The Fed’s Epic Miscalculation: New Market Highs

Some of you reading the above are now pondering why such could be seen as a “miscalculation” when it’s been pretty obvious since the 2008 Financial Crisis they’ve appeared to make that their primary role. This is where the question reveals the answer, as in: “appears” denotes correlation – hand-in-hand synchronized movements confirm causation.

This distinction with a difference should not be taken lightly, especially for the Fed itself. In other words: The so-called “invisible hand” is no longer. And once “the hand” is seen by all, that “hand” now owns everything it touches: good, bad or indifferent.

This is the absolute worst case scenario (my conjecture) that the Fed is now in. Why?

It’s now blatantly obvious to the general populace.

Can you say “Uh-oh?”

The Federal Reserve and all its participants have always tried to stay aloof from any criticism, or expectations coming from the general public. After-all, they are not elected, so why should they. That’s for the politicians that appoint them.

What this has allowed, and has never been more obvious since the recent election, is for Fed officials to willfully show outright disdain to those very same politicians.

Jerome Powell’s many 2018 interviews showed this in spades. These were some of the most tone-deaf displays of political indifference, or outright public disdain for a sitting president. The kicker in the ordeal was, this was also the very same president that appointed him to his current position only months prior.

Saying that his many non-answer answers bordered on petty would be kind. They were far worse in my humble opinion. But to this, they inadvertently have helped lay the premise for miscalculation that will now be amplified – all by his own upcoming words and actions.

The issue ever since the 2008 market debacle has been just how, when, and by how much the Federal Reserve should or should not have intervened. The answer to question will be debated for decades to come, much like that of the Great Depression.

There are those (which include myself) that can rationally argue or accept the premise that the Fed intervening when it looked as if the world was ending in 2008/09 was an acceptable action. What we do not condone (which everyone from Wall Street to the Media now demands) are the actions taken at and since then Chair Ben Bernanke’s now infamous 2010 Jackson Hole speech, where it’s basically been one form or another of QE: to infinity and beyond!

Every-time the markets went into hangover-mode from another stimulus action, the Fed, in one form or another, signaled more “dope” in the form of QE, rate cuts, _______(fill in your moniker of choice) was either on the way, or at the ready should the markets show signs of being “dope sick.” i.e., “Dr. Fed” was always standing by with another injection, but they would dispense it as they saw fit. i.e., Think Michael Jackson’s doctor and routine.

This worked for nearly a decade, but then it all began falling apart. In other words: the patient was demanding that if you wanted another performance hit? You’d better be ready with another “hit” for the performer. And any “no” was not going to be taken lightly – and they weren’t.

During the 2018 year the Fed proposed they knew precisely what they were doing and began their now ill-fated attempt at weening the markets off stimulus. Every-time the Fed administered their reversal measures (balance sheet reduction, rate hikes, etc.) the markets swooned till finally, in December, they were entering outright shock-and-seizure mode.

That is, till the now “Call from Cabo” appeared and calmed them as a precursor till this once confident to the point of arrogance “autopilot” Fed could come to the airwaves and make in no uncertain terms: that it was all a mistake, and a big one. And would go on to reverse every single monetary position in a matter of months.

Every. Single. One. The result?

These same “markets” that at one time were just used as a corollary type indicator to Fed policy are now the absolute stick measurement of it.

Fed officials can no-longer use terms or verbiage such as “We don’t take or use market gyrations as some indicator or other indicative measurement for setting monetary policy.” That presumption is now firmly discarded into the wastebasket of history. Not because the Fed wants it there, but because the public has now placed it there – and that’s where the Fed miscalculated.

The issue for the Fed has been in assuming (and you know what happens when you do that) the the general populace doesn’t understand monetary policy. The issue here is, whether they do or don’t no longer matters. What they do know now via the Fed’s own visible-hand is that a Fed policy of easy money means their 401Ks don’t go down. If they do? The first information they’ll now look for is what did the Fed just do, or just as important, didn’t do. Everything else is now meaningless.

How important of a distinction is this, and just how much has the Fed’s world now changed? Here’s a hint…

This past week former CEO of Goldman Sachs™ Lloyd Blanfein’s reply to host Poppy Harlow’s question speaks volumes and was not just striking, but foreboding. To wit:

Poppy Harlow: Do you want to pay more taxes, Mr. Blankfein, and should you?

Do I want to pay more taxes? No, I’d like to pay no more taxes, but I’d like to live in a civilized world where people aren’t coming with torches and rakes trying to, you know, kill each other. I sure as heck would be willing to pay more tax if I could buy a — you know, a happier and less polarized society for sure.

LLoyd Blankfein – at CITIZEN by CNN Conference

So now the question to be asked and answered comes from you dear reader, and it is this…

Exactly how do you think the general populace is now going to react when the markets go down, their pension or 401k value goes down along with it – and the direct cause (whether rightly or wrongly) they can/will now point to is the Federal Reserve?

Oh, and let’s add one more, shall we? Just for chuckles.

And the one that will point it all out, with the biggest of bully-pulpit’s, is the very same person that the entirety of the Fed has publicly dissed over, and over, and over again?

“But wait…” as they say on TV. There’s more!

Not only is it an election year, but worse, far worse in my estimation, everything the president said they should be doing, they’ve done. And the results? Hint: All time highs.

Now, if the Fed for any reason tries to pull at its next meeting something the market takes as “too cute by half?” It can all far apart. All of it.

And guess who will get the blame and the reaction to it? Hint: See Blankfien quote above for possible clues.

This is a situation the Fed never thought it would be in. That was their first mistake…

This upcoming meeting decision may conclude to be their last. Because if the Fed thinks the aura of independence will come back once someone else assumes the presidency? May I remind Mr. Powell and company of this little exchange between Mr. Schumer and Mr. Bernanke.

“Get back to work!”

This will now be the clarion call of not just politicians, but by those very people that make elitists blood run cold. i.e., Those with pitchforks and rakes.

© 2019 Mark St.Cyr

For Those Wondering What I’m Thinking

I was asked for my thoughts on this recent “market” move with some indexes reaching new life-time highs and a few others coming within a hares breath. Here’s my reply for those that may want to know.

“One of the most damning ideas to capitalism over the last decade can be seen in real-time as corporate leaders who used to argue competing against such things as GSE’s (government sponsored entities) was something totally anathema to free-markets and would rail against these entities with calls they need to be curtailed, if not outright banned.

That idea is all but dead-and-buried. Because today, we now have a “new and improved” version known as FSE’s (Fed sponsored equities). This newest perversion is something that is currently hailed as a “brilliant use of monetary policy.” What adds insult-to-injury? It is now replete with its own band, bandwagon and cheering section made up of those very same corporate leaders whom prior railed against such a notion. It’s not only appalling, it should be seen as downright disgusting to any true self-identifying capitalist.”

-Mark St.Cyr October, 2019

Here’s something else I know…

I more than likely wasted my own breath, because they’ll never print it.

© 2019 Mark St.Cyr

Proving A Point

I was asked (more like subtly accused) by a colleague if claiming on today’s show the notion of “I was talking about this way before…” wasn’t a bit on the “excessive boasting side,” insinuating that I myself was trying to front-run something that really no one else could have known prior.

The reasoning given was “I mean, really, who could have seen this coming months ago?” To which I forcefully answered: WTF are you trying to insinuate?

Let’s just say, at that moment, suddenly I then seemed to be the one “front-running” the questioning. But I digress.

Why? Simple – it ticked me off, and this person should know better. It irked me to the point I went back to see precisely when and if I did it pertaining to exactly this circumstance.

What’s the circumstance? Hint: The Fed’s now panic interjection and growth of the Repo markets, needing to not only raise the original amount from $75 Billion available overnight of just weeks ago and temporary. But then to over $100 Billion and “permanent,” to where last night when they raised the amount available again, this time to “at least” $120 Billion, it was oversubscribed needing $134 Billion to made available.

So, to answer the question: am I front-running this story? Here’s my response and I’ll let you decide, because in the end that’s all that truly matters. To wit:

From my article January 2, 2019 “Something to be aware of…” Yes – January.

Suddenly there seems to be some very unsettling actions taking place in what is known as the “General Collateral Repo Rate Market.” This market is one segment every business needs to both know and understand, whether you’re a solo-practitioner or, CEO of a global concern. The reasoning is this is where businesses of all types secure funding for their operational transactions.
This market is very liquid, or at least has been, when it comes to the transaction processes. However, in the final days of 2018 on Friday the market suddenly spiked in a one day record move, bringing the overnight rate to its highest since 2001.
However, this move was being explained away by many as a “one day, year end, balancing the book” type phenom. Then, it did it again as in – today.
That’s not something that is suppose to happen unless there’s something wrong. What that “wrong” may be is anyone’s guess. And guessing much of the “experts” are doing just that, for, again, this was only suppose to be a one-off-thing possible on the last day of the trading year.

From the same article, again, to wit:

The reason why I make this point is that there are some key identifiers that should not be taken lightly in the above and could hold (again, could) significant underlying clues, which are: These have been traded and accepted as – all worth the same in response to one from the other. i.e., all the “apples” in any given basket were assumed unbruised and insect free.
However, now with there being no longer any implied “Fed Put” or other central bank insurance and a “market” that has touched bear market status in mere weeks of all time highs, it may just be the so-called “banks” or “middle-men” no-longer trust what’s in these tranches without first knowing precisely what are in them, along with precisely what they may – or may no longer be worth at first blush.
Does it mean I’m right? I have no clue yet, in that light, I’ll only point to the last time I made such an observation was when I argued that when a company sends product across the oceans with the absence of a letter of credit, it wasn’t something to demonstrate how secure vendors feel in shipping their products and getting paid as so many argued, but rather, might be a sign of desperation.

Last time I warned on something like this, as I state in that article, the entire shipping container business sunk just months later. Today?

It appears to be the entirety of the Repo market. You know, the thing that keeps everything, and I do mean everything afloat.

The constant theme seems to always be curiously the same: no one ever seems to be able to see things like this coming ahead of time.

Seems I don’t have that problem, but then again…

What do I know.

© 2019 Mark St. Cyr