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"Everyone's Praying But No One's Believing" - The 'Fed Put' Is Dead
Via Scotiabank's Guy Haselmann,
Chalk Outline
Yellen’s detailed speech initially triggered an out-sized market reaction. Unfortunately, it was mainly due to shallow market depth and weak-hand positions. The ‘risk-on’ trades that ensued seem driven by positional unwinds from short-term traders. These markets will likely reverse back to lower prices once those initial trades are digested.
Yellen’s speech should quickly begin to hurt over-priced financial assets. The stellar performance of financial prices over the past several years has primarily been driven by central bank accommodation. The double digit average returns (15%+) of the S&P 500 from 2009-2014 was not driven by economic strength, but rather by massive global central bank actions. There is simply a poor correlation between economic activity and the S&P 500 in any given year.
Since the Fed’s balance sheet flat-lined in 2014 (with the policy rate locked at 0%) risk assets have chopped side-ways-to-lower. Therefore, a sooner (than priced-in) removal of accommodation should be hurting, not helping, risk assets.
The looming 2015 rate hike, threatened by Yellen and other FOMC members, is desirable and plausible in their eyes due to several factors:
1) confidence that the US economy is on firmer footing and has moved materially away from crisis conditions;
2) a sense of desire and urgency to move off the ‘zero lower bound’;
3) anxiety about not having any ammunition during the next economic downturn;
4) fear of missing the business cycle and with it the opportunity to move off of zero rates, and;
5) as stated in Yellen’s speech, the potential that holding rates too low for too long “could encourage excessive leverage and other forms of inappropriate risk-taking that might undermine financial stability”.
Yellen’s speech was the first time I can ever remember a Federal Reserve Chairperson commenting that inappropriate risk-taking might be undermining financial stability. This is explicit confirmation that the Fed’s aim of lifting asset prices in the hopes they bolster broader economic activity has reached the end of its useful life. Barring a financial or economic disaster, the ‘Fed put’ has been put out to pasture.
James Bullard said on TV earlier this week, “the Fed cannot permanently raise stock prices”.
In general, there are three potential conditions for the US and global economy for the rest of 2015: better, worse, or about the same. According to Yellen, the Fed is likely to hike unless conditions worsen materially. It is not good for financial assets if conditions worsen, nor is it good if the Fed hikes rates. Until assets move from being too expensive to too cheap, portfolios should reduce risk profiles as much as possible. Without further central bank steroids, what is going to drive expensive risk assets higher?
Going forward, the risk-reward distribution continues to look skewed to the downside. Poor market depth and crowded positions could even cause a meaningful overshoot.
Since there are numerous days of trading between now and the remaining 2015 FOMC meetings, there is positive optionality of holding long-dated Treasuries. If conditions worsen, all Treasuries are likely to rally. If the Fed hikes, then the curve should flatten, while credit and equities will likely fall as the dollar strengthens.
The shift in Fed policy toward extracting accommodation is important for market direction. Lofty US share valuations will be tested by tighter conditions. Higher rates will likely lift the US dollar higher and decrease the amount of share buybacks. Seven years of easy money has borrowed from the future, indebting many companies and countries globally. The ‘new normal’ is the best case scenario for the next decade.
Moreover, the Fed is arguably hiking after the hump in the economic cycle. Either way, valuations will likely be challenged further as average operating earnings are already decreasing, and since revenue-based valuations currently stand almost 20% above their historical median. The best places to hide are cash or long Treasuries.
“Everyone’s praying but no one’s believing”. –Iron Maiden
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Well, they can keep propping up the stock markets, but they can't prevent the real world consequences of doing so.
"Everybody Knows"
https://www.youtube.com/watch?v=XTc3hIEPTyo
Everybody knows that the dice are loaded
Everybody rolls with their fingers crossed
Everybody knows the war is over
Everybody knows the good guys lost
Everybody knows the fight was fixed
The poor stay poor, the rich get rich
That's how it goes
Everybody knows
Everybody knows that the boat is leaking
Everybody knows that the captain lied
Everybody got this broken feeling
Like their father or their dog just died
Everybody talking to their pockets
Everybody wants a box of chocolates
And a long-stem rose
Everybody knows
Everybody knows that you love me baby
Everybody knows that you really do
Everybody knows that you've been faithful
Ah, give or take a night or two
Everybody knows you've been discreet
But there were so many people you just had to meet
Without your clothes
And everybody knows
Everybody knows, everybody knows
That's how it goes
Everybody knows
Everybody knows, everybody knows
That's how it goes
Everybody knows
And everybody knows that it's now or never
Everybody knows that it's me or you
And everybody knows that you live forever
Ah, when you've done a line or two
Everybody knows the deal is rotten
Old Black Joe's still pickin' cotton
For your ribbons and bows
And everybody knows
And everybody knows that the Plague is coming
Everybody knows that it's moving fast
Everybody knows that the naked man and woman
Are just a shining artifact of the past
Everybody knows the scene is dead
But there's gonna be a meter on your bed
That will disclose
What everybody knows
And everybody knows that you're in trouble
Everybody knows what you've been through
From the bloody cross on top of Calvary
To the beach of Malibu
Everybody knows it's coming apart
Take one last look at this Sacred Heart
Before it blows
And everybody knows
Everybody knows, everybody knows
That's how it goes
Everybody knows
Everybody knows, everybody knows
That's how it goes
Everybody knows
Everybody knows, everybody knows
That's how it goes
Everybody knows
Everybody knows
Ain't no such thing as a perpetual motion machine. The 1st and 2nd Laws of Thermodynamics forbid it.
True, but how long can you wait for those laws to take effect? And what is the domain of the system? Perspective is important ...
We're GODS now......fuck your laws of Thermodynamics
https://www.youtube.com/watch?v=RkLfpXpO5sQ
I never heard a sitting chair of the Board of Governors say that inappropriate monetary policy might be undermining our financial or economic stability for that matter.
Something new every day
http://mic.com/articles/125042/ellen-de-generes-says-caitlyn-jenner-is-s...
It is becoming too obvious to ignore, and too many people are waking up to the banker's scams and the political collusion.
Watch this amazing video of a 12 year old girl in Canada explaining how Central Banking is making debt slaves of all the citizens while driving the country into financial collapse.
Share it with friends, neighbors, family, even your children. Make it go viral.
ahttps://www.youtube.com/watch?t=372&v=JHQOX8EVNmE
So simple, even a caveman can get it (or a child).
Must be a FED troll or some banker scum reading this. I can see how they would find this very scary stuff coming from a 12 year old girl.
It is like defining rape as inappropriate sexual contact.
Calling it 'inappropriate monetary policy' is how these types squirm out of a beheading.
Greenspan also used this strategy when he said there was a 'flaw' in his thinking.
Channel your inner Alan Simpson and just call bullshit on these word games.
Japan. And so it begins here.
Soon the pension funds will break over here in Europe because they are obliged to offer a minimum return to their customers of 1%.
Now if you're forced to invest at least 75% in government bonds that return near zero, then there's only one outcome...
especially if you where already underfunded from the start.
That will be the black swan in the comming decade.
Today I was in the city having lunch with my father and sister and all I could see where 2 types of people. Tourists and old people. All where spending.
But if the old people stop spending... that will crash the economy by itself. And when the economy goes bad, the tourists stay home.
Sorry for the ignorant question .... obliged by law, custom, or market considerations?
From my perspective, "inappropriate risk-taking" sounds similar to Alan's "irrational exuberance".
I just got back from rescuing our girl cat "Ladybug" from the upper branches of the apple tree out back for the second time this week.
There's a cagey blond-tailed grey squirrel that comes around here with a sense of humor. He sits on a lower branch of the apple tree and chatters at Ladybug. Ladybug wants that squirrel in the worst way; she charges up the apple tree after after it. The squirrel hops up a couple branches and chatters at her some more. Ladybug wants that damned squirrel! She climbs up higher after it. The squirrel hops up another couple branches and chatters some more. This continues until Ladybug is way up in the tree and can't go any higher or the branches will bend and dump her. Can't get down either; she's so high in the tree that the branch is too skinny to turn around on and her claws only face one way. She's stuck where she is in a situation where any move up or down courts disaster.
The elusive (and so desirable!) squirrel jumps on the power line that runs through the apple tree and to the house, runs along it to the roof, and chatters at her from the rooftop.
Ladybug sits on her branch for a while acting like she meant to do this (as cats do), but eventually she has to cry "Uncle" and wail pitifully until Mrs. Tippy makes me get the ladder out and rescue her dumb ass.
Perfect!
So...all we gotta do is ignore the cat...
...either it gets down on its own...
...or croaks tryin'.
We all gotta learn...
m
I've never seen any cat skeletons up in trees.
See...?
m
Hello there Janet. Are you home ? I think there's a light on in there ? Or maybe it's just a reflection off your vacant eyes.
Let's see now- "inappropriate risk-taking" wouldn't have any connection to interest rates at the zero bound and endless purchasing of goverment bonds would it? Naw, I didn't think so either.
Nobody gets appointed chair of the Fed, by openly acknowledging reality.
NigTard Bulls are going to have nightmares over this possibility. Sadly equity 'Bulls' are usually the last on the list when it comes to 'brains'. They are great 'followers' but lack any real critical thinking skills. Know who you are?
http://www.barrons.com/articles/bears-are-back-in-charge-as-charts-flash...
Bears Are Back in Charge as Charts Flash Danger
Now that the Fed rate decision has been digested, the bears are on the prowl looking for more prey.
By Michael Kahn
September 23, 2015
Last week, everyone was on the edge of their seats waiting for what Janet Yellen and company would do. The immediate reaction was predictably volatile, but as of Tuesday’s trading the bears have taken back control. Correction over. Now a new leg lower begins.
In my column last week, I outlined a potential framework for what may be heading our way (see Getting Technical, “Roadmap for Stocks Now That Rate Hike Is on Hold,” Sept. 17). In it, I pointed to a rather severe downside target should a bearish trend really take hold.
But there is one more support level that must be taken out before my worst-case scenario is put into play. It is the bottom of a very large head-and-shoulders pattern two years in the making (see Chart).
http://si.wsj.net/public/resources/images/ON-BM892_GTchar_NS_20150923131...
Standard & Poor’s 500
This ubiquitous pattern consists of a central peak or head surrounded by two lower peaks or shoulders. A line called the neck connects the lows between the peaks, and that provides the support that must hold to keep the market from falling a lot further.
There is more going on behind the scenes than a contrived Picasso-like depiction of the market. After all, on a real person the neck is higher than the shoulders but that is not the point. What is important is that a head-and-shoulders formation encompasses all the technical changes that came before it.
For example, the moving average death cross that got so much attention occurred as the head portion of the Standard & Poor’s 500 broke down. So did the break of the bull market trendline drawn from the very important October 2011 low. And arguably, so did the completion of the Dow Theory sell signal shortly thereafter.
The neckline for the S&P 500 is currently in the 1865 area — not quite 4% below Wednesday afternoon trading near 1935. So is the closing low last October after the Ebola scare panicked investors out of the market temporarily. Considering all the volatility still plaguing the market, that is really not too terrible.
It is what happens at the neckline that will be critical. It is a very important support floor under the market where buyers must emerge to basically save it.
Head-and-shoulders patterns do not demand that the decline continue unless the neckline is penetrated to the downside. Therefore, if buyers do emerge then the decline will be halted. And the good news is that failed bearish technical patterns often result in new bullish conditions. In other words, that could be it for the bears.
But a lot of trading is in store before the neckline is tested, and it may not get tested at all. Again, this is just a framework against which we can judge the market’s actual movements and act accordingly.
As an aside, there is one outside influence that keeps me on the more bearish part of the spectrum and that is commodities. While the energy rout is well known, what’s troubling is the continuing decline in industrial commodities such as copper, cotton and lumber, and even in basic materials stocks such as U.S. Steel (ticker: X), which is now trading at a 12-year low. Food commodities also seem to be under extreme pressure, and the Market Vectors Agribusiness exchange-traded fund ( MOO ), covering food producers, equipment makers and supplies, just confirmed a breakdown below a three-year support level.
Watch the S&P 500’s neckline. That should be the point of no return, but if demand picks up perhaps the market will avert the severe decree.
Its going to do whatever the hell makes Goldman Sachs the most amount of money.
A lie is a lie whether one whispers it in your ear or it is broadcast to all.
OOOOh! there is a ritual at MSG now.
The pope is a fraud, not unlike the Fed.
Same premise permits both to persist.
...premise: that something can come from nothing!
GTFO, POPE and FED!!!!!!!!!!!!!!!!!!!!!!!!!!
You fucked up....you trusted us!
I think people are confused with the definition of a"put" option.
When someone "buys a put" they're betting the share(s) of the underlying security will go down.[ selling puts the opposite, but you're most likely hedging shares you own]
The fed "PUT" is somewhat of a misnomer. It implies that the Fed. can SELL puts against ANY & ALL assets, because it owns those ASSETS.
Selling a put, is the technically correct term, assuming the Fed. is omnipotent, and owns the markets.
I wonder if Moe Howard ever sold a "call" option?
People who hold a large position in a stock will purchase "puts" on the stock to hedge themselves against losses should the stock fall in price. Most often they do this when the market is volatile and the stock in question has increased risk of realizing losses, but the holder doesn't want to exit his position.
The "Greenspan Put" was a prevailing confidence that the Federal Reserve under The Maestro would come to the rescue should the stock market start going down. Market participants could discount the risk of losses because Alan Greenspan had their backs - just as if they were hedged by holding puts on their positions.
Nowadays the "Fed Put" is the confidence of investors that the Federal Reserve is in control and will not allow equities or systemically important financial institutions to collapse. Risk on!
Exactly.
That's why I'm perplexed the term is still used. The "Fed. PUT" is an oxymoron based on the current Fed. mandate, and ability to stabilize the equity markets.
It should be called the, " Fed. HOPIUM" we shot our wad jawboning derivative macro bullshit double seasonally adjusted unicorn mandate.
Well Done.
Time to issue the arrest warrants and move in with swat teams and navy seals to close operations down and convert the financial system to an open source publicly owned and operated system of thousands of interchangable cryptocurrencies.
don't believe it...the FED will just print more...who or what is going to stop them. What they have done since 2006 is completely illegal...but since the criminal Wall Street Banks give a job to anyone with power....our complaining does NOTHING. Corzine walked and he was caught red handed....and NOTHING!
Forget occupy wall street it is time to invade!
There are a number of mechanisms (ETFs) to short all of the major stock indices and real estate. There is relatively little downside risk, but plenty of upside potential.
lol. Care to share a few?
So, addressing the "look for what is NOT apparent" is this about ZIRP/NIRP for the "Fraud Preserve's" ability to continue "QE to Infinity".
While the "Media" continues ranting about the "nomial interest rate hike that never happened" the "Fraud Preserve" goes about "biz as usual" with all its private/secret "credit facility windows" to the Goldman Hacks, JPM, ectl.
The say one thing and do another. The fed has a 4.5 trillion dollar balance sheet, including 1.75 trillion in MBS, with an average maturity of approx. 10 yrs. They are rolling over all this debt, so QE is still happening to the tune of 450 billion per year just to keep the balance sheet from shrinking. Supposedely they would like to see the balance sheet reduced gradually, but we all know what would happen to the debt markets if they stopped this "re-investment". It would be an epic credit collapse. One other thing, the feds income was 101 billion last year of which 97 billion was returned to the treasury. That means they kept 4 billion for themselves. A nice little dividend for all their hard work creating money out of thin air.
"Barring a financial or economic disaster" ... easily arranged, I should think.
In general, there are three potential conditions for the US and global economy for the rest of 2015: better, worse, or about the same.
This is a good analysis, if you have shit for brains...
I like the "potential" part.
As I observed on the day the deed was done, whatever benefit the Fed hoped to obtain from leaving rates unchanged was bound to be offset by the uncertainty and lack of command they showed. Such has indeed proven to be the case.
Miss, oh Miss, I told you that no dogs were allowed in the Inner Sanctum of the Great and Powerful Oz. Now look what the filthy little beast has done.
"Barring a financial or economic disaster, the ‘Fed put’ has been put out to pasture."
Hmmm...I'm sure one of those just might come in handy right about now.
And believe me, it won't go to waste.
"4) fear of missing the business cycle and with it the opportunity to move off of zero rates,"
The FED has screwed up the business cycle.