In just a little over 30 days the Federal Reserve will once again meet to ponder the rationale to either hike rates once again, or stand pat. But that’s only part of what I believe will overhang the “markets” much like the Sword-of-Damocles in the coming weeks.
What will certainly be included in that consideration will be whether, or not, to begin the process of shrinking the balance sheet with an officially marked: time, date, and amount, combined with the unfolding schedule. And last, but certainly not least, a final consideration (that will surely make for quite the informative vote tally) that must be considered will be – if – they dare do both as in a hike, as well as announce the reduction schedule in unison.
As of this writing the current odds for just a hike are about as close to nil as one can get. The odds for stating they’ll begin the reduction process is even less. The most being considered (let alone – positioned for) by the “market” is a return to more jawboning of the obtuse kind that would make a Rorschach test envious. i.e., Be ready to buy any and all dips. Rinse, repeat.
Yet, when it comes to Fed. watching, and its rational. What has been far more fascinating to observe as the phenom now known as “BTFD” (buy the f’n dip) is what can only be described as what I’m now coining the “FIJT” (e.g., faith in Janet trade – rhymes with fidget.) I’m not trying to be funny or just looking to coin phrases. It came to me as I was watched the “markets” price action during the latest global events. e.g., N. Korea.
It has been both an amazing, as well as surreal experience to watch these “markets” pay absolutely no consideration to the aspects for the possibility that a true hot war, complete with nuclear warheads engulfing not just the Korean peninsula, but the entire globe with WWIII implications – and the “market” treated it with less an impelling reaction than a Kardashian escapade. i.e., “Yeah…whatever.”
So oblivious and non-concerned have these “markets” become even ZeroHedge™ minted two of their own monikers to express just how insane everything now appeared. e.g., “Buy the F’n Fire and Fury Dip”, and “Buy the F’n All Out Nuclear War Dip’ers.”
Personally, I couldn’t stop laughing when I first read those, but after the laughing subsided the reality began again in earnest, for the issue is that these lines now describe the sheer disconnect (and sheer insanity) to anything once thought of as markets.
As far as these “markets” are now concerned (and positioned for) the only person that can derail (or threaten) them is not some foreign dictator threatening all out nuclear war with the West. No, the only thing which can bring these “markets” to its knees – is a “diminutive woman” sitting as Chair of the Federal Reserve named Janet, playing Atlas. For with the sweep of her pen, and later resulting press conference, can singlehandedly unleash an all out “nuclear” war causing a global financial meltdown the world has never seen.
The above is not hyperbole. The odds for a misstep via the Fed. is the only thing that keeps these “markets” awake at night. Not threats from N. Korea, China, Russia, stunted earnings, imploding retail sales, deteriorating data, political strife, the list goes on, and on.
If you think that’s an exaggeration? Let me make the following statement: If you think the latest “hiccup” in the “market” was anything significant? Hint: Before the Fed. and their subsequent fellow central banker interventions? That was considered normal, daily, price action. Today? It nearly calls for “Special Reporting” coverage. That’s how prosaic these “markets” have now become over the last decade.
The only reason these “markets” have assailed this most recent wall-of-worry (i.e., since the Nov. election) and held on to its cliff edge is there’s still some chance (albeit deteriorating ever further) that a tax deal, and Obamacare reform, is still a possibility.
Again, this is the only proposition holding the implications for what the Fed. has already wrought at bay.(e.g., raised multiple times into further deteriorating data) For once the “market” has to accept that the agenda that enabled the “Trump trade” is not only DOA, but indeed dead and buried? Everything changes on that alone. And I do mean everything.
But that’s the least of the problems. And, I do mean least. For this is where the Fed. now has their own finger-on-the-button as to unleash financial armageddon the likes the world has never seen. And one doesn’t need to be a Nostradamus devotee to figure out the time and date. It’s scheduled for September 19 – 20. That’s the next meeting for the FOMC, and the stakes could not be higher.
Should the Fed. raise at the September meeting alone with all things being equal (let’s just say the threat of war is averted successfully) and there is still no legislation passed or resolved to be passed with a set date? I am of the opinion “markets” and I mean all markets (e.g., currency trades, emerging markets, et cetera) will roil and buckle in a manner not seen since the August 2015 meltdown originating out of China.
Why? Because currently – no one believes (let alone positioned) they will. I believe that is a grave mistake in the making. Yet, as I’ve implied – I think it gets worse. Much worse, and here’s why…
As scary as the advent of a rate hike that is presumed for all intents and purposes to not be forthcoming. To then have it thrust into the “markets” disrupting all the carry trades, and their correlated arbitrage and hedging vehicles? The immediate disruption will be quick and revealing.
But if (and it is a big if) the Fed. also includes balance sheet criteria for implementation concurrently? We go from a market pricing “Reset” button – to a global financial “Armageddon” launch in the blink of an eye. And no one, and I mean just that: no one is prepared for it. Period.
I am of the reasoning that if the Fed. does in fact raise rates once again at the September meeting, against the current data and economic malaise, in conjunction with the ever unfolding political strife over the Trump agenda, but also, the debt ceiling, and more? I believe they’ll also find the fortitude for reasoning (as convoluted as it surely will be) why they also will include clear balance sheet rhetoric.
It is this (i.e., the combing of the two) I feel can/will be the catalyst that will truly spook the “markets”, possibly into an all out unstoppable rout. And it is clearly a possibility, using the Fed’s own words and past signaling.
I give the odds of raising alone at about 70/30 for. Doing both at about 50/50. Right now the “market” puts odds of anything other than standing pat at about ZERO. Or, as expressed by that great statesman of financial prowess, Alfred E. Neuman…
“What, me worry?”
© 2017 Mark St.Cyr