This page has been archived and commenting is disabled.
What The Market Chose To Ignore In Yesterday's Fed Announceent
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."
Finally, what yesterday's hike also ignores is that as Jeffrey Gundlach explained recently, the economy is at a worse place than where it was the last time the Fed could have hiked, the industrial recession is now official, the earnings drop of the S&P500 is far more steep than it was 3 months ago, and China's renewed devaluation is signaling that it is all uphill from here from the emerging markets.
Yes, the markets did not "freak out" yesterday (and they seem rather stable today), but once the post-rate hike "signaling" rush and euphoria wears off, the only answer is that the Fed did, as DB and BofA's Michael Hartnett suggest (more on that shortly) a policy error and even the "markets", having largely lost their discounting ability, will sooner or later reach that conclusion.
Here is the full comment by Bloomberg's Richard Breslow:
Time for Plain Speak
Most of the initial post-FOMC conclusions (stress on the word initial) have focused on the positive market reaction. The S&P, after all, ended the day with big gains and other markets didn’t freak. That’s not a bad thing. The hope seems to be that it will be sufficient to see us through year end and then we’ll see what the new year brings. Asset markets chose to hear the parts of the statement and press conference that they wanted to.
Being less dovish than the meeting previews suggested is now a sign of bullishness on the economy. The dot plot having significantly more tightening than market pricing is okay because the word “gradual” seemed to work its way into each sentence. It really does feel like Chair Yellen worked her magic, because the misdirection was masterful
Beyond December, for the Fed to have pulled this off successfully, they will need to change the reaction function of the market to news - a response mechanism that has been codified and ossified for seven years. That will be the much harder task.
The dollar will have to be allowed to rise without Fed speakers channeling their inner Chamber of Commerce. Policy divergence should be sold as a sign of the U.S. functioning, finally, as the global growth engine.
To make the “I’m feeling good about the economy” message something more than a throw-away line, they need to kill the bad-news-is-good sickness. This will entail being a lot more straightforward about what gradual and data-dependent mean. Gradual to the market means how many rate hikes in 2016. To a room full of economists it means reaching a forecasted neutral rate three years from now.
This is really important 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.
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 those balance sheet reinvestments won’t be going away anytime soon
»
- 52 reads
- Printer-friendly version
- Send to friend
- advertisements -
The Rally Monkey has been cued...
There is no "market". The "market" IS The Fed and the TBTF's who control 70% of all "market" transactions. The TBTF's will always obey the Fed because they ARE the Fed (Shareholders) and they are dependent on the Fed for free money and interest on their excess reserves parked at the Fed.
Hence NO negative equity market reaction to the rate hike. This is all a complete sham and it won't change until the debt overcomes the ability to hold it up any longer.
This is what communism looks like.
can't agree. broken or sham (or, of course, working) markets aren't what communism looks like. the whole goal of communism is a planned economy... straight. i.e. no markets
I'm giving a literal answer because I noticed that some people here are literal-minded
LMAO! Markets, where?
Everyone obeys the edicts of the Fed and the governments/ngo's.
if so, then it's a sham market. nevertheless, the markets are there. and they would not be there if it was a planned economy, where you only have a planning office
beyond literal, today?
There were markets aplenty in NS Germany and Fascist Italy. Private ownership was fully legal for citizens of the nations in question. There were no regulations regarding ownership of goods for citizens.
Production of goods were like we have today, regulated by the government for safety and public good. They weren't making poisonous foods and whatnot. In fact the only real difference between those systems and what we have today is that immigration was heavily regulated, and non-citizens were allowed to live there, but were second class citizens. As opposed to the US where Illegals get free healthcare and everything else, and get to vote without having to have any of the legal obligations that citizens have. Basically being a citizen of the US in the US means you are a second class citizen. Being a white citizen means you are not only second class, but you are third class as everyone else gets employment opportunities before you.
Germans in the Third Reich were freer than European Americans are in their own damn country. They could at the least speak up about this shit. Try being a white guy and speaking about any of this shit. God forbid you bring up Jews involvement either.
"It's like anuder shoah."
you miss the whole point of fascism (original), I fear. what Mussolini called "corporativism", and is still misunderstood in the US and UK
yes, fascism allows markets, and tightly regulates them, and yes, public safety and health are very high goods, in fascism
but let's take one aspect of markets where you can see how fascism really works: labour
a fascist meeting about wages looks like this: on one side the workers, on the other the entrepreneurs/capitalists. and chairing the meeting the fascist politician with a handgun, saying: "agree on this, or else, for the good of the nation"... with a resulting political price for labour (i.e. wages)
an example of the "corporations" Mussolini (and Hitler, mind) were talking about is Taxi Drivers, organized in a manner to ensure that prices aren't important, while the "correct" way of delivering the service is paramount.
the whole story of Uber, in a fascist country, would hence be solved by a squad of goons hitting on their CEO's head until he sees the wrongness of his deeds... or his head splits
neither Freedom nor Liberty are in any way important, in Fascism. as for National Socialism, it's against Liberalism (classic)
so yes, both Fascism and National Socialism allow markets... as long as they work the way the Fascists agree with. and when they don't... heavy handed intervention... outside "the market channels"
the "correction of markets" inside the market channels... is still liberalism (classic)... gone bad
You're missing the point as usual Ghordi. The BIS/CB/TBTF Complex can print as much Fiat currency as it wants and can "Buy" as much Equity/Bonds/ Prescious metal Shorts as it wants. Paper costs nothing. It's all about "Credibility" or the lack thereof..and with the Fed and Wall Street controlling 70% of all transaction volume, it might go on for a long time.
philpat, I often have to ask forgivance and note that I missed the point. but I don't see it here
nothing is free. one of the things the libertarians have right, "There Is No Such Thing As A Free Lunch"
yes, they can print and print and print. but it has a cost. not immediately, but eventually
@Ghordius
I'd love to continue this heavenly discussion but, alas, it's late here in Bali and we have a dinner appointment on the beach. Hope the weather is warm in Brussels....
Communism and Fascism are where the political continuum meets at the other side of the sphere. It amounts to the same practical reality for the average person. Which is, either way, you're screwed. Welcome to the NWO.....And, of course, the new EU order whereby unelected "Officers" rule.
Incidentally, the same "Central palnning" philosophy applies to BOTH communism AND fascism? And also the EU, especially now with the new "Border Gestapo" policy, which, fortunately, some of the former Eastern European States see for what it is?
The UN rules the world through NGO's and the security council.
Fascism is nationalistic. Communism says you have no nation, and you have no race or people. You are merely the pawn of the state.
If I were forced to chose between the two, I would chose Fascism. I'm highly opposed to supporting Africans that produce nothing of worth outside of drug addicts and violence. These people never invented the wheel FFS.
I am highly opposed to white nationalists who produce nothing of worth outside of hatred and ignorance.
The irony about white supremacists is that you drooling inbreds typically represent the least intelligent and the least cultured of all the "whites". According to your own dogma, that makes you an inferior subgroup that the other whites should actively prevent from breeding.
interestingly, you are pointing with your comment to something deeper: some people here on ZH are just that: about the White Race. period
all the rest, the pseudo-fascism, the pseudo-anti-Zionism, the anti-semitism, the anti-communism, the anti-globalism... the works...
...all just rationalizations about this theme
Fascism is an offshoot of National Socialism. which is a double-dose of conservativism and one dose of socialism, to make it sound like a cocktail recipy
Communism is an offshoot of Socialism, making communism a double-dose of socialism
for the average person... let's talk specifics, will you? if you belong to the correct group, be it nationality or race or creed, they are somewhat similar
but the economic underpinnings are radically different
Fascism (classic, the original, not the epithet currently used in the US) is about managed markets, while communism is no markets, only planned economy straight
Marine Le Pen, for example, advocates national socialism. it does not make her a fascist, mind
Vladimir Putin does not advocate it, only Russian Nationalism. but the end result in Russia is something that can be reasonably seen as National Socialism
as a rule of thumb, a working generalization, Old Worlders take ideology seriously, New Worlders don't. why? can't say
Please go properly educate yourself on each of these distinctions.
that's more then weak. if you see something you don't agree with, then point it out
Sorry Ghordius, but you wrote such a list of make-it-up-as-you-wrote-them equations, it's ridculous.
Fascism is an offshoot of National Socialism
Say what? So there was no fascism before national socialism was invented? And where did NS come from?
Communism is an offshoot of Socialism
Maybe be self-declaration, but in reality communism has deformed socialism so much it became almost unrecognizable.
And just recently you also confused statist and conservative.
All that shows only one thing:
Your thinking is truly warped, to keep your beliefs still valid. ("Wie biege ich mir mein Weltbild zurecht", don't try google translate on this as result is BS)
malek, the problem about national socialism is that whenever it is mentioned, people think about the one specific German Nazi party only
before WWII, you would find National Centrists, National Liberals , "National People's" and National Socialist parties in the whole of europe and beyond
each and every one attached the "National" in front of their main ideological attribute to differentiate themselves from other parties that were less nationalistic, i.e.
the Centrist Parties, the Liberal Parties, the People's (or conservatives) parties and the Socialist parties
as you say "Communism is an offshoot of Socialism. Maybe be self-declaration, but in reality communism has deformed socialism so much it became almost unrecognizable."
in the same way Hitler's party took National Socialism and deformed it so much that it became almost unrecognizable
"And just recently you also confused statist and conservative." did I? my "weltbild" explains history quite well, and I am only explaining, here, not judging
----
a few examples from wikipedia: German National People's Party; National Liberal Party (Germany); National Liberalism; and, for the lulz, National Anarchism
"So there was no fascism before national socialism was invented? And where did NS come from?"
first there was... and still is National Socialism. Then, Fascism. Then... Hitler's party, which took National Socialism to something now more known and yet different
examples for National Socialist parties that are not "Hitlerian"
the Czech National Social Party, founded in Austria-Hungary in 1898 as a center-left party advocating Czech independence
the National-Social Association, a small party in Germany, founded in 1896
the National Socialist Party (UK), a breakaway group from the British Socialist Party formed in 1916
the Jatiyo Samajtantrik Dal (National Socialist Party), a small party in Bangladesh
the National Socialist Council of Nagaland, an insurgent group in India
the National Socialist Party of Tripura, a party advocating Tripuri self-determination in India
the Ba'ath Party, an Arab national-socialist party in Iraq and Syria, eradicated in Iraq by the American administration, btw
As your examples only go back like 50 years before Hitler (and you don't even mention a timeline on fascism),
I take it you believe fascism only exists since Mussolini?
You are astoundingly stupid.
For laughs, now tell us for how long socialism exists!
BTFH!
(buy the fucking hikes)
Futures sporting wood..no amount of rational thinking takes place ...Asia loved the hike too..a big Fuck u to savers.......
I remembered when rate hikes were bad for equities. WTF is going on?
what you remember is the "Great Moderation". those were exceptional times. now, we have other exceptional times
in other words, the article explains it so:
"To make the “I’m feeling good about the economy” message something more than a throw-away line, they need to kill the bad-news-is-good sickness. This will entail being a lot more straightforward about what gradual and data-dependent mean. Gradual to the market means how many rate hikes in 2016. To a room full of economists it means reaching a forecasted neutral rate three years from now.
This is really important 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."
which sounds to me like that at a certain point, the FED and the US Banks have to decide
either the US economy or the US Stock Market. hohum, I see somebody has a bad morning
Yeah, this whole they need to kill the bad-news-is-good sickness thing is going to be hilarious to watch!
I don't think anyone knows what's going on....
I can only presume that either a) NASA has discovered an enormous asteroid and its trajectory is destined for a direct impact with earth or b) some sick mofo's are seriously going to attempt a one world government (NWO)...
A) is this funny/sad/strange prayer for something going BLAM! and B) is this strange reaction to "the transformation of exceptionalism"
some stuff ends with a whimper
Four rate hikes in 2016 will push the ff rate to 1.25-1.50.
That seems to be a bridge too far, because the banks will pump the prime rate in unison, as they did yesterday. More drain from all levels of society in the form of higher rates for mortgages, home equity loans and HELOCs, car loans, education loans, credit cards, building loans, all mannor of loans should push the US consumer into the fetal position.
That's to say nothing for capital investment, which is approaching nil already. And let's not forget that the big wigs will not be financing stock repurchases with as much gusto as previously.
In terms maybe the Fed and bankers can fully comprehend, rate increases are "unequivocably bad."
Stock market crash no later than April.
Each quarter point is roughly an 8% percent drop in home prices (starting with a 3 percent 30yr). People are buying to a payment. go to a 4 percent 30 and housing drops by 33%.....
are we slow thinkers lately on ZH..the fed is tightening, but the DC .gov is budget busting, remember when yellen said Fiscal side must do it's part??
massive debt spending is on the way:
", late Tuesday night, Ryan unveiled a few thousand pages of consequential tax, spending, and regulatory legislation costing roughly $2 trillion and gave Congress and the public two whole days to review everything".
Ya' gotta pass it before ya' know what's in it!
Fed came into being on Dec 23rd 1913- a massive debt filled budget will pass on that date this year..the reptiles remember what works in keeping the public distracted (with terror and rate hikes,) from the real work of crime at the highest levels..we be duped again.
Cromnibus, and nobody can convince me Speaker Ryan is any different than Speaker Pelosi, or Dear Leader Obama.
How much more pretense are people willing to swallow before they pull their heads out of their ass and have spontaneous good 'ol fashioned tea parties all across the land?
Is it quiet in DC? State capitols? How disappointing, the tolerance to swallow more statist jizz is still too high.
Zerohedge in ruins and disbelief, collapse nowhere to be seen. It turns out stocks were actually growing because of fundamentals, not cheap money.
You are being sarcastic, right..../?
Nope, I'm serious. Their wacko narrative that markets are rising only because of cheap money is exposed now. Companies listed on stock exchanges acutally produce value, economy is recovering and optimism is increasing. Maybe not as much as it should, but certainly things are nowhere near as bad as this biased doom porn site presents them to be.
So long as they can keep it all proped up, your analysis is sound. Personally, I don't believe in magic...
Interesting analysis. Circle back in a few months - say, around March/April....
So a 0.25% effective FFR is NOT cheap money? Time to go back for another read of that Sharpe Investments textbook.
the fed has been the punching bag for too long, the public is mad at the fed policy that makes the .01% wealthy while main street is in rags..
so to distract that hate and scorn that the Fed has taken the fiscal side is now stepping in to get Money to main street..too many wanted the fed audit or outright killed...
janet raised rates but at the same time the budget debt cap was removed and massive spending budget is on it's way to passing this week.
that is what the in the know crooks are focused on the money drop from DC.
Money to main street?
Is there a main street in Damascus?
Yeah, they renamed it a few years back to Martin Luther King Jr Blvd......
exposed after one day? I have identified the wacko on this site and it aint us.
Companies are able to produce Potemkin value because of cheap money. The notion is that lots of new, cheap fiat distorts markets and leads to inflated value and misallocation of cash. Government does this anyway - the trillions spent on the wars made a few people rich but its a massive misallocation of resources and so productive labor and innovation.
Halliburton isnt valued as it is for any other reason than artificial demand created by state policy. Gold is not undervalued as it is for any other reason than having 275 paper ounces to physical - when 275 people buy 1 ozof gold - what 'value' was created by the nominal seller of gold they dont have?
The doom and gloom might be overstated here and there - but not in the long run.
You can not print wealth, or value, and you cant dump trillions in new fiat into 'markets' without distorting their 'true' valuation.
Were you asleep during the housing or dot com bubbles? Because now, the fundamentals, including household and national debt and labor participation rates and actual inflation is worse than 8 or 14 years ago.
Christ man - 'economy is recovering?' Says who or what?
The nasdaq? See above.
That which can not be sustained...
I'm sure you will return here after the collapse (whenever it happens) and do a self-analysis where you went off the tracks, plus a mea culpa! /s
So market fundamentals = Animal Spirits?
While you are at it, please do explain to the rest of us gravitation theory [1]; the fact that the Earth spins on its axis at 1000 MPH at the equator, and the rest of us do not spin off into space (at least don't suffocate in the upper atmosphere). That according to spherical geometry (a sphere with ~25k mile circumference), the Earth curves 8 inches for every mile squared; at the same, one can observe the BASE of the Chicago skyline, from the shores of Michigan, 60 MILES across Lake Michigan ..
----------------
[1] sans accounted for by "closing the string into a loop, where fermions and bosons each run in opposite directions around the loop." (massive superstring theory)
So myself and 100+ million others, looking for perm work since at least the summer of '12, should be finding that good job (in fact, they should be finding us, as they did in the 90s), that most of us had back in at least 2002, anytime soon? That job, requiring some college, that paid no less than 50k / yr, gas at the pump no more than $2 / gal (before $100 per barrel derivatives contracts), mortgages for ~2000 sq. ft. homes, at no more than 6%, were ~$1300 / mo (with taxes).? And all this w/o NAFTA and CAFTA?
Sign me up Dude!
I do blame myself for sticking with this site for 6 years or more. And I wish I had a crash in the system on the day I found this blog, and never found it again.
It has cost me too much to speak of, without tears. (sniff)
Fundamentals....?
You know companies like NFLX, UBER, AMZN
I am sure TPTB will soon think of some false flag event to be blamed for US economy collapsing after FED's rate hike.
Remember remember
That after December
Joe sixpack's bills come due
And always remember
That after December
The Fed can print moar, too
Be interested in Hedgers thoughts on this take:
http://www.cnbc.com/2015/12/16/fed-raised-rates-but-missed-the-point-com...
And in particular:
'However, the Fed is also raising the rate it pays member banks to hold required reserves at the Fed, doubling that payment to a half-point. This gives banks a much bigger incentive to earn a half-point on their cash, risk free!
That is a major disincentive for banks to make further loans. And it comes at a time when the velocity of money, or the speed with which the money supply turns over, is close to zero.
The increase in interest paid on bank reserves, the hike in the discount rate and the lifting of the cap on reverse repurchase agreements, used to drain excess liquidity from the banking system, are tantamount to a stealth tightening of policy!
I suspect it may take the markets a day or two to figure this out.
But the Fed has just become a hawk in dove's clothing.'
Ever get the feeling you've been cheated?
Boy, I wish I could get a half percent ROI.... with real inflation for mainstreet america running 5-10%. AAA bonds paying 3 plus percent, yeah there will be a long line to get that half percent \Sarc.
All it is is a safe haven destination for foreigners making the strong dollar play Yen / Euro carry trade. I cant beleive that no one is calling parity with the Euro......
With that said, I put 70% of sideline cash to work in equities today
No, someone doesn't have to end up being wrong.
The Judge, after hearing the defense lawyer argue a point: "You're right."
The Judge, after hearing the prosecution refute the point: "You're right."
The bailiff, approching the judge: "But Judge, they can't both be right!"
The Judge to the bailiff: "You're right, too, now sit down."
"The dollar will have to be allowed to rise without Fed speakers channeling their inner Chamber of Commerce. Policy divergence should be sold as a sign of the U.S. functioning, finally, as the global growth engine."
But that's the falacy right there: The U.S. IS NOT the 'global growth engine' - it is the 'Global Financialization engine', which enjoys 'exorbitant privilege' from a coercive foreign policy, which thankfully, is in the process of disintegration.
four hikes next year
ROFL - Stop it, you're killing me!