy direction, and implied statements: the Fed. is now “Central Bank of the world.” And that is the phrase they are using – not me implying.
“International developments” everyone now knows and takes as central bank parlance to mean: China. And the chairwoman in her speech made it quite clear “international developments” are what now drives Fed. policy action. Again, don’t take my word for it. You can find a transcript or watch the speech for yourself and draw your own conclusions.
Besides, if this is not the case; then how does one square the circle of the Fed’s mandate? For all intents and purposes the congressional mandated raison d’ être have now been reached within any tolerant measurement. The U.S. stock market is once again within spitting distance of it’s never before seen in human history high. So: how is it that all this “good” causes not even the modest of follow through as implied via the December 2015 rate hike decision with its explanations and certitude. But rather: the normalization schedule (inferred via the Dot Plot) in-turn gets reduce by half only 3 months later? And…the Chair herself implies that to may be too many? Something doesn’t square here if we’re doing so well does it.
That said: there is an inherent, overarching, problem within this now stated “international development” meme that I’m not sure the Fed. has really thought through. And it’s this…
If “international developments” (i.e. China) have now taken first position over U.S. data, one can only summarize that the Fed. is now following, as well as, instituting a policy as the self-anointed mop-up team for the sins and/or consequences of spill over of a communist run economy.
Capitalism, free markets, and everything else associated with it such as U.S. savers, insurance companies, bond holder, etc., etc., will take a back seat: Not lead. Nor – do anything that may hurt or foster any harmful effects caused by the mal-investment or debt crisis inherent caused by a nation following communistic policies and interventions within its own market, economy, and currency.
In other words: China will continue to be allowed to make a mess. The Fed. will play “janitor” of the monetary policy world. Talk about “leading from behind.” Actually, don’t talk about it: That’s not good for Wall Street. As if you were still confused.
Now there may be no more confusion as to exactly where the Fed. now stands. But confidence they can actually manage all this with positive consequential follow through? Without it all turning into some iteration resembling the Sorcerer’s apprentice? That’s a whole ‘nother matter entirely.
© 2016 Mark St.Cyr