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The Fed's First "Policy Error" Was Not Yellen's "Dovish Hold" But Bernanke's Tapering Of QE3
Two days before the Fed confused everyone when it delivered neither a dovish hike nor a hawkish hold, but the most dovish possible outcome, we warned readers that the September FOMC announcement could be a carbon copy replica of what happened precisely two years ago, when everyone was expecting Bernanke to announce the Fed's taper - a sign the US economy was solidly improving and QE was a success and thus can start being unwound - only to get precisely the opposite when Bernanke said "no taper", leading some to wonder if this had been the Fed's first major policy, and communication, mistake.
Sept. 18, 2013: Fed shocks market when it "unexpectedly" refrains from QE taper http://t.co/nmEbVeSDrl
— zerohedge (@zerohedge) September 15, 2015
Fast forward to Thursday's Fed statement and subsequent market reaction which prompted many to ask if Yellen's own error did not just cost the Fed a substantial dose of credibility, because this may well have been the first time when a dovish Fed led to such a major market selloff.
And while there was no selloff in September 2013 when the Fed refrained from tapering, the market reaction in December 2013 when Bernanke did announce the tapering of QE3 was very clear: an initial drop followed by a massive surge.
Ironically, according to Deutsche Bank, it was not the Fed's Thursday announcement that was the Fed's most notable mistake, but Bernanke's 2013 Taper announcement, which the market perceived as an all clear signal for the economy, only to realize just how clueless the Fed truly has been all along.
Here is DB's Dominic Konstam explaining why for the Fed, the mistakes are starting to pile up, with the December 2013 tapering start being the first and foremost one.
At a recent investor gathering a question was asked, prior to the FOMC meeting, in the spirit of why the Fed should raise rates, whether or not anyone could argue that tapering itself was a “mistake”. It is an interesting question but the answer is surely a resounding “yes”. While a counterfactual is hard to prove, the impact of tapering in rates space is self evident. From the moment it began we saw a relentless fall in long term rates and a return to where those rates more or less stood around the onset of (endless) QE3. The cost of tapering should therefore be viewed in terms of what we have lost in rate space. If we think of 5y5y OIS as a terminal Funds rates, we have lost the best part of 200 bps in terminal funds and still counting. The Fed has managed to recognize about 75 bps of this so far in terms of dropping their terminal funds rate projections.
One conclusion from the taper mistake is that if the Fed wants a sustainable normalization of rates it needs to be considerably behind the curve. It can never raise rates if the market discounts lower rates. Our confident prediction is that the Fed will raise rates only when the market is begging for it and it should do it more slowly than the market discounts. That means the curve needs to be a lot steeper and the terminal rate priced a lot higher than currently. For the Fed to move otherwise, normalization is bound to fail i.e. be short-lived and partial. Recognizing this the Fed would do well to signal that by explicitly relinquishing any claim to higher rates through 2016. There might then be a chance that they could actually hike in 2016.
Just in case anyone is still harboring any hope that the Fed may hike in October or December, or even any time in early 2016, allow us to disabuse you of such a fallacy, thanks to the recent devaluation chaos out of China. DB continues:
For Yellen the uncertainty is that if the yuan is to fall further, it may not be now but perhaps year end or even later. There would need to be a clear shift positively in China’s fundamentals for that uncertainty to dissipate. Meanwhile any adjustment if and when it came would add to disinflation concerns at home and, presumably, at least initially adversely affect stocks, led by other Asian equities.
Confused by what all of the above means? Simple: forget any rate hike now or for the foreseeable future. The Fed just got its first major wake up call by the market that it made a policy error, a mistake which it can and will trace to the QE4 unwind. Which means one thing: if Yellen decides to undo the Fed's mistake, having not hiked on Thursday, she will next undo Bernanke's last error: the naive hope that the US can operate without a regime of epic liquidity, i.e., either printing money once more in the form of QE4, 5, etc... or, as Kocherlakota hinted, the arrival of NIRP.
One thing is certain: with the market tumbling, and with Bank of America admitting yesterday that a plunge in the S&P below 1870 to hint that QE4 is on the table, there is much more debasement of paper currencies on the horizon as the Fed grudgingly admits it is back to square one.
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The Fed's first policy error was coming into existence.
one man's error is another mensch's gravey train.
ZIRP leads to collapse:
http://www.safehaven.com/article/38731/zirp-leading-to-economic-collapse-much-higher-gold-and-silver-prices
Well, if you can't taper a ponzi, and you can't, the outcome is obvious.
You fuck my wife, and i'll bake you some cookies.
"Self Esteem"
I wrote her off for the tenth time today
And practiced all the things I would say
But she came over, I lost my nerve
I took her back and made her dessert
Now I know I'm being used
That's okay, man, 'cause I like the abuse
I know she's playing with me
That's okay 'cause I got no self esteem
We make plans to go out at night
I wait 'til 2 then I turn out the light
This rejection's got me so low
If she keeps it up I just might tell her so
When she's saying that she wants only me
Then I wonder why she sleeps with my friends
When she's saying that I'm like a disease
Then I wonder how much more I can spend
Well, I guess I should stick up for myself
But I really think it's better this way
The more you suffer
The more it shows you really care
Right? Yeah, yeah, yeah
Now I'll relate this little bit
That happens more than I'd like to admit
Late at night she knocks on my door
She's drunk again and looking to score
Now I know I should say "No"
But that's kind of hard when she's ready to go
I may be dumb but I'm not a dweeb
I'm just a sucker with no self esteem
When she's saying that she wants only me
Then I wonder why she sleeps with my friends
When she's saying that I'm like a disease
Then I wonder how much more I can spend
Well, I guess I should stick up for myself
But I really think it's better this way
The more you suffer
The more it shows you really care
Right? Yeah, yeah, yeah
The FED is not confused and there are no Hawks. They have not raised rates since June 2006 and will never raise them. About time we all realized this and quit thinking otherwise. Unwinding their toxic balance sheet is also impossible.
Simply put, the FED is the bad bank.
Let me ask the simple question: "where" did the...what 5 or 6 trillion since 2007... 'where' did it go?
And how is, really, this neo-Keynesian stim and print approach any different from "trickle down" economics so frequently criticized - apparently because while taxing people less is bad, printing money and handing it at 0% to banks who can instantly make billions buying treasuries at 0.5%...
sigh.
Ther'es shit in the water and food. On top of the brainwashing techniques used on television {youtube has some decent shit on that}
I mean - there fucking has to be.
p.s. The local sports team from my area makes the local sports team from your area look like a bunch of effeminate little girls.
Jamie Dimon and Llyod Blankfein are now billionaires, and there are a ton of new millionaires whose names end in, berg, man, stein, fein, and witz
$5 or $6 trillion? You aim so low. But you are counting using the monetary system that is in use for a few more minutes.
Of course they have bought all they think they will need for when the time comes.
All that is bought can be returned. Isn't that what VISA used to say?
This is gobbledegook. Even if you grant that maybe QE and ZIRP was needed in 2009, it should have started tapering off, by which I mean ended with a first raise of rates, by the end of 2010. Or 2011. Or 2012. So don't come whining to me that they merely tapered a bit by 2013 without raising rates even by September 2015.
The keep finding one excuse or another and probably always will be able to, so it's really just a matter of when (if) they ever decide to move anyway.
WTF ARE YOU SMOKING TYLER - POLICY MISTAKE, ARE YOU KIDDING ME??? THE FED SHOULD CONTINUE TO "FAVOR" CASINO BETTING AND WEIGH IN ON BEHALF OF THE PSYCOPATHS OF WALL STREET VERSUS THE REST OF THE REAL WORLD OF HUMAN BEINGS. SAVERS ARE BEING SLAUGHTERED BY YOUR CONTINUOUS SELF RIGHTEOUS BABBLE OF "I AM ALWAYS CORRECT" AND "SEE WE WILL HAVE NO RATE HIKE AND THEN MOAR QE"
ENOUGH!
LET THE MARKETS DO WHAT THEY ARE SUPPOSED TO DO - DISCOVER PRICES, FUCK THE CENTRAL PLANNING. AND IF THAT MEANS THE BUBBLES POP - WELL SO BE IT!. THE ZERO PRICE OF MONEY IS UNREAL. IT WILL ALWAYS BE "UNREAL"
LEARN TO FUCKING READ...
You must have smoked way too much shit...in Grade SKoOL
Ironically, according to Deutsche Bank, it was not the Fed's Thursday announcement that was the Fed's most notable mistake, but Bernanke's 2013 Taper announcement, which the market perceived as an all clear signal for the economy, only to realize just how clueless the Fed truly has been all along.
LEARN TO SWIM
Some say the end is near.
Some say we'll see armageddon soon.
I certainly hope we will cuz
I sure could use a vacation from this
Silly shit, stupid shit...
One great big festering neon distraction,
I've a suggestion to keep you all occupied.
Learn to swim.
Maynard
When pigs feed at the trough of low interest rates and QE, what hapoens when the fed removes the trough?
Bullshit...
In this case, the error was starting QE3
Going back, it was starting the Fed in the first place that was the policy error.
According to Bank of America Merrill Lynch:
https://app.box.com/s/2x1jqc1901tv8v00mbqnqjfbu8rrqzzp
The HY Note
Global growth concerns spread from us to Fed
A slow moving train wreck
Today’s Fed decision was the second worst outcome for risk markets, in our view. We have written on numerous occasions that if the Fed didn’t hike rates today initially markets would rally modestly before selling off. The realization that global growth concerns are not only real, but very dangerous right now should cause a risk off environment. And with no room to cut rates, we question the Fed’s ability to manage any further slowdown through what would have to be QE4. However, we can’t see how additional quantitative easing will help, as the goals of QE have already played out: the banking system has recovered, rates are low, investors have driven debt issuance and asset prices to uncomfortable levels, and the housing market has recovered enough to not be a concern.
Furthermore, lower rates don’t help high yield at this point. Whether the 10y is at 2.20% or 2.0%, does the asset class really look all that more compelling? Not in the slightest. In fact, outside of hiking while sounding very hawkish, not hiking and sounding very dovish while expressing concern about the global economy may be the worst thing that could have happened today.
We have been saying for months that the global economy is weak and the Fed’s dovish disposition today only bolsters our view. Europe is about to enter QE2 as inflation and growth remains poor. Japan and Brazil were just downgraded. Commodities remain under pressure and we think, at some point, the narrative could turn from a supply driven story to a demand driven one. Domestically it becomes harder to argue that a strong dollar and the lack of inflation can be viewed as transitory and this headwind is continuing to hurt high yield corporates. Manufacturing is uneven, consumer spending hasn’t improved in a year, and 2014 real median income was down 6.5% versus 8 years ago (and down 7.2% from the 1999 level). Although auto sales remain strong, we would expect as much given low gas prices, an aging fleet and the fact that auto loans are one of the few places in the economy where it’s easy to obtain credit.
Additionally, high yield corporate earnings remain incredibly weak, with yoy earnings growth negative for the first time since the recession (even ex: commodities EBITDA growth is only slightly positive). Leverage is at all-time highs (again, even ex- commodities) and the High Yield index is more globally exposed than it has ever been (35% of the market generates 45% of its revenue from outside of the United States, and that doesn’t include Energy, which is globally exposed despite not realizing significant direct sales abroad).
Not only are earnings weak, but there has been next to no capex investment, debt issuance has been massive, and buybacks and dividends have driven equity valuations as CEOs and CFOs, afraid to invest in organic growth, have chosen to buy growth instead. And as a result, recovery rates are 10-15ppt below historical norms and defaults and downgrades are creeping into the market. Although we understand many will say its just commodities, is it really? What started as coal weakness 18 months ago became coal and energy weakness. But it wasn’t really just the commodity sectors, as retail was also already weak. Now it’s the commodity sectors, retail and wireline (but definitely not all of telecom). The situation almost seems unbelieveable, as everything that seems to go wrong is explained as being isolated (AMD, well, of course semiconductors are in a secular decline) and treated as a surprise (Sprint).
In our view, the makings are there for a risk off environment for some time to come. For non-commodity spreads to be 400bp tighter than in 2011 makes little sense to us. Replace Greece for a much bigger problem: China. Replace Washington dysfunction and debt downgrade with uncertainty about monetary policy and EM weakness (though we may see Washington dysfunction very soon between this fall’s budget talks and the presidential race looming). Replace US QE with European QE. Additionally, replace strong earnings growth and margin expansion in 2011 with no earnings growth, a stronger dollar, and higher leverage today. Replace decent liquidity back then with poor liquidity now. And replace the fears of a double dip recession with the potential for fears of a global recession. Though this last point has yet to play out, we think it’s only a matter of time before investors begin to feel as bearish as we do.
The Fed had an opportunity today to hike rates and begin to build a cushion should the global slowdown be so severe it can’t be ignored. Instead, they chose to wait. In our view, this has left them in a predicament as now the rumbles of never being able to increase rates will become even more exaggerated, and when they ultimately do, we think it will be more painful than if they had gone today. We expect as a consequence for there to be more market volatility, more uncertainty around the Fed’s motives and belief in the economy, and therefore more downside risk. Most importantly, however, the acknowledgment of weakness only bolsters our view that we are in the midst of the beginning of the end of this credit cycle, and we warn investors to tread carefully not try to be a hero into year end.
Now is the time that investors need to be managing risk rather than looking for alpha. 1 or 2 names will destroy the performance for what has otherwise been a good set of holdings. Remember what many have forgotten over the last 7 years, credit returns are skewed to the downside. The best case scenario is to earn coupon and the ultimate payment of principle. The worst case scenario is 40, 50, 60 or more points of loss.
We’re in the midst of watching a slow-moving train wreck, and in our view the Fed confirmed as much today.
the whole idea of raising rates, lowering rates, qe is all bs. if the congress hadn't (legally or illegally) contracted out the money supply to a group of private banks in the first place this wouldn't even be a discussion. congress would have been spending money into the economy interest free, we wouldn't have a national debt (to this degree) and all the corporate, public and private free shit would not exist as it does today. whether it was gold based money or fiat paper, you could directly point to who fucked shit up....congress. now we have the untouchable fed gods. yellen is nothing but an ambasaddor to the private fed bank gods in the temple of syrinx, she has no power.
QE may have kept markets up but the real economy is collapsing.
Cheap oil = collapsing global economy
Low commidity prices = lack of demand for raw materials from which real things are made
Central Banks can prop up stock markets (for now) but eventually reality will set in.
Maintaining the penthouse suite while the foundations are crumbling.
More Central Banker insanity.
Epic fail is epic.
I don't know if stopping the last round of QE was a mistake. I thought the last round of QE WAS the mistake. The market had recovered strongly from 666 to 1350 and was in a solid uptrend. It certainly wasn't undervalued in late 2012 by any significant degree when the last round of QE started. For some unknown reason Bernanke decided to juice it up with a butt load of QE which took the market up another 50% inside of two years. Earnings certainly didn't go up 50% in two years, rather PEs inflated. The CAPE went up to super high levels. Forward PE ratios went to full levels. Price to sales ratio's went to off the chart levels. Household net worth to GDP and market cap to GDP went to very high levels, well above the normal range.
... And then, the economy didn't show up to validate it all.
If used it all, QE should be reserved for times when asset prices have gotten completely devastated. That wasn't true and 2012 and it is not true today.
Empirical evidence of the success of QE in terms of helping the real economy is actually very poor versus the steroid jolt to asset markets.
Deutsche Bank's argument looks a little Talmudic to me. It is impressive to see how the Wall Street crapshooters will concoct arguments to enable them to continue their systematic thievery. In their arrogance, they now say that the Fed should always follow the markets, rather than pursue price stability and full employment as mandated by law. They badly need to be wacked between the eyes with a 2 X 4, like the proverbial South Carolina mule.
The first and most fatal policy error was the original formation of the federal reserve. But rather than beat that horse to death, let's consider more recent times.
1971 - complete the delinking of the dollar from gold.
1990s - massively artificially manipulate interest rates lower.
1990s - create huge artifical bubble in stocks (NASDAQ bubble).
2001 - massively artificially manipulate interest rates lower.
2000s - create huger artifical bubble in real estate.
2008 - tarp and otherwise save banks that caused RE boom.
2009 - massively artificially manipulate interest rates lower.
2010s - create hugest artificial bubble in RE, stocks, bonds, debt.
2015 - admit federal reserve may keep rates at zero forever.
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The most crucial blunder in recent times... the blunder that assured the system would collapse... was saving the criminal banks and other financial institutions that caused the first housing bubble and housing collapse. Once that was done, no market forces existed, and today, no markets exist... only manipulations mangled into a form vaguely resembling those of former markets.
honestannie - The repeal of Glass Steagal was the trojan horse.
Oh yeah, that was a biggie! How could I forget? But now I can't edit my message to insert that. Excellent point. When was that? Early 1990s?
If QE was not illegal, is QE 5 illegal? When does it become illegal ? Hilsenrath - ask Janet that question please, actually in fact ask Rupert Murdoch first.
The Greespam put the US on a path that it has still not deviated from.
Go back to where the can was at the beginning, before it was kicked. And stop using the "market" as an indication of success.
"first" policy error? Are you f**king high? They have made nothing BUT policy errors since effing 1913. They caused the damn great depression. Tell me when they fixed anything?