As we sit here today both the “markets” as well as the mainstream business/financial punditry have all but concluded: the Federal Reserve is aware of its mistakes, willing to pause, and more importantly, had these assumption verified in public by its current Chair.
I believe this is wishful thinking at best and intellectual malfeasance at worst.
When it comes to the latest “market” gyrations since the December meeting of the Fed’s FOMC (Federal Open Market Committee) one thing is clear: the Fed is not in control – the slavish QE (quantitative easing) addicted HFT (high frequency trading) headline reading algorithmic parasitical creation of the Fed et al. collectively known as the “capital markets” are the ones in charge. For if one thinks the worst is over. I believe January may lead to reality check few are prepared for.
2018 was supposedly the year the Federal Reserve could earnestly begin the process of “balance sheet normalization” known as QT. Again, supposedly, this process was told/sold upon the lines of “running in the background.” i.e., if they didn’t tell you it was transpiring (and has said as much) the “markets” would barely notice, if at all.
This reasoning was trumpeted via the Fed consistently making the arguments that it was not the cause for asset inflation, but more along the lines of correlation.
In December Mr. Powell was abruptly notified that the Fed’s interpretation and assessment wasn’t just wrong – but dead wrong.
The proof was made manifest when Mr. Powell’s collectively interpreted monetary faux pas stating the QT process was on “autopilot” during the December presser.
In a pure instantaneous effect of causation, not correlation, the markets knee-jerked lower, never looking back selling everything that wasn’t nailed down. Until? Hint: “autopilot” suddenly was clarified to mean: auto-pause. So far the verbal jujitsu has worked.
Again, as I imply – so far.
To say that the Chair has back-peddled on his once hawkish tones would be an understatement. It may be that the entire committee itself is not only saying one thing and doing another, but more alarmingly, having what was supposedly recorded (i.e., printed release of meeting minutes) having the appearance of being altered, after the fact, to reflect an entirely opposite interpretation from what may have been discussed.
That’s a very, very, very (did I say very?) worrisome revelation, if true.
In a recent interview former Dallas Fed adviser Danielle DiMartino Booth appeared on FBN: AM™ and made the following observations, along with reiterating much the same via her own social feed. To wit:
In regards to the minutes release…
“It was fairly apparent given yesterday’s minutes release that they were definitely massaged, modified, call it what you will, after the fact.”
In regards to assessing the Chair…
“What’s hard for investors though is, ‘What is he going to say today?’” she said. “He was hawkish in October. He was dovish in November. He was hawkish in December. And he was dovish in January.”
“I am flummoxed by this man I once had faith in,”@DiMartinoBooth 1/10/19
I understand her frustration, however, I feel the ones that will be far more “flummoxed” in the not-so-distant future will be both the Chair himself, along with the entire inhabitants of the Eccles Building.
Currently the “market” is not delivering any such vagueness for interpretation. It wants the entire QT process to not only pause, but pause now and never be restarted. And if not? Hint: Equity winter goes from spastic temperature reversals to glacial status with every passing meeting.
This latest observance of BTFD (buy the f’n dip) is another in the long line of the Fed, along with the majority of the mainstream financial/business media believing they’ve successfully navigated another “market” tantrum and that they now “Got this!” i.e., Mr. Powell’s “rookie mistakes” of using the wrong descriptors publicly. (wrong as in, dare say the truth and upset the “markets.”)
And yet, when it comes to saying what’s on his mind, there seems to be no concern for self-editing when it comes to the area of politics.
Actually, there is a bit of self-editing, but the manner and actual edit itself is far more instructive than the Chair himself may understand. For should the “markets” suddenly test Mr. Powell’s interpretation of exactly what they want and when? His political commentary is also going to find itself suddenly being tested. And I don’t think either he, nor the entirety of the Fed itself, truly understands just where it now sits. Let me explain…
Before I start let me be very clear: this is not about how I feel politically. What I’m addressing is the very nature, along with the possible interpretations and ramifications that need to be clearly understood by anyone at the upper levels of business or politics. Diplo-speak is a necessary discipline. i.e., you both do, or do not say anything without knowing full-well what you want inferred. Period, full stop.
This past week Mr. Powell was the featured speaker for a sit-down styled interview at the Economic Club™ in Washington, D.C. This event has been reported on by various media outlets, and from what I’ve discerned, that reporting has been misleading at best and void of any true journalistic integrity at worst. i.e., it’s a love fest, as long as the Chair says what they want to hear.
When it came to the current gyrations within the “markets” a few questions were put forth, then the moderator steered it into the political inserting the President’s recent calling out of the Fed. and if the Chair would ever meet with him. Mr. Powell’s response was something I would call “too cute by half.” i.e., he wouldn’t state yes or no. He kept intentionally avoiding it only to finally answer with a non-answer under the guise of (paraphrasing) “No Fed Chair has ever refused.”
The disdain for the man that appointed him to his current position was made abundantly clear. And it’s not the first time he’s done it. There is no other way to interpret this, for the entirety of the crowd and moderator allowed the inference to stand via the laughter in response. i.e., If these current gyrations are making it uncomfortable for the President? Even better.
My conjecture of course, but don’t take my words for it. Watch it for yourself. There is no ambiguity.
When it comes to meeting Congress? All praise, couldn’t overstate how much he enjoyed meeting and discussing monetary policy with them. So, Congress? OK. President? – who f’n cares. Well for the time being we have to assume, right?
The issue now is that if the Fed has concluded that the recent BTFD moment is something easily sustainable, rather than the equivalent of an “Indian summer” that fooled many a novice thinking winter had negated its usual process. Both the Fed and its Chair may find its the political side of the equation that will also be tested in just as much, if not more, harshness than what the “market” has in store.
Hint: Remember congress: “Get to work?” I think it will be Mr. Powell that will be reminded not all too subtlety what congress thinks about Chair’s should the “markets” begin to falter, again.
The recent bounce via almost any technical analysis in regards to charts, momentum indicators, volumes and more shows this may not have been anything more than a front-running earnings positioning move. i.e., it’s all ephemeral positioning for earnings exposure. And will disapear just as fast, if not faster than it appeared should earnings reports begin confirming what everyone is now under the assumption will be: mediocre to abysmal.
The Fed is set to meet at the end of the month. Mr. Powell has changed his conference schedule so that there will now be one after every meeting instead of last year’s one one – one off.
That means every meeting has to be considered “live” regardless, along with Mr. Powell now has twice the opportunities to say the wrong thing (or not say the only thing that matters) at the wrong time.
Should the initial earnings season start on a bad footing these “markets” are going to react first, and find out what Mr. Powell and Co. have voted for and think going forward – last. Remember, the balance sheet is still currently on “auto-pilot” meaning (theoretically) there’s less money available for Wall Street to BTFD every day that goes by.
A pause in interest rates and no pause in balance sheet scheduling is going to be received about as gladly as the mysterious brown paper bag found on ones stoop. The “markets” have made it clear what it is demanding and it is assuming Mr. Powell knows this explicitly.
Just like Mr. Powell has made it clear on his current feelings when it comes to the political – the “markets” have made it clear what they want -and expect- via the monetary policy settings going forward.
It will now be the Fed that is tested for whether or not it has interpreted correctly. For test these markets shall. One should consider December as the “market” issuing a “pop quiz” for understanding and comprehension.
Consider January when “finals” take place. Where only yes and no answers are allowed. No space will be left for “explain your reasoning here” pontifications, along with only two grades possible.
Pass or Fail.
© 2019 Mark St.Cyr