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The Fed's Perilous "Fake It Till You Make It" Strategy May Be Coming Home To Roost

Tyler Durden's picture




 

Submitted by Mark St.Cyr,

We all know the difference between reality and wishful thinking. Many of us know just how quickly the jaws of reality can crush the life out of unicorn and fairytale stories when fiction is used to cover the facts. Where the businesses and happy customers that are supposedly represented on an income statement turn out to be little more than the Non-GAAP application of a fairy’s wand and pixie dust.

However, this doesn’t stop people from buying in (literally) to the illusion. And what has far more onerous consequences is when the story tellers themselves begin to believe their own works of fiction.

Since the financial meltdown of ’08 one thing has changed in ways never before seen in its voracity, let alone the sheer breath of complacency and acceptance to it. That “change” is what used to be reported or used as benchmarks of statistical data (whether it be of the government supplied sourced or other venue) and the outright publicly displayed willingness to adulterate them.

Some will ask, “Is it really such a big deal? It’s not like reports haven’t been adjusted for decades, what’s the big deal now?”

Part of that question is correct. Yes, we’ve always tried to “smooth” out data to get a more accurate read of what is actually transpiring within an economy and more. As a matter of fact whole companies as well as individuals have built well deserved reputations for doing just that and supplying that advice to businesses and others. However, what is taking place currently (in my opinion) is the practice of “goal-seeking” as in the manipulation of that data; and moving it closer in a perilous pursuit of another methodology that may have far more disastrous consequences e.g., “Fake it till you make it.”

Personally I am all too well versed on this latter dictum. It is used extensively throughout the motivational speaking realm. The problem is not with the idea per se, it’s in the where, why, and how application that causes all the problems. Let me give you a quick example for clarity…

Want to break a habit such as smoking and more? “Fake it till you make it” works perfect here and is absolutely a useful and beneficial frame of mind to accomplish that goal. For as soon as you decide to quit you can begin living and adapting your life to that as a person who doesn’t. Want to begin and start acting like a person of success? You can do the same.

Where the dangerous version of using this example comes into play and is shouted from stages, and books too many to mention here, is when you’re advised to buy or spend (as well as kid yourself into believing this is how the rich do it) money you maybe can’t afford or, get into onerous long-term contracts and financing deals such as a high-end or exotic cars, or homes well above your current income as to “grow” into it. i.e., Fake it till you make it.

Here is where “faking it” only works for so long because someone else comes along and “takes it back” with a Sheriff’s notice for non-payment. The landscape is littered with those who bought in (again literally) to this type of advice. And yet – this is exactly what is taking place in kind at the most powerful monetary body in the world e.g., The Federal Reserve.

Just this past week the “data dependent” Fed. was supplied with the fantastic news that the Dept. of Commerce will now “double seasonally adjust” GDP data. i.e., if at first you don’t succeed – try, try again. This coincides with other reports now that have become outright jokes to anyone with a modicum of business acumen. e.g., The jobs reports, consumer spending, et al. Yet, all this data is exactly what the Fed. points to as confirmation why they should or should not alter or adjust monetary policy. I’m sorry, but this is no longer delirious or delusional economic policy and theories in action. This is out right dangerous.

For how does one now solve the dilemma when investing or anything else market related when data has been flipped from adulterated, to inverted, to an inverted adulteration? (e.g., data was at first adjusted, then it took on the caveat of “bad is now good.” to now where it’s adjusted and can literally imply both good and bad)

As much as that may seem like a play on words, I assure you it’s not. For in today’s markets all that matters is what the Fed. does and when. There is no longer anything approaching what was once known as “fundamental investing” in these markets. “Fundamental” is now nothing more – than front-running. Pure and simple.

And with that now comes another dilemma in this duopoly: Who does the Fed. now want to believe? Their own numbers? (e.g., like those of the Atlanta Fed.) Or: the double seasonally adjusted, goal-seeked versions?

One heralds: “Bad news is good, and worse is fantastic!” implying the Fed. is hamstrung to the zero bound along with keeping the narrative alive for the possibility of a resurgence of QE. And the other portends: “Bad news is now going to be adjusted to show good, and better news will be seen as “mission accomplished” releasing the Fed. to both raise rates sooner, and possibly faster, than the market anticipates. Welcome to your new version of “clarity” as portrayed by current Fed. speak.

The argument can be made (in which I’m trying to do just that) as of this week: all “clarity” as to what any relevant data point used and professed by the so-called “smart crowd” as to infer what the Fed. may, or may not do, in the coming months – has been completely and outright nullified. The Fed. by virtue of their own clarifying distinctions when they moved from “patient” to “data dependent” means one will lose their minds (as well as money) let alone patience as they now try to extrapolate what data point the Fed. now views as determinant.

Let’s use a very possible (if not plausible) example to express the above today, in real-time…

You are a fund manager with a considerable amount of money at risk within the markets whether private or customer funded. As of last Monday you were of the mindset along with the group think based upon confirmation expressed by “clarity” statements emanating from the Fed. that “data” is what will determine their policy adjustments. And so, with the narrative of “bad news is good news for stocks” you are fully exposed to equities. That has been the bread and butter trade of “insight” for nearly 6 years.

However, just days ago (going into a long holiday weekend) you just learned: the remaining “data points” that helped buttress those assumptions (i.e., deteriorating macro data points) are now going to be “double seasonally adjusted” as to show that maybe in the eyes of those discerning those numbers – they just aren’t as bad as they first portended to be. Now what?

Are you so sure the Fed. won’t raise rates in June? Maybe they won’t, maybe they won’t this year, or in our lifetime. Who knows. However, exactly who is this “data” being adjusted for to show more “clarity?” The public at large? Or – The Fed? And if it’s the latter; then all previous assumptions of what, why, when, and how are now moot. Welcome to where double speak aligns with goal-seeked expressed via Fed. speak. Good luck with any clarity in that equation. Let alone what the headline reading, algorithmic front-running arsenal of HFT vacuum tubes will now interpret it.

The Fed. embarked on the greatest experiment in the history of monetary policy based on the ultimate “fake it till you make it” strategy. They have openly stated the underlying premise (or illusion) why it was pursuing this path was for: The wealth effect. However, as with most that ever followed this type of strategy without fully comprehending the dangers – trouble is now lurking around every corner.

What was once implied as “good” can now mean just that, which in turn means bad for stocks. What was said as being “transitory” can now mean to have lasting repercussions to stock values. What was earlier programmed and algo fueled to mean “buy, buy. buy” could this Tuesday be flipped with a switch in code to mean “sell everything!” No one knows because “clarity” just took on a whole new meaning with “double seasonally adjusted.”

The only one’s that may be more surprised with the coming ramifications to a “fake it till you make it” world of monetary policy are those that still believe it’s been their investing prowess over the last 6 years that’s been the force behind their performance. For one thing will be certain.

Will JBTFD (just buy the dip) work in the markets any longer when monetary policy has more in common with trying to figure out what the definition of “is” is? And if you’re confused going forward don’t feel bad. Just take solace in how confused the HFT headline reading algo’s will be going forward. Because as the volumes as well as market data shows:

They’re the only one’s still in this market.

 

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Sun, 05/24/2015 - 18:43 | 6127837 Looney
Looney's picture

All real economies around the world have been uZIRPed by the INKLESS money printing.

The beauty of their scam is that they don’t even need to ‘’print” trillions of banknotes. All it takes is an intern with an oversized twitching finger keepin’ his hand glued to the keyboard 24/7.

Looney

P.S. Kevin Henry, I hope your Chihuahua dies of syphilis because she preferred to be fed by your neighbor’s viral gay-chimp, rather than taking any food from YOU, you fucking cock-sucking cunt.

P.P.S.  Just in case Kevin’s “fucking cock-sucking cunt” offends anybody, I am down-voting myself ;-)

Sun, 05/24/2015 - 18:51 | 6127853 junction
junction's picture

"We all know the difference between reality and wishful thinking."  What crowd do you hang out with, Mr. St. Cyr?  Everyone and his brother (and sister) are on SSRIs, including David Letterman.  These "happy pills" blur the lines between the grim real world and the drug-induced mellow yellow world of ant-depressants.  One of the downsides of SSRIs is that they sometimes cause psychotic behavior, whether by Federal Reserve top officials or by those prescription-drugged out Waco cops who started blasting at anything that moved outside the Twin Peaks restaurant.  

Sun, 05/24/2015 - 20:13 | 6128023 LooseLee
LooseLee's picture

He's on the list

Mon, 05/25/2015 - 07:45 | 6128887 doctor10
doctor10's picture

When its obvious somebody in DC or NYC should have read a history book-they are all irrelevant-and dangerous to the rest of us

https://mises.org/library/forgotten-depression-1920

Sun, 05/24/2015 - 18:46 | 6127839 Elliott Eldrich
Elliott Eldrich's picture

When one is continually moving the goalposts, changing the rules, and making up new rules on the fly, one is no longer conducting any sort of an actual market. One is, instead, conducting the economic equivalent of "Calvinball." For those who don't recall the classic comic strip "Calvin and Hobbes," Calvinball is a rousing sport that eventually ends in a good fight, with all participants being merrily pummeled.

Sun, 05/24/2015 - 18:46 | 6127842 DOGGONE
DOGGONE's picture

Important part of Fake It":

"Stop whoring for Wall Street"
http://www.showrealhist.com/yTRIAL.html
http://patrick.net/?p=1223928

Sun, 05/24/2015 - 18:47 | 6127846 knukles
knukles's picture

Seen that happen more times in more ways that I care to remember.  Small tales become bigger, soon engulfing and enveloping their creators, ultimately falling grandly apart when the lies can no longer be consistent and juggled any further.  All rooted in the ego's false pride and hubris in search of money, power, property and prestige.

Sun, 05/24/2015 - 18:57 | 6127855 two hoots
two hoots's picture

As soon as there is any sign or perceived sign that hints of approaching mandates they will raise rates and then big sigh. They are surely making up stuff at this point and know we know it. How can they continue to exist? Maybe because Congress is protected by insider trading rules?

Sun, 05/24/2015 - 18:52 | 6127859 EndOfDayExit
EndOfDayExit's picture

The Fed is just trying to stop or at least to slow down the equity bubble with rhetoric. They may also be trying to address some geo-political pressure on the dollar. If it were not for these 2 issues they would be happy to keep ZIRP for as long as possible. As to whether they do indeed raise the rates soon, I guess nobody is sure any more (and this is exactly how they want the investing public mood to be).  

Sun, 05/24/2015 - 18:53 | 6127860 buzzsaw99
buzzsaw99's picture

there is no dip anymore, just a permanently high plateau. btfath is where it's at bitchez.

Sun, 05/24/2015 - 19:00 | 6127869 Mini-Me
Mini-Me's picture

The only way to avoid being taken to the cleaners financially is not to play.  Take your chips off the table.  

Convert your green pieces of paper into real money or barterable goods, and wait for the shit show to begin.  We saw the overture in 2008, but the play is about to begin in earnest.  

Sun, 05/24/2015 - 19:10 | 6127894 Billy the Poet
Billy the Poet's picture

Whenever they start with an overture you know you'll get an intermission at some point and finally exit music. Makes for a long sit down. This one's been going on seems like forever.

Sun, 05/24/2015 - 19:05 | 6127873 ebworthen
ebworthen's picture

If the markets keep breaking and declaring "self-help" whenever there is an individual or sector drop of more than 5% - how can they ever go down in any appreciable way?

Sun, 05/24/2015 - 19:38 | 6127930 teutonicate
teutonicate's picture

This is really "Fake it till you Quake it".

Anyone who is still prepared to play this Ponzi scheme gets what they deserve. 

And I don't want to hear you crying on my shoulder for leaving 10% on the table.

Nobody rings a bell at the top.

 

Mon, 05/25/2015 - 00:30 | 6128572 JoWazzoo
JoWazzoo's picture

Yeah - and when stocks do start to go down in ernest, it will be interesting to see the ramifications of the world's largest Margin Call in history.  Cars will be sold.  Homes sold.  Mariiages dissolved.  Regardless of all other factors, this alone could tip us in to recession given the tebuous levels we are alraedy at - i.e. stagnat retail sales, stagnant wholesale sales, inventory byuild ups, etc.

 

But for stock buy backs and Pension Obligation Bond buying, stocks would have tanked ages ago.

Sun, 05/24/2015 - 19:28 | 6127937 Chuck Knoblauch
Chuck Knoblauch's picture

Even if they could transition easily into another currency.

They wont.

They want to kill you.

Sun, 05/24/2015 - 19:51 | 6127980 tdogg
tdogg's picture

“double seasonally adjusted.”  Is that like "double secret probation" ?

The Fed & the US have officially jumped the shark.

The end is nigh.

Cut the horse shit Mr. Yellen.

https://www.youtube.com/watch?v=1tfK_3XK4CI

Sun, 05/24/2015 - 20:38 | 6128084 fremannx
fremannx's picture

The Fed's "fake it till you make it" strategy will probably be its demise... but it's not their fault according to Greenspan.

http://www.globaldeflationnews.com/greenspan-blames-u-s-government-for-e...

 

Sun, 05/24/2015 - 22:06 | 6128289 CHC
CHC's picture

I can't wait for the legs to fall off this whole fucking charade so I can see how fucking far those mother fucking banksters, politicians and those tidy 1% fall and watch them lose every damn thing.  They'll be worse off than the average man in the street.  Fuck 'em, may they all rot in hell.

Mon, 05/25/2015 - 03:51 | 6128735 DeusHedge
DeusHedge's picture

the fed is so unoriginal in that they can't think of anyone else to wrap up in their scheme- besides ex-business owners and lenders about to receive their sheriff's notice.

Mon, 05/25/2015 - 08:57 | 6128966 d edwards
d edwards's picture

there's a big difference between "adjusting" data and falsifying it  in business you go to jail for the latter, in gov you get promoted.

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