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A Big, Fat "Policy Error" Or Worse? Find Out Tomorrow

Tyler Durden's picture




 

On Tuesday, the day before Yellen's historic rate hike, the S&P closed at 2,043. Today, the day after a Fed announcement which everyone cheered overnight as simply fantastic, perfect, "dovishly goldilocks", and countless other superlatives because it sent the market surging, the S&P closed at.... 2,042. In the process all the euphoric gains from the widely telegraphed Yellen announcement and press conference have been completely wiped out, not just for stocks...

 

... but also for the most "sensitive" asset class in recent weeks, junk bonds which suffered a bruising wipeout today.

 

... and then there is the one asset class that has so far slipped through the cracks, but which will be very closely scrutinized in the coming weeks now that rates are rising: leveraged loans.

 

All of which begs the question: did algos finally figure out precisely what we said first thing this morning, namely that the market completely ignored what was a hawkish hike..

Yesterday, in a carbon-copy response to what happened in December 2013 when the Fed announced the Tapering of QE, stocks first sold off then, as if to validate the Fed's decision as being accurate, saw a dramatic buying surge which pushed them to close just off the highs. With bonds and gold selling off while the dollar rebounded, the Fed could not have asked for - or engineered - a better reaction, while markets, as Bloomberg's Richard Breslow points out, 'chose to hear the parts of the statement and press conference that they wanted to."

 

That was the easy part. The hard part now is how to ween the market away from the old narrative, the one which has pushed the S&P to record highs over the past 7 years on bad economic news, and to renormalize the market's own "reaction function" to that of the Fed. The problem is that from day one there is a major discrepancy between the two: as previously observed, the Fed did not deliver the desired dovish hike, and kept its 2016 year-end fed funds rate unchanged at 1.4% suggesting 4 rate hikes in the coming year, and which as Breslow notes means "being less dovish than the meeting previews suggested is now a sign of bullishness on the economy." This sets the Fed on a collision course with the market because "with the market pricing fewer hikes than the Fed suggests, someone is going to end up being wrong. If we do get four hikes next year, markets (read equities) will need to deal with a hawkish surprise. If the Fed is forced to backtrack, there goes the full-speed ahead theme."

 

What this explicitly means is two things: bad economic news is no longer good for the market - after all the dominant paradigm now is one of strong dollar=strong economy=strong S&P (ignoring that the stronger the dollar, the worse the earnings recession sets up to be, the sharper the full economic recession), and that as Breslow concludes, the "Fed needs to focus on the real economy and get out of the QE mindset. I suspect that will be easier said than done."

... and that as a result, what Yellen has done, now that the kneejerk reaction is over, is policy error, pure and simple? To be sure, the pancaking of the 2s30s screams "error" and an imminent global deflationary wave:

 

Or maybe it has nothing to do with the Fed, and everything to do with tomorrow's quad witching. We warned about just this in last week's "Beware The "Massive Stop Loss." Recall:

[The Fed's rate hike] falls at a peculiar time—less than 48 hours before the largest option expiry in many years. There are $1.1 trillion of S&P 500 options expiring on Friday morning. $670Bn of these are puts, of which $215Bn are struck relatively close below the market level, between 1900 and 2050. Clients are net long these puts and will likely hold onto them through the event and until expiry. At the time of the Fed announcement, these put options will essentially look like a massive stop loss order under the market.

And what is the number one rule about broken markets? All stops get taken out.The irony will be if, regardless of what the Fed does, the subsequent move is driven not by the market's read through of monetary policy but by the "pin" in this massive $1.1 trillion option expiry, the biggest in many years, one which if recent market action is an indicator, suggests the stop loss strike level will be taken out in the process setting the "psychological" stage for market participants who will look at the drop in the market, and equate it with a vote of no confidence in what the Fed is doing, potentially forcing the Fed to backtrack in less than 2 days!

This is how we concluded:

"The irony will be if, regardless of what the Fed does, the subsequent move is driven not by the market's read through of monetary policy but by the "pin" in this massive $1.1 trillion option expiry, the biggest in many years, one which if recent market action is an indicator, suggests the stop loss strike level will be taken out in the process setting the "psychological" stage for market participants who will look at the drop in the market, and equate it with a vote of no confidence in what the Fed is doing, potentially forcing the Fed to backtrack in less than 2 days! "

If so, tomorrow's already illiquid expiration may be an event for the ages, one which may culminate with a Kervielesque-rate cut just days after the historic first ratae hike, only this time the Fed can't do a 75 bps rate cut in response to one panicked futures trader, so 25 will have to suffice.

Or perhaps it is neither the Fed, nor tomorrow's market technicals, and the reason is an old and familiar one. Dennis Gartman.

This is what the "world-renowned commodity king" said in his overnight letter:

What then do we make of this? How then are we to invest? What then are we supposed to do? ... All we know is that the trend remains upward and it was for that reason that although we were cautious and recommended openly that it was wise, ahead of the Fed’s to become neutral of equities (a position obviously we wish we had not taken, with the benefit of hindsight), we did not and would not recommend being short of the equity market. As we have said for years, and shall say as long as we are able to write TGL on a daily basis, in a bull market there are only three positions that one can have: Aggressively long of equities; modestly long of equities, or neutral of them. As of earlier this week, ahead of the Fed meeting, we advocated neutrality. Now we have to suggest the middle course once again. We’ve really no choice.

 

There we sit this morning, knowing yet again that these things do not end well, but knowing too that it is better to be modestly long than otherwise.

The rest is history.

So tune in tomorrow when, if the JPM "Gandalf" is right again, things are about to get very exciting.

 

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Thu, 12/17/2015 - 23:08 | 6938089 V for ...
V for ...'s picture

Do you understand what you have done, un-Federal no-Reserve Board, ruin the world  for your tiny group, nazionists.

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

One child is every child.

Thu, 12/17/2015 - 23:13 | 6938099 ISEEIT
ISEEIT's picture

Entire3ly irrelevant..

Did diverse 'language' develop as a means by which to avoid 'telling the truth'? 

This entire shitshow has become catastrophic and yet barry the creep (who has a "gift" of being absent a genuine conscience) is about to shit in the mouths of his 'people who live under 'america' just because he can.

"Sooner or later, EVERYONE sits down for a banquet of consequences".

YEP.

That is true.

Thu, 12/17/2015 - 23:19 | 6938102 V for ...
V for ...'s picture

Career politicians are the bouncers, the gate keepers, the crowd control, puppets, loved by their fans.

Anyone who states facts or real finance tells the truth as they know it.

Friday can't come soon enough.

Let the cheaters pay for their faults.

Thu, 12/17/2015 - 23:23 | 6938108 razorthin
razorthin's picture

Yawn

Thu, 12/17/2015 - 23:47 | 6938152 Atomizer
Atomizer's picture

I'd like you to yawn when Windows 10 cuts off your certificate until you upload the new mandatory OS manifesto. 

1 January 2016 – Microsoft: SHA1 certificates will no longer be accepted even if they have not yet expired

https://support.servertastic.com/deprecation-of-sha1-and-moving-to-sha2/

 

The wagons are circling grand theft globalist. 

Thu, 12/17/2015 - 23:54 | 6938162 g'kar
g'kar's picture

that's the problem when you only rent your o/s.....unlike linux

Fri, 12/18/2015 - 00:00 | 6938172 motorollin
motorollin's picture

Microsoft is only killing off SHA-1 for code signing certs in 2016. Not until 2017 are they axeing the SHA-1 server certificates for websites.

Fri, 12/18/2015 - 00:02 | 6938158 g'kar
g'kar's picture

"A Big, Fat "Policy Error" Or Worse?"

 

there are no policy errors. the fed (and other central banks) only do what their owners, certain large private banks, deem neccessary to maintain or improve their stranglehold on their respective slave states.

 

and now some ted nugent:

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

Thu, 12/17/2015 - 23:56 | 6938166 hedgiex
hedgiex's picture

Aeons ago in a galaxy far away, one death star that consume capital veered into outer orbits and collapsed into a dark hole under the force of its capital debris. Have fun with the volatilies that only matter with the death star. No cause and effect on and from the real economies.

Fri, 12/18/2015 - 00:02 | 6938176 holdbuysell
holdbuysell's picture

Is it ok to pop popcorn in the morning? Seems more like an evening snack.

Fri, 12/18/2015 - 00:07 | 6938180 Atomizer
Atomizer's picture

In case you don't believe me, this is a parody of Windows 10. The architects will crawl back into the cracks once free OS bullshit lights are turned on.

Microsoft HoloLens Parody - GogglePorn!

 

Fri, 12/18/2015 - 00:51 | 6938224 cherry picker
cherry picker's picture

Microsoft, Apple and others remind me of that Dilbert comic strip.  The similarities are profound and probably more realistic than anyone would care to admit.

Fri, 12/18/2015 - 00:43 | 6938214 BeerMe
BeerMe's picture

ZH kind of trying to have it both ways here.  Laughing that the Fed doesn't raise rates and then when they start say it is a policy error.  Hmm...  I personally think they waited too long to raise rates.  It should have started at least 3+ years ago.  Yesterday's move is more of the same and nowhere near normal.

Fri, 12/18/2015 - 08:34 | 6938564 insanelysane
insanelysane's picture

ZH posts articles from different sources.  Just like in the markets, some people think it is a good time to sell and some think it is a good time to buy.

Fri, 12/18/2015 - 00:52 | 6938225 yogibear
yogibear's picture

Does the fat lady (janet Yellen)  sing?

Fri, 12/18/2015 - 01:14 | 6938245 chilller
chilller's picture

"This Federal Reserve Policy Error is brought to you by, OUTBACK STAKE IN THE HEART HOUSE."

Fri, 12/18/2015 - 01:16 | 6938249 Flying Wombat
Flying Wombat's picture

Janet Yellen Gets Nuts - The Peter Schiff Show

http://thenewsdoctors.com/janet-yellen-gets-nuts-the-peter-schiff-show/

Fri, 12/18/2015 - 02:28 | 6938319 Charming Anarchist
Charming Anarchist's picture

I can not wait to see Yellen read A Christmas Carol live on television!!!

Fri, 12/18/2015 - 02:44 | 6938338 Maestro Maestro
Maestro Maestro's picture

I was so wrong when I said they wouldn't raise rates.

 

These Americans are insane.  I have no choice but to admit that they really believe their own lies now.  With captains like this, I'm sure the Titanic we're on can do better than just sink.

 

Even at my ripe old age, I gave these creatures the benefit of the doubt.  Thinking cynically, I thought they would at least avail themselves of the plausible denial for responsibilty of the financial and economic calamity to transpire shortly, that NOT raising rates would have afforded them.

 

I'm always wrong when it comes to the degree of hubris and stupidity that Americans are capable of.

 

Merry Christmas.

Fri, 12/18/2015 - 03:08 | 6938350 BapZander
BapZander's picture

I was hoping for a -3.5% loan. You give me fiat, and then pay me to spend it. Crap, I'm not a bank.

Fri, 12/18/2015 - 03:36 | 6938363 Fed-up with bei...
Fed-up with being Sick and Tired's picture

COME ON, PEOPLE, read the fine print, so to speak.  When puts are BOUGHT, there is an insurance policy effect:  premiums are paid and the participant makes money on long puts if the market craters.  So, in effect, the premiums are lost to total decay.  So, to say that pinning is not GOOD for put buyers is quite contrary to the upside potential, during the day session on Friday, should the market crash.  THEY WILL SIMPLY CLOSE or SELL those puts mid-day session and take the credit, or ROLL THEM OUT into later and lower strikes and make money on the new strikes bought (again, long puts make big money in down markets).

Fri, 12/18/2015 - 04:26 | 6938394 GreatUncle
GreatUncle's picture

Like the point will be no 75bps cut only a 25bps.

But if you allow for NIRP you can we would be at -50bps.

Fri, 12/18/2015 - 05:49 | 6938436 Lies All Lies
Lies All Lies's picture

Are the Tylers on holidays already? Nothing happening here for ages. ZZzzzzzzz

(in fact I'm re-considering my subscription)

 

Fri, 12/18/2015 - 07:47 | 6938493 jm
jm's picture

Policy error?  If a 25bps hike is all it takes to destroy the US economy, then we all might as well take it as a hint and get on with the process of balance sheet repair. 

That said, an incredibly levered Chinese economy has been short dollars, long materials, so if you are an emerging market, keep popping the vicodin. Yellen may have just reversed Chinese stockpiles.

Any liquidity drain via reverse repo doesn't have to be something like an $800 billion one-off.  As long as IOER, fed funds, OIS, and reverce repo react in such a way consistent with Fed monetary control, they can jawbone markets or incrementally drain to get the desired effect.

Fri, 12/18/2015 - 08:12 | 6938518 insanelysane
insanelysane's picture

There are a bunch of problems and people are starting to ask questions.  MSM reports Chinese economy is fine but the Chinese are disappearing all of the sellers in their market.  Shockingly a couple of days ago one of the MSM financial channels reported how much the FEDs $4T balance sheet actually equates to.  I think it was something like they could buy the top 30 companies in the S&P or the bottom 300 companies.  They just reported it and didn't discuss it because how can the FED ever sell that.  This mornings fun fact was that oil reserve levels at this time of year haven't been at this level since 1930.  Did anyone have a car in 1930???

Fri, 12/18/2015 - 08:57 | 6938607 jm
jm's picture

In a nutshell, if Yellen raises rates, the scream is "Precisely the wrong time to raise rates." If she doesn't, the scream is "Another blown opportunity and a looming disaster."

China: the economy is absolutely imploding.  

Fed balance sheet concerns mean you want Yellen to get back to normal and resize the balance sheet.  What's your beef?

Fri, 12/18/2015 - 08:21 | 6938533 Wow72
Wow72's picture

If you understand they have been under estimating and minimizing our problems for the past eight years ...Then you understand its 10 times worse than they would ever tell us. 

Fri, 12/18/2015 - 08:44 | 6938579 deerhunter
deerhunter's picture

Is the sky falling ? Dow closes up 200. Happy Friday!

Fri, 12/18/2015 - 08:54 | 6938602 El Hosel
El Hosel's picture

This is not about the 1/4, its about the SPY being rigged, in a very large way..... 1400 points the SPY went up this cycle, this stock bubble is double the last two and the economy is in much worse shape. BIG FAT STOCK BUBBLE caused by an even bigger corruption bubble. Cherry on top was last weeks DOW / DD 26 Billion dollar market cap round trip in a couple days. These wankers have pulled off another Multy Trillion dollar heist in broad daylight.  The "Recovery" is complete, thats what the 1/4 says.

 

Fri, 12/18/2015 - 09:05 | 6938627 hangemhigh77
hangemhigh77's picture

Hang this ugly little gnome. And hang every living fed chief. It's time to hang the banksters.

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