I received a note from a colleague asking for my thoughts in relationship to what the “markets” are doing currently buttressed by my stated inclinations that a sell-off may be forth coming.
Here’s my reply…
Don’t read too much into the current gyrations both up or down during this very low volume week going into a month end, combined with a major holiday. This month, which is typically one of the lightest in terms of volume, is more at the whim-and-will of what traders call “the paper cup market.”
What this implies is just what the metaphor conjures. i.e., it doesn’t take much of a breeze (or a few strategic buys or sells) to move the “markets” toward a large target going into a month end close. This month appears to be 2900 for the S&P 500™. (“markets” love round numbers)
Where you really have to start paying attention to is what happens going into next month with both the positioning for a new month, while also calculating what they (i.e. Wall Street) believe the Fed will or won’t do at its meeting of this same month.
What you need to fully understand is the revelation that has now been made public via former Fed. president of N.Y. Bill Dudley is far from “yesterdays news.” It is the, and by that I mean just that the possible greatest PR blunder ever made by a central banker. And that’s not hyperbole.
However, what is now the thing that needs to be watched first is precisely how “Wall Street” (i.e., the markets) decides to interpret it. As I said prior: Does Wall Street still assume the “Powell Put” is active at these levels? Or, is the Fed inclined to watch the “markets” crash and burn for a while before making any other move? Mr. Dudley has now made this a needed calculation. And that changes everything. Let alone “Wall Street’s” propensity to test or force it.
There’s also another point to all this that I haven’t seen hypothesized anywhere, so I will. And it is this…
What if Mr. Dudley’s supposed PR faux pas was an intentionally planned release as to warn the so-called “friends in all the right places” as to get out as to: bank cash and sit on hands – then buy, buy, buy at much lower prices as they (the Fed) then ride in to rescue with a big ol’ helping of QE and sizable rate cut?
Think that through very carefully, because when it comes to those which reside at these levels, a little PR backlash and a contrived market sell-off that they believe has the ability to relieve them of any political foe, then reward (once again) their “friends of the Fed” on Wall Street. Do you really think that is something only “tin foiled hatters” would conceive, knowing what you do now about so many other things?
If you think I’m off base on this, or just trying to insert my argument of the Fed being political, may I remind you of what I wrote back when then Chair Janet Yellen was proposing for future Fed policy as it was all but assured Mrs. Clinton was going to win – and how both her (Mrs. Yellen’s) stance and proclamations flipped 180º when the results came in.
Below is a sampling of that article. To wit:
And here’s the Fed. itself, again, to wit:
“Central banking is in a brave new world,” Atlanta Fed President Dennis Lockhart said in an interview on the sidelines of the conference.
While policymakers have maintained the Fed should eventually reduce its bond holdings, Lockhart said some officials were closer to accepting that they needed to learn to live with them. “I suspect there are colleagues who are contemplating at least maybe a statically large balance sheet is just going to be a fact of life and be central to the toolkit,” he said.
So why is the above relevant? Fair point, so one more quote, again, from the aforementioned article. Ready?
“You are seeing an exploration of how are we going to operate in a quite different world than before the crisis,” Lockhart said.
And the relevancy for the above is? Da, da, da, daahhh…..: The election had yet to happen. (of course, in my humble opinion)
The above was the working assumption inferred, and perpetuated by Fed. watchers, as well as the Fed. itself all the way and up until the election results on November 8th. Need I remind you about Ms. Yellen herself in mid October stating what the economy may need is for the Fed. to run what is termed a “high pressure” policy?
For those who’ve forgotten, here’s the money quote. To wit:
The Federal Reserve may need to run a “high-pressure economy” to reverse damage from the 2008-2009 crisis that depressed output, sidelined workers, and risks becoming a permanent scar, Fed Chair Janet Yellen said on Friday in a broad review of where the recovery may still fall short.
Now, it’s a concerted gaggle of “Hawks’ Are Us” with 4 rate hikes, balance sheet reduction to proceed, and another hike signaled for December. Remember: It’s no longer a question of if, but now – it’s when, with dates, and amounts. And that’s what truly matters
I would also like to remind you the aforementioned Bill Dudley was a voting member of the very FOMC that went form “Doves on a wire” to “Hawks R Us” the moment Mr Trump was elected.
Do you think what he suggested openly this week wasn’t being discussed behind closed doors when he was actually a voting member?
Or, maybe this is a better question…
Do you need more tinfoil?
As always, we shall see.
© 2019 Mark St.Cyr