I received a note from a colleague asking (in some ways poking me) for my thoughts since the “markets” not only didn’t end in some form of burning apocalypse, but rather, ascended once again towards ever further glistening heights.
I’ll sum up my response with the following…
Although the “markets” vaulted higher seeming to do the exact opposite of what used to be the anticipated resulting reaction (i.e., a rate hike would cause an immediate sell-off) my warning remains the same. Why?
Because the circumstances for those warnings (warnings that begin in earnest on that day) have not only increased, the resulting market reaction to the Fed. decision makes the case even further. e.g., That prudence – should be the first cause, not chasing the BTFD (buy the f’n dip) moment of any day.
So with the above for context, this morning I thought I would try to express all the words I spoke (and there were a great many embellished with expletives I didn’t even know I knew!) as to demonstrate just what is currently taking place behind the smoke-and-mirrors of today’s HFT fueled “casino.” To wit:
The above chart is the USD/CNH (e.g., how many Yuan to a $Dollar) cross rate since mid 2010. That’s import and for this reason: It shows the path set since the financial crisis, and continued in earnest with then Chair Ben Bernanke’s now famous (if not infamous) Jackson Hole speech of QE 4-eva in 2010 remaining in-effect under his tutelage.
As you can see in the above, it’s been a straight ride down until the “markets” begin reacting to not only the possible ending of QE later in 2014, but also just how “dovish” or “hawkish” the “new” Fed. under Ms. Yellen would be.
From this point forward the “markets” would do nothing but ping-pong between the then “new all time highs” set at the end of QE and the bottom set by panic-stricken Fed. members when they needed to jawbone, promise, plead, their own version of “whatever it takes” is at the ready should it be needed. (Hence, the “Bullard Bottom and subsequent instances.)
The signaling of less QE, more QE, hike now, hike later, hike never, did nothing more than help cement the mindset and deed that “Buying The F’n Dip” was the only winning strategy in the markets – that was – as long as China’s Yuan remained stable. Hint: It has not.
The only thing that has been “stable” is just how persistent it has fallen (or rising as the chart shows via its $ relationship) since the ending of QE.
When that “stable” became unstable? As in August of 2015? It was the single catalyst which nearly brought the entire financial markets – once again – too its knees. And the Yuan has continued to fall ever-the-more, and ever since, exacerbated by an ever-increasing strength of the $Dollar.
Again: Since that period in Aug. the Yuan has done nothing but devalue ever more. So much so that it was only this past January (you know, right after the Fed. hiking all but a week or prior) China took (or was forced) to extraordinary measures as to try to stop the cross rate from breaking the all important psychological level of 7.00.
This was directly ahead of what had to be thought through by the politburo as some form of pre-stopgap measure ahead of the Jan/Feb FOMC meeting as to try to gain more sense of the situation. i.e., Would there be the possibility of ever-increasing pain should the Fed. become far more hawkish and begin a drastic raising in earnest.
It appeared China wanted (or needed) to then send a little “signaling” of its own as to remind the Fed. just what was at stake. For just days after throwing all it could at the Yuan – it appeared the politburo allowed to let it fall. To wit:
That was all of 60 days ago, thereabouts .
All that was (in my opinion) a direct result of the Fed’s decision to not only raise in Dec. even though just weeks prior it was signaling a very wishy-washy stance. But was in direct response to what appeared to be a now “hawkish” Fed. along with a new, possibly hostile, anti-China trade administration.
Now: March 15th happened. Where they’ve not only raised again, they’re signaling they are now “Hawks Are Us!”
And as for “data dependence?” Such as how the economy might, or might not, be doing such as the all important, most coveted GDP reporting? Well, let’s just say the Chair now views that kind of ‘data” as “noisy.” And “noisy” is a quote.
Again, how can one feel confident in Fed. signaling when that very Fed. which states it’s still “data dependent” hikes not just once, but twice in 90 days into a revised – once again – GDP forecast via the Atlanta Fed. that now stands at .9% down from the revised (once again) 1.2 from the 1.3 revision from 1.8%, which by the way is the weakest since 1987. And yes – 1987.
The only “noise” this data emits is the thunderous sound of it crashing through the floor of economic health. And apparently, the Fed. has now donned “earmuffs” to go along with their economic blinders for interpreting the health of the economy. You just can’t make this stuff up, for no one would believe you without a “picture.”
But just like every picture before the advent of cameras on phones, this picture is still developing. What it finally morphs into, how scary, or harmless the image works out to be is a process not that unfamiliar to those who can remember a Polaroid®. We’ll just have to wait as it develops.
However, as we wait, I guess, we can take solace in remembering much like the “markets” the only phrase which seems to fit as we view the ever evolving process, which comes from the one, and only, Alfred E. Neuman.
“What, Me Worry?”
© 2017 Mark St.Cyr