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The Fed - Hawk, Dove, Or Chicken?

Tyler Durden's picture




 

Submitted by Joseph Calhoun via Alhambra Investment Partners,

Janet Yellen threaded the needle last week with a masterfully worded statement following the FOMC meeting. The word “patient”, the removal of which had produced so much angst in markets recently, was excised to appease the hawks while the rest of the statement cooed dovishly to appease the stock market bulls. The Fed finally acknowledged reality and downgraded their economic outlook, now expecting growth to continue along the 2 to 2.5% path it has been on for several years now. They could have saved themselves some embarrassment by merely reading my weekly missives. I’ve been saying for almost two years now that the economy’s growth trajectory hasn’t changed much. We’ve had some better quarters and some weaker ones, but year over year growth has been stubbornly stuck with a two handle since 2011.

Considering the Fed’s over optimism of the last few years though, one can’t help but worry that their current forecast will end up being so again. They’ve forecast every year that growth would accelerate and spent the second half of the year backtracking as reality refused to conform to their hopes and dreams. This year they didn’t even wait until the second half and with their track record I am left wondering how they’ll be wrong this time. Will their estimate of growth be too high or too low? For investors the bigger fear should, of course, be the former as anything lower than here will probably be hard to distinguish from a recession. And a recession with valuations this high is not a pleasant prospect for anyone with exposure to the stock market.

Based on the incoming data so far this year, the Fed had little choice but to acknowledge the obvious which is that, like last year, the first half is not shaping up too well.

Last week the only report that was better than the consensus – which has been falling in any case – was jobless claims. The manufacturing surveys (Empire State and Philly Fed) were both less than expected and the Philly version was particularly worrisome. New orders were less than the headline activity number, unfilled orders collapsed to -13.8 from last month’s +7.3. Shipments were also below 0 (indicating contraction) at -7.8 and employment was also weaker than the headline at 3.5. Margins are also a concern with input prices falling to -3.0 and finished goods down more at -6.4. All in all, a weak report that is hard to blame on weather and the port strike on the West coast.

 

The industrial production numbers reflected the recent survey data, coming in at a less than expected 0.1% with last month getting a revision into negative territory. The manufacturing part of the report showed a decline of 0.2%. It is obvious – to even the Fed now – that the industrial/manufacturing side of the economy is slowing. Part of that is due to the rest of the world slowing down but with data in Europe and Asia starting to improve that excuse is getting a little dated. Part of it is also due to the energy sector which continues to struggle with low oil and natural gas prices amidst a glut of fuel. We’re starting to see some defaults in energy high yield now and the WSJ reported that several banks have had trouble finding buyers for energy loans they had intended to syndicate. Losses are modest so far but I suspect we’re only seeing the tip of the iceberg now.

 

Housing is still struggling – something else the Fed acknowledged – with the Housing Market Index, housing starts and mortgage applications all disappointing. The Leading Economic Indicators seemed to confirm the budding slowdown coming in at a less than expected 0.2. Last week’s data was not an aberration but rather the continuation of a trend that started a few months ago.

But back to Ms. Yellen and her word-smithing. The immediate effect of the statement was that everything, with the notable exception of the dollar, got bought. Stocks, bonds, gold, oil and everything else that wasn’t nailed down found an immediate bid. In other words, the market acted more as if the Fed had eased rather then opening the door to a rate hike later this year. And in a sense that is exactly what they did. They have spent months preparing the market for a rate hike based on an improving US economy and with their nod to economic reality made it a lot less likely. In fact, I’ve said before and still believe that we will not see a rate hike this year and maybe not even next. The Fed’s shift to forward guidance as their essential policy tool means that changes in expectations are the equivalent of actual changes in policy.

So it appears we will be getting more of the same from the monetary side of the economic growth equation, a mix of zero interest rates (negative real rates) and the hope that the wealth effect is greater than all the research says it is. Not that either policy has worked to date. The euthanasia of the rentier, that Keynesian disdain for those lay about savers, has failed so miserably that one wonders how long it will be before monetary policy takes a Logan’s Run turn and shifts to the real thing. Surely if we just kill all the seniors trying to live off their savings we can get down to the business of spending our way out of this lousy economy. The Fed’s policy of lowering interest rates at any sign of economic weakness over the last few decades has distorted capital allocation so badly that a new theory – secular stagnation – had to be invented to explain the poor performance of the economy.

Secular stagnation is not a discussion topic because we’ve run out of ideas – except maybe at the Fed – but because low interest rates in this cycle accomplished nothing more than allowing corporate insiders to borrow against company assets to line their own pockets and governments to continue avoiding structural reforms that are the real impediment to better growth. Yes, some of the easy money leaked into student and auto loans here in the US and certainly it boosted borrowing outside the US as the weak dollar enticed borrowers from Beijing to Rio, but that has only made the problem worse as the global debt pile has grown even larger in the years since the Great Recession. The now rising dollar has exacerbated the problem for all those non-US borrowers and the Fed can’t get off the zero bound for fear they will prick the debt bubble for which they provided the air.

QE and ZIRP were supposed to work through the two channels of the portfolio balance effect. The twin policies would force investors into riskier securities in a reach for yield, allowing lower rated borrowers to gain funding. In this cycle, that was primarily lending to shale oil and gas producers. The rise in the price of risky assets would also produce a wealth effect as those with the means to participate in financial markets go out and spend their new found, Fed induced wealth. Now the energy loans are coming a cropper and the Fed is left with the wealth effect as the sole remaining prop under a weakening economy.

We often hear various Fed officials described as hawks or doves but Janet Yellen’s Fed brings to mind another avian metaphor. They are afraid to raise rates for fear that doing so would upset the asset market inflation process and derail what is left of their theory. In her press conference last week Yellen said that stock market valuations were on the high side of historical norms, an appellation that only works if one includes the stock bubble of the late 90s. It seems that she and the other members of the FOMC have decided that another epic stock market bubble is better than admitting they were wrong. This FOMC doesn’t have any hawks or doves, only chickens.

 

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Mon, 03/23/2015 - 11:06 | 5917993 exi1ed0ne
exi1ed0ne's picture

How about "looking out for themselves and their sycophants"?

Mon, 03/23/2015 - 11:19 | 5917996 Headbanger
Headbanger's picture

How bout just chicken shit?

Here's a good one from Market Watch:

http://www.marketwatch.com/story/watch-out-for-wall-streets-new-game-of-...

Mon, 03/23/2015 - 11:59 | 5918125 Pool Shark
Pool Shark's picture

 

 

"The Fed - Hawk, Dove, Or Chicken?"

Goose.

As in: "The Fed exists solely to 'goose' the markets.

[Eventually their goose will be 'cooked'...]

Mon, 03/23/2015 - 12:41 | 5918285 KnuckleDragger-X
KnuckleDragger-X's picture

My thoughts exactly Headbanger, but they are going to follow the script to the bitter end because that's all they have and that's they know.....

Mon, 03/23/2015 - 11:22 | 5918031 Burt Gummer
Burt Gummer's picture

QE4 is just around the corner, they will never raise rates.....

https://www.youtube.com/watch?v=i9bHuquTFCs

Mon, 03/23/2015 - 11:07 | 5917995 JRobby
JRobby's picture

Chicken

Stuck in an ever shrinking coop.

Mon, 03/23/2015 - 11:46 | 5918084 A Nanny Moose
Mon, 03/23/2015 - 13:59 | 5918573 JRobby
JRobby's picture

Pulled by the copyright police

Tue, 03/24/2015 - 00:29 | 5920696 Hope Copy
Hope Copy's picture

Humm, you got to find that video elseware..

Mon, 03/23/2015 - 11:08 | 5917997 Thirst Mutilator
Thirst Mutilator's picture

They're all kosher right?

Mon, 03/23/2015 - 11:51 | 5918104 Colonel Klink
Colonel Klink's picture

They're kosher right up to the point of when they start to canibalize themselves.  Because something that eats its own shit can't be kosher any longer.  The grand turdbalism will begin to consume itself.

Mon, 03/23/2015 - 13:18 | 5918433 Thirst Mutilator
Thirst Mutilator's picture

Hey ~ I was just trying to provide a valuable 'service' to the confused individuals [like CH1], that may not have realized that the objects of their sychophant behavior might actually be Khazars & don't give a FF about flying pigs.

Mon, 03/23/2015 - 11:10 | 5918003 JustObserving
JustObserving's picture

Corrupt, criminal, cabal of chicken-hawks is an accurate description of the Fed - not unlike their Neocon masters.

Mon, 03/23/2015 - 11:15 | 5918009 dsty
dsty's picture

Off topic somewhat.

But economically speaking the Hawks are doing pretty good.

World map of who buys weapons from whom.

A few surprises.

http://www.businessinsider.com/where-the-world-buys-its-weapons-2015-3#i...

Mon, 03/23/2015 - 11:15 | 5918010 lester1
lester1's picture

THE FED ARE A BUNCH OF CHICKENS !!

 

THEY WILL NEVER RAISE RATES,

NOT THIS YEAR,

NOT NEXT YEAR,

NEVER !!!!

Mon, 03/23/2015 - 11:50 | 5918101 Farmer Joe in B...
Farmer Joe in Brooklyn's picture

Not until the market makes them.  I know we haven't seen real price discovery in quite some time.  But I'm certain Mr. Market is still out there somewhere....

Mon, 03/23/2015 - 11:17 | 5918013 tocointhephrase
tocointhephrase's picture

 Janet Yellow

Mon, 03/23/2015 - 11:17 | 5918015 10mm
10mm's picture

How about just Chicken Shit.

Mon, 03/23/2015 - 11:18 | 5918020 Panic Mode
Panic Mode's picture

It's PONZI, stupid!!!!

Mon, 03/23/2015 - 11:40 | 5918065 lester1
lester1's picture

We ponzi'd some folks.

Mon, 03/23/2015 - 11:18 | 5918021 wmbz
wmbz's picture

~ For years people like former U.S. Representative Ron Paul have been calling for an audit of the Fed, but officials at the central bank have successfully warded off the threat of having a third party come in to inspect its books. 

   Today Alex J. Pollock of the American Enterprise Institute entered the fray with a strong call for a Fed Audit on the grounds it is running huge economic experiments without effective Congressional oversight.  Pollock was CEO of the Federal Home Loan Bank of Chicago from 1991 - 2004. He strongly believes giving the Fed independent power of manipulating money and credit without occasionally looking into details of its operation can be disastrous.  He concludes, "The money  question profoundly affects everything....it is far too important to be left to a fiefdom Fed." 

   It's hard to overlook the fact that since the Federal Reserve System went into operation in 1914 the U.S. dollar has declined to a present value of about four cents.  The Fed ought to be audited before it drives the dollar to zero.

Mon, 03/23/2015 - 11:18 | 5918023 WillyGroper
WillyGroper's picture

Vulture.

Mon, 03/23/2015 - 11:21 | 5918029 LawsofPhysics
LawsofPhysics's picture

???  Please, The Fed is a criminal banking cartel, period.

WTF?!?!

Mon, 03/23/2015 - 11:27 | 5918037 NihilistZero
NihilistZero's picture

Even if the FED doesn't raise rates, even if there's another QE, what good will it do? There isn't much additional government debt to buy. There's ZERO organic mortgage demand. Selling stocks is apparently a FED offense punished by a market breakdown. To the degree that it could, the only time stimulus has worked during the Greatest Recession was the 2009/10 period of tax rebates and housing credits. Things picked up noticeably here in SoCal. Even Ron Paul has said, though he doesn't agree with monetary stimulus, that if you're going to do it getting it directly to consumers is the only way for it to work. So what is the FED going to accomplish with more. .01% stimulus? They have to non-debt based get consumer spending up if the malaise is to end. I only see 3 ways to get that. Increase wages, which they tried and failed miserably at. Direct consumer stimulus, which was working but stopped, perhaps because of a lack of political will in Congress. The last option is to prick Housing Bubble 2.0 so RE is a smaller part of fixed costs. It seems the last option is working on it's own. We'll see if it makes a difference.

Mon, 03/23/2015 - 11:32 | 5918046 Hohum
Mon, 03/23/2015 - 11:49 | 5918096 Fun Facts
Fun Facts's picture

Vampire Bat.

Mon, 03/23/2015 - 11:57 | 5918121 oudinot
oudinot's picture

I think Peacock is the most apt fowl term for the Fed.

Always preening, narcissistic, can't fly, can't work  but  displays  their exquisite plumage-intellectual bullshit-when afraid.....

Mon, 03/23/2015 - 12:05 | 5918154 aliki
aliki's picture

the article lost me at "threaded the needle".

more like "lied thru their teeth about what their really doing which is financing ever ballooning deficits & debt, taking ELECTED officials OFF the hook from doing the right thing, making the difficult decisions on CUTTING programs that have simply gotten completely out of control in size & scope, all-the-while creating a COMPLETE mis-allocation of capital due to leaving rates too lo (can't go lower than zero) for too long (which is how bubbles are formed) and at the same time have given a green-light to central banks around the world that this insane 'plan' works because our stock market is 60% above its prior all-time high & finally since paul mccoully says it works, the fed should declare 'victory'."

Mon, 03/23/2015 - 12:08 | 5918164 Chuck Knoblauch
Chuck Knoblauch's picture

Ask Dollar Bill if he'd like a cigarette and blindfold before his execution.

Mon, 03/23/2015 - 12:43 | 5918289 yogibear
yogibear's picture

There are no more Fed hawks. Only doves and easy money printers exist.

Mon, 03/23/2015 - 12:50 | 5918320 adonisdemilo
adonisdemilo's picture

I couldn't find a .

box to tick that said "IDIOTS" so I was unable to vote.

If I have to vote then it could possibly be "CHICKEN" as long as it's prefixed with "HEADLESS."

Mon, 03/23/2015 - 13:23 | 5918458 J J Pettigrew
J J Pettigrew's picture

She is not an avian at all..

 

SHE IS A DEER IN THE HEADLIGHTS spewing nonsense.....FROZEN.  Cant Move.

Mon, 03/23/2015 - 13:29 | 5918483 orangegeek
orangegeek's picture

yellen is carrying out fraud - she continues to use US government deposits as leverage to purchase equities and bid US indexes higher.

Mon, 03/23/2015 - 14:09 | 5918602 Raincheck
Raincheck's picture

Actually, I think we owe the chickens an apology.  

Mon, 03/23/2015 - 14:37 | 5918704 YouThePeople
YouThePeople's picture

Dodo

Mon, 03/23/2015 - 15:57 | 5919103 polo007
polo007's picture

Central bank balance sheets as percent of IMF nominal GDP:

http://fingfx.thomsonreuters.com/2011/12/21/1652597407.htm

Debt to GDP ratios:

http://fingfx.thomsonreuters.com/2015/03/19/111450d1ad.htm

Tue, 03/24/2015 - 00:24 | 5920693 Hope Copy
Hope Copy's picture

Chickenhawk..  The US Fed needs to eat more and at a discount.  Rates up and more than T-Bill and US bond holders can tollerate.  They are going to cough them up come June.

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