Archive - Dec 17, 2015

While campaigning ahead of elections, Spanish prime minister Mariano Rajoy was rocked with a right cross when a "selfie-seeking teen" approached and went full Balboa on the side of his face, breaking his glasses, before Rajoy's security detail wrestled the assailant to the floor. As El-Pais reports, the 17-year-old told police "I'm very happy I did it," while Rajoy later tweeted that he "was fine." It appears it is time for a European ban on teenagers (who are suffering massive unemployment) and fists.

Micro-cap stocks have suffered a key breakdown relative to mega-cap stocks, suggesting a “risk-off” shift on the part of investors.

Heading into the Fed's first "dovish" rate hike in nearly a decade, the consensus was two-fold: as a result of relentless telegraphing of the Fed's intentions, the hike is priced in, and it will be a "dovish" hike, with the Fed lowering its forecast for the number of hikes over the next year. Consensus was once again wrong on both accounts: first the rate hike was far more hawkish than most had expected (see previous post), and - judging by the surge in Asian, European stocks and US equity futures - the "market" simply is enamored with such hawkish hikes which will soon soak up trillions in liquidity from the financial system.

Now, slave, get back to work, if you have a job, and make sure you save some energy for your other part time employment as you will be going to those jobs later today. 

The hard part now is how to ween the market away from the old narrative, the one which has pushed the S&P to record highs over the past 7 years on bad economic news, and to renomralize the market's own "reaction function" to that of the Fed. The problem is that from day one there is a major discrepancy between the two: as previouslly observed, the Fed did not deliver the desired dovish hike, and kept its 2016 year-end fed funds rate unchanged at 1.4% suggesting 4 rate hikes in the coming year, and which as Breslow notes means "being less dovish than the meeting previews suggested is now a sign of bullishness on the economy." This sets the Fed on a collision course with the market because "with the market pricing fewer hikes than the Fed suggests, someone is going to end up being wrong."

Grant Williams is very skeptical of the Fed’s ability to continue to control markets much longer.

Many people wonder why couldn’t we let the market set the interest rate. After all, we don’t have a Corn Control Agency or a Lumber Board. So why do we have a Federal Open Market Committee? It’s a very good question.