This page has been archived and commenting is disabled.
"Warning Signs" & The Fed's Grand Illusion
Via Scotiabank's Guy Haselmann,
Ever since Bullard’s agoraphobic performance last week on Bloomberg TV, it should be crystal clear to the FOMC and investors just how powerfully markets will react to any shifts in Fed policy or attempts at policy normalization. An equity market freefall abruptly took an about-face, resuming its ‘melt-up’ trade, after a worried Bullard merely hinted at the possibility of more QE stimulants.
The FOMC should take this as a warning sign. It would be irrational for the Fed to believe that after QE purposefully elevated asset prices and generated a one-way moral hazard spectacle, that there is not going to be some-type of reversal (reaction) when QE is withdrawn and the first hike nears.
The new flaw in Fed communication that has arisen recently, and that was amplified by Bullard’s interview, is how Fed policymakers fundamentally assess and mollify the trade-off between attempts at stimulating real economic activity and financial stability risks.
For several years, the FOMC has been confronted with the delicate balance between removing accommodation too slowly and removing it too quickly. Since the Fed is basically out of effective bullets and its balance sheet has ballooned to the practical limits of prudence, the Fed is therefore trying to err on the side of not removing accommodation too quickly. In this regard, the Fed has allowed the fog to roll in, by repeatedly and cunningly changing the markets’ focus in order to ‘buy time’. (As a case in point, the first hike never arrived when the unemployment rate hit 6.5% as the Fed initially said it would.)
Yet, how far can this asymmetrical leaning go before negative second-order effects and risks to financial stability via asset bubbles make this stance a (ever-growing) poor trade-off. It seems to me that if the Fed were truly data dependent then it would have ended QE a long time ago and even hiked rates already.
The Unemployment Rate is currently 5.9%; not far from the 5.5% level that is widely considered full-employment. It could be argued that technological advancements or demographic shifts alone could have structurally lifted the level considered full-employment. Given this, and the plenty of other economic indicators that look quite strong, I find it astonishing that the Fed is still providing depression-like policies, let alone not already hiking.
- No wonder why financial markets are (temporarily) in ‘melt-up’ mode’: the appearance of an accommodative Fed, maintains the relative-peer-performance race that is driving so many portfolio managers.
Last week’s wild trade was a precursor of the unwind trade that will occur when the one-way bets have to find a two-way equilibrium clearing price. Dreadful market liquidity due to regulatory constraints have been evident recently and will cause a down-side overshoot during the unwind process. I suspect that barring some negative global event, the Fed will want to hike in March (if not sooner to regain some credibility). However, the chance of 6 months passing without encountering a problem is probably small; thus the Fed could be confronted with losing its ideal window to do so.
The FOMC’s dialog needs to change immediately. The current trade-off is not the contemporaneous one between more versus less policy stimulus today, but is an intertemporal trade-off between more stimulus today at the expense of more challenging and disruptive policy exit (and disruptive markets) in the future.
Another factor that has magnified market stresses and helped to keep a bid in the Treasury market recently has been the release by the Fed and other regulators of the final version of the liquidity coverage rule (LCR). LCR-mandates have led to large bank hoarding of ‘level-one’ risk-free highly-liquid securities (e.g., Treasuries) at the expense of riskier less-liquid securities. Volatility has increased partially due to those risks migrating to less well-capitalized institutions. This factor is not going away any time soon.
- I still expect long-dated Treasuries to maintain an underlying bid and grind to lower yields over time.
- I expect the pace toward lower yields to quicken once the Fed’s policy pivot leads to unwinds of the QE-generated asset bubbles that have been created; and which were chased by so many who were fearful of missing the upside or of underperforming peers. This circumstance is a Hobson’s choice which now has a shortening ‘half-life’.
“Someday soon we’ll stop to ponder what on Earth’s this spell we’re under” – Styx
»
- 9169 reads
- Printer-friendly version
- Send to friend
- advertisements -
Run, rabbit, run. Dig that hole, forget the sun. When at last the work is done, don't sit down, it's time to dig another one.
It's a Trap!
EVERYTHING in life is an illusion except when you eat and take a dump
.....but ...... but ..... it's so beautiful........ https://www.youtube.com/watch?v=TTUQyEr-sg0
You Sir are correct.
being as one of their goals is to kill the dollar (thus killing the world economy simultaneously) they are doing a bang-up job despite the newspeak they may offer. I'd rather listen to mr panos than janet, jim or ben. at least he is honest and entertaining while the latter are neither.
The FED prints money out of thin air… via QE
The FED then buys mortgages (debt) from these guys.. http://www.newyorkfed.org/markets/pridealers_current.html
Those primary dealer banks take their cut and lend at 1% interest to corporations who do stock buybacks.
Stock buybacks artificially raise stock prices… stock market goes up!
It's magic......
The only illusion around here is that things will change any time soon.
It will be a slow grind, gradual collapse of various layers of ponzi and sub ponzis but the good thing is MSM and Banalysts will keep it glorified and well reasoned all the way down for our amusement.
The muzzles have had it and the USA will not stand in their way.
In fact if anything we're supplying them with the guns and ammo.
I do think we will support Ukraine to the end however.
I dont see any reason why the Fed would taper or not do QE4?
Any reason at all. There is frankly zero upside for them.
Im not saying its the right thing, I am sayin its the thing.
The Fed is Hans Gruber.
Bernanke and Co. just want to be known as exceptional thief's thats all.
No, that's 'Bill' - 'Bill Clay'...
McClannnnnnnnnnnnnnnnnnne!!!!!!!!!!
The picture above reminds me of a piece from "9-11 The Musical"
https://www.youtube.com/watch?v=p8WxmkAYh0c
Markets are just a plain scam anymore ... last 2 weeks have proven that without the slightest doubt.
Everybody still dumb and greedy enough to "trade" these dark pools - deserves going under with the sharks and money changers.
It is definitely time to leave this business. As long as you still can.
And like a squirrel - to FAST prepare for a very nasty and very cold and several years lasting (economic) winter. If not an ice age.
Once "it" hits - there will be NO more time left to get your shit together. As the shelves will be empty - and the exits and ATMS closed or blocked.
The Federal Reserve now has cast the image of unlimited QE/money print and buying of treasuries with money from thin air.
The Federal Reserve makes it up as they go along so emboldened without realizing their headed the same path as the Weimar Republic.
First Japan blows then the US.
The DOW will be solidly above 17,000 prior to the mid term elections. The un-fed equal Q-E infinity, it is well beyound a simple "fixed" market, it is an owned market.
Thevies, liars & systers rule, make the rules and own the "lawmakers" so what will change that?
warning signs ?
well.... until action is taken against this daylight robbery of the common citizen that has been going on for so long... the warning signs ougtht to be for those who do not join this madness... all alternatives to survive this financial repression are not going to save anyone...
indeed the numbers tell the true story... if anyone believes the corrupt govenments will ever pay their debt, then those who belive such illusion deserve the crap we are under.
All trade is barter or bilateral in essence.
Money helps to quantify and keep the accounting ledgers.
When money is printed by a centralised institution then that institution can shave portions of other peoples buys and sells and eventually (added with the effect of interest) none of that buy or sell is worthwhile for anyone anymore and the central instituion ends up owning everything.
Profit is when you have 1 chicken which lays 20 eggs and hatches 20 chicks, not printed money.
Problems of Europe are the same what others countries, have already, are or will be facing eventually.
Epic Lulz will be when people will realise it was all an illusion, a very well thought out paper for physical scam perpetuated by the help of media and even educational institutions.
Tick tock motherfuckers...
The Fed's backup is IMF SDRs.
Could be, but will the world buy it this time?
Even if the TPTB would want the system to collapse today (which they know it would sooner or later), but so many people are dependent on it, infact the whole world, the victims of the system would not let it collapse because they know nothing better themselves.
The problem for the TPTB (I think) is that they try to collapse it and it gives rise to a coup where someone with better fake promises takes over rather than a reset.
We will control the horizontal. We will control the vertical. You are about to experience the awe and mystery of: The Outer Limits.
They all know they can't pay back the debts, eventually markets will realize this. In the mean time they keep printing.
"Given this, and the plenty of other economic indicators that look quite strong, I find it astonishing that the Fed is still providing depression-like policies, let alone not already hiking."
Personally, I find it 'astonishing' that a seasoned market participant like Haselmann could make such a statement, knowing that he has full access to all of the information provided here on this site, as well as the treasure trove of readily available information out there that would BEG to differ with his 'look quite strong' indicators... Perhaps the Myopia of being a market 'participant' clouds one's vision after a spell.
I think they copy the craft from KitKat advert, split acting - splator!!!
Guy Haselmann,
In case you haven't figured it out, bluntly stopping QE AND raising rates is Politically AND Structurally Un-tenable. Such is the nature of how even otherwise bright individuals can be Blinded by just a few years of QE, into thinking that the drugged-up 3-legged horse is 'ready to run' all on its own...
Surely they can get closer to the Sun than this !!!
We're 0.4% away from structural full-employment? Talk about total BS. A lot of people I know are desperate for jobs. Job fairs are overflowing with people and we are very near full-employment according to official numbers and experts? How can anyone at this point give them any credibility?
This is the downside of bad data.
Both inflation and unemployment data are so not tied to reality that they are both coming back to bite the FED.
If you live by bad data, you will also die by it.
Yellen appointed by Obama .....
Do you think that Yellen might be a BIG government - BIG fed - BIG Keynesian - BIG democrat ?
Do you think that her new job might of come with some strings attached ?
The only thing that will stop her before her term ends is a revolt by the bond market or currency market! Unless that happens .....
nothing will change till maybe 2017.
We are watching the ultimate big crony political takeover of our country ......
Welcome to the Grand Illusion,
Come on in and see what's happenning
Pay the price and get your tickets for the show...
Moar rotational crashes to come.
If unemployment is really trending down toward 5.5%, which is considered full employment, shouldn't there be less unemployed?
Not sure if this author really gets it or has just given up talking about how far off the numbers are and why?
If the Japanese bond market hits it's long overdue turbulance .... then all bets are off.
It might spark a global bond market revolt ... then you will see how much control the Fed has .....
There was a bill passed in the USA that allows to president to have the Federal govt directly by securities in the stock (2009 or earlier?) market at any time and without limit. (This is not Fed buying or QE but something entirely different.) The law was passed quietly and MDM never speaks about it and so even alternative financial press seems to have forgotten it. Indeed I feel like I am the only one who does remember it.
With this in place the govt can buy any dips in the market. It makes toying with QE "will she or won't she" rather a silly mugs game.
Anyone got a URL to the bill I'm speaking of?
post it at http://www.elitetrader.com/et/index.php?threads/ka-please-i-dont-even-li...
Thanks
Are you talking about TARP? Quote from Wikipedia's TARP page:
"TARP allows the Treasury to purchase both "troubled assets" and any other asset the purchase of which the Treasury determines is "necessary" to further economic stability."
Is this what you are referring too?
https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=5&cad=rja&...
Ahhhhhh yes the plunge protection team PPP
http://en.wikipedia.org/wiki/Working_Group_on_Financial_Markets
AGGREGATE PRIVATE DEBT + AGGREGATE STOCK MARKETS CAPITALIZATION =
Ignorance, Arrogance and Extraordinary Popular Delusion that it can be Controlled and Supported on the Way Down........
You lost me at 5.9% unemployment and full at 5.5%. Do you seriously believe we are even on the same planet with 93 million out of the workforce...Please
Show the American people their track records:
http://patrick.net/forum/?p=1223928
the fed will have to increasingly be invovled in molly coddling the credit and stock markets from here on out , unless it is planning on embracing catastrophe resulting from what happens when you shut the money spiggots off cold turkey.
in that case, just wait for a bottom like in 2008. bailouts will be forthcoming. anyone publicly arguing against them wil eventually be swept aside like in 2008, or shot with a nail gun.
not a single politician with power will ever argue against bailouts. ever. politicians are professional extractors. crisis is the tool bailouts a solution.
Styx?
When Martin Luther condemned the Papal church for simony, nepotism and "Indulgencing", Pope Leon X is said to have said : Why does he now foul mouth a tradition that has served us so well for over a thousand years, thanks to that jewish born Icon?
I guess the Fed feels the same way about the "invisible hand of the market"; an invisible hand that has more than its fair share of printing and "forward guidance" by the Popes of the new ICon of monetary markets.
As Bretton Woods framework made the FED the monetary pope of the world!
And BW revoke made the FED the church of fiat indulgences, all in name of "Greenback, Our Saviour" !
Who was that guy Santayana who coined that phrase : Those who forget their past....?
The following quote caught my eye..." It would be irrational for the Fed to believe that after QE purposefully elevated asset prices and generated a one-way moral hazard spectacle, that there is not going to be some-type of reversal (reaction) when QE is withdrawn and the first hike nears."
It WOULD be irrational, if that is what they believed. But I really, really think they thought differently. I believe they thought that they could temporarily support the market, and asset prices, and that eventually, the business cycle would come 'round again, and lift everyone onto a new growth phase. They'd be able to slink away, unnoticed, amidst all the euphoria, and no one would be the wiser...
Ooops! That damned old business cycle never showed, and instead of 'slinking', the Fed is squirming under the lights as they realize that everyone is looking at THEM.
Awkward!
https://www.youtube.com/watch?v=9hvA0wWTIv4
Fed is tantamount to financial terrorism, anyone can see it! The 99% are the losers in their insideous game.
stopped reading at the word "exit"
Lester1 wrote: “The FED prints money out of thin air… via QE”.
This is not true: it is much worse than “thin air”.
Generally, new currency (cash or bank reserves) can only be issued into circulation to member banks. If such a bank wants new currency in the amount of $1 million, it must give US Treasury securities (of equal face value) in exchange. Thus, new currency, or bank reserves, is/are collateralized by such securities.
The problem here is that US Treasury securities have value only so long as people believe the Treasury can collect taxes sometime in the future to redeem those securities. Thus, government debt is the instrument by which a generation of tax consumers financially cannibalizes following generations of tax payers.
The dollar, than, possesses value only so long as people believe the Treasury can cannibalize our children and grandchildren.
And the measure of this cannibalism is the amount of governmental debt on the books.
Currently, this amount is enough to cannibalize following generations of Americans to the end of time. Don’t take my word for it; my conclusion is derived from data, assumptions and formulas provided by recent Financial Reports of the US government.
What verdict shall we pass on a nation that has allowed cannibalization of its children?
To characterize the practice as owing to “thin air” just doesn’t capture the enormity of it.
Does anyone remember The Plunge Protection team, the presidents working group on financial markets. This is not the FED or QE, none of that, this is a whole other entity in fact after “Black Monday” in 1987 Regan put together a team to prevent the market from having major downturns. The group was charged and accused of going way beyond their legal mandate in attempts to manipulate the stock market by using government funds to buy stock index futures and stocks or using moral suasion to have banks do their dirty work. The only way they really could don this is through the US treasury, the FED or the cooperation of banks. Quite possibly all of the above were done and still are, on OCT 2008 the Working group did issue a statement saying that the government may own certain shares in the firms that which it provided loans.