2018: It Was Different This Time

I know there are those that might think mid November is a bit too early to begin talking about the year as if it has finished. It’s a fair point. But the issue with most “year in review” articles is that they’re of the “mailed in” variety, much like the obligatory obituary of some once famous icon.

The issue today is what has passed so far this year may be just a warm up before the winter truly takes hold before year end.

I’m of the opinion 2018 still has the capacity to reset all past memories of this year’s events. In other words, what is now being looked back upon as, the worst is over (i.e., “February Scare” and the market’s version of an “October Surprise”) may be looked back upon as just a warm up for year end gyrations. And if so?

That makes it very, very, very (did I say very?) different this time, indeed.

We need to do a bit of “down memory lane” to put things into perspective, because if one listens to most of the mainstream business/financial media it’s easy to construe that they’ve all been issued their required supplement of amnesia pills. Some in far higher doses than others.

Remember when everything the Federal Reserve was both doing and contemplating was argued as “baked in?”

With great fanfare then Chair Janet Yellen handed the bag baton to incoming Chair Jerome Powell so he could continue orchestrating the so-called well thought out rate increase cycle and carefully implement the ever increasing or, ratcheting process of balance sheet roll off she had developed under her tenure.

She departed January in the lingering mist of her surety that she expects no new financial crisis in “our lifetimes.”  

Then in February the markets roiled sending it plummeting in ways not seen since 2015. This was the first time the “markets” could verify that the Fed. was indeed “pulling away the punch bowl” known as QT (quantitate tightening) – and they didn’t like it. But there was a very distinctive difference this time. That difference?

No Federal Reserve member came running from behind the curtains to commandeer any and all forms of media to espouse “Don’t worry, we’re still here!” as they had done throughout 2015 as the initial QE (quantitative easing) spigot was being cut off. i.e., paging Mr. Bullard morphed into a Ferris Bueller moment in equivalency.

Then in late March the “markets” regained its footing as to take advantage to front-run the already record breaking pace set for further stock buybacks with any remaining QE remnants (i.e., from the prior roll-over or, reinvestment process) before they disappeared entirely.

This was an imperative (or people want their money back!) as to gain exposure for any possible earnings reports for Q1 and Q2 that may have any remaining upside narrative to spin.

And spin they did.

Throughout the year we were told ad nauseam across the mainstream business/financial media that everything concerning the Federal Reserve and rate hikes was already “baked in.” Trade wars? Tariffs? Again, “baked in.”

As a matter of fact with the “market” continuing to vault ever higher it was articulated by many a next-in-rotation fund manager, as well as many an Ivory League Ph.D aficionado that tariffs were now to be looked on as something positive. The reasoning?

You guessed it: “Just look at the markets for proof.”

Then, suddenly, it all came to a screeching halt. However, it appeared to be just a bit too late as the “markets” seemed to have misjudged the edge and began an initial “Thelma and Louise” impersonation.

Why was October so different? Hint: Once again the “markets” could no longer hope that the Fed. would back off its already punitive cycle of taking away their punch bowl.

The October meeting set in stone (barring a complete rout) that not only would there be no change in the rate cycle as implied earlier, but the acceleration into light speed for the balance sheet draw down (aka “Normalization”) was in fact going forward as had been prescribed. e.g., $50 Billion per month. The resulting “market” reaction? Hint: To wit:

(Source)

So here we are in November and what does that mean for the “markets?” Here’s something I believe no one anticipated:

The Fed. is not only not viewing October’s swoon as not being anything close to warranting or deserving the title of “rout.” It’s making it abundantly clear it’s barely worth mentioning as demonstrated in its most recent communiqué.

Can you say “Uh oh?”

Suddenly Wall Street is aghast, next-in-rotation fund managers are apoplectic, even buzzer banging false narrative spinners are suddenly taking to any outlet that will have them to voice their concern that the Fed. is misguided to continue on with its “lunatic” tightening policy.

What happened to all the “baked in” and “the market’s comfortable” with the Fed’s policy, trade tariffs and more as was touted prior to October? For it now seems that the only reason why this “market” has been able to ascend these heights is via central bank intervention.

I can only assume this because of the ever increasing cabal of Wall Street associates that are now “taking a knee.” However, this is not in some type of solidarity to current protests. This is to beg the Fed. to “Please stop! Just Don’t Do it!”

The problem is it’s getting harder to not see it’s all falling on deaf ears. i.e., Every time a Fed. president has spoken lately it’s been to reassure its steady as she goes. 

That’s not what the “market” both anticipated nor, wanted to hear.

But now it is undeniable truth and fact and with that now also comes the consequences. And it’s here where the end of year could (again, could) end up making the other swoons look like just a warm up act.

Should the “markets” now fully accept that the Fed. is indeed going to leave them “hanging out to dry” in the icy winds of November and December to fend for themselves, the “market” is going to do the only thing it seems to have perfected these past 10 years of anything Fed. related. And that is this:

Front run it.

We saw what the “markets” did when a Fed. insider alerted it to what the Fed’s hand was going to pursue. Hint: See disgraced retired market moving information leaker Jeffrey Lacker.

How do you think it’s going to both think, as well as react, now that the Fed. in last weeks statement revealed, in no uncertain terms, that both increasing rates along with withdrawing its once considered “manna from money heaven” was not only going to continue, but allowed to accelerate as planned?

Hint: Can you say “this year end may be different than others?”

© 2018 Mark St.Cyr