The Market Has Spoken: The Fed Made A Policy Mistake And "Quantitative Failure" Looms - What Comes Next

Tyler Durden's picture

Now that the Fed's rate hike is in the history books and Yellen is eager to demonstrate that the Fed is confident enough in the US economy by unleashing the first tightening cycle in nearly a decade, market participants are dramatically shifting their attention, from the rate hike as a bullish key catalyst in the "renormalization" timeline ("buy stocks" because the Fed wouldn't risk recession if it wasn't confident in the economy), to the actual consequences of the Fed's dramatically changed reaction function, which as we explained previously, was far more hawkish than the market initially expected. 

Most important however, as we have repeatedly discussed ever since August, is the market's obsession with whether the Fed just made a critical "policy mistake." As Bank of America's Michael Hartnett, one of the foremost skeptics that the Fed is doing the right thing, explained previosly, "the “tail risks” to “deflationary expansion” are high. Like a game of Jenga, a bull market built by central banks can collapse if further BoJ/ECB QE and Fed hikes engender US dollar spikes & US EPS & EM/commodity swoons, FX-wars & volatility rather than a fullblown recovery."

The threat, therefore, is that after "Quantitative Success" pushed up stocks from 666 to over 2,100 in 6 years, the opposite may be on deck now, hence the neo-narrative of Quantitative Failure and the dual risk that:

  • Fresh attempts at QE in Japan & Europe are met with investor rebellion in the absence of clear signs of economic improvement.
  • Fed tightening into a “deflationary expansion” proves a “policy mistake” by causing harmful US dollar appreciation.

For signs of the first look no further than the market's profound disappointment with the BOJ announcement on Friday morning, which sent the Japanese Yen plunging at first, only for the carry currency to soar once the market realized that the BOJ's ability to intervene in markets may be far more constrained than had been anticipated, as we showed yesterday...


... and of course, the ECB's historic disappointment on December 3 when Mario Draghi promised the sun, moon and stars and delivered... almost nothing, likewise sending the EUR soaring and crushing countless macro hedge funds.

But how to determine if the Fed made a mistake, and more importantly if the market thinks the Fed made a mistake? We presented Hartnett's answer to that key question as well, saying that upon a rate hike:

  • Watch the long-end
  • If the long-end concurs with the Fed’s view of economic recovery, then banks, cyclicals and value stocks will receive a bid. Asset allocation toward “strong
    dollar” & “Fed tightening plays” will harden, with the exception that value will likely outperform growth
  • If the long-end rallies, signaling a policy mistake, then cash, volatility, gold & defensive growth will be the way to go.

So what happened since the Fed hike? Well, after a one-day kneejerk rebound in risk, coupled with a drop in vol, gold and virtually no reaction in the long-end, the result, as shown below, has been a very disturbing one for the Fed. 

As can be clearly seen, the market has responded not only by endorsing a deflationary outcome with the 30Y jumping, WTI sliding, but also stocks tumbling, with the Thursday and Friday drop in the S&P matching the worst plunge in the market since the ETFlash crash of August 24.


In short, the market has spoken: this is a "policy mistake", or as Bank of America - which also explained recently in 8 very charts why the Fed just launched the next Bear Market - called it "Quantitative Failure."

The question then becomes: what happens next when the "boxed in" Fed realizes it has erred, and scrambles to undo the damage, any last trace credibility be damned? Here is Hartnett's answer to that as well:

Since the risk of Quantitative Failure brings with it the risk of more extreme policies/politics in 2016, the natural hedges are gold & volatility. Gold in particular will be interesting to watch in coming months. The Fed’s determination to raise rates means gold prices should fall. If in contrast gold rises with Fed hikes that’s a clear sign of a “policy mistake” and investors anticipating the need for more inflationary policies next year.

In other words, as we have said for the past 2 years, since the Fed does not ever have the option of waving the white flag of surrender and admitting defeat (at least as long as there is fiat currency left for its to print and debase) it will have no choice but to unleash even more violent, "unorthodox", inflation-stimulating policies in the coming months (such as the monetary paradrops we discussed here in September and October). When that happens, the biggest winner will be the one asset class that as of this moment has never been more hated, the one whose hedge fund net short position has never been greater: Gold.

Gold rose 1.5% on Friday while risk was turmoiling, but is still below the FOMC announcement price. That means that while risk assets have started pricing in the Fed's misstep, gold and its record hedge funds shorts are still mostly unaware.

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Squid-puppets a-go-go's picture

I really am sick of this bollox about higher rates=gold fall

that might be true if you were raising rates into a healthy economy (even then the historical evidence is unclear) - but raising rates into a sick debt ridden economy which will cause bankruptcies > stockmarket crash > flight to safety 

gold should do quite well, thankyou very much (rhypothecation slamdowns aside. carn, comex, leverage yerself 1000 to one we dare ya)

Captain Debtcrash's picture
Captain Debtcrash (not verified) Squid-puppets a-go-go Dec 19, 2015 4:38 PM

They know what they are doing, never let a good crisis go to waste after all.  Explained here. 

jm's picture

Simply put, higher rates mean higher returns (discounting for any funding costs) Whereas gold's cost of carry stays put. The differential of the two make treasuries more attractive.

What's to argue about there?

bbq on whitehouse lawn's picture

You were taught that 1$ = 1$. But this isnt true. Not all dollars can buy all dollar assets. Some dollars can only buy fuel, some can only buy bread, some can only pay rents.
How much gold is for sale at any price? How much art will be melted down for semiconductors.
Said another way, not all money can be spent on stocks, bonds or commodities. Much of that money has strings tied to it, makeing sure how and on what its spent.
This is why price moves result in repositioning of investments, its all about shakeing the tree so rents can be collected on those investments. Otherwise "wallstreet" would have nothing to do and no way to get paid.

doctor10's picture

99% of what is being written about the "rate hike" is a load of steaming &*it. Credit is useless to the average Joe. Thats why its cheap. Nobody can use it.

Regulation, taxation, licensing and legal tort threat has shut down all small business competition to the big boyz. That's precisely the way the big boyz want it.

The "rate hike" is simply the fee Fed.Gov is charging the big boyz for having kicked out the competition and helping to implement their monopolies.

that's all.

o r c k's picture

But they can make gold go up or down to their liking -right?

ISEEIT's picture

Some "folk's" can manipulate reality....but not indefinitely. I assume you're being sarcastic with the question anyway, right?

"We manipulated some folk's"

gatorengineer's picture

no  one here seems to realize that gold prices in Euros not dollars....  Strong dollar lower gold.  that simple

actionjacksonbrownie's picture

Paul Volcker admitted that "allowing" Gold to rise in the 70s was his biggest mistake as chairman of the fed. Do you think the present fed is going to make the same mistake? As long as they can print "money" and do it in a clandestine manner, there is no way Gold is going to rise any appreciable amount - at least not in the paper market. I would look for shortages of physical and sky high premiums before I would look for any resumption in the Gold bull market.

JRobby's picture

Gold - a competitor to fiat

In all organized crime, competitors are weakened or eliminated

honestann's picture

True... until they run out of physical gold to augment their paper gold manipulation.  Or until someone figures out that day will arrive soon.

TRM's picture

"the market's obsession with whether the Fed just made a critical "policy mistake." " um no.

The Fed does make policy mistakes for the economy but it is the market's owm mistake in trying to manipulate the Fed that is THEIR policy mistake. They used up all that zero interest money to buy back stock and give themselves bonuses instead of infrastructure upgrades, automation and other productivity enhancements.

curbjob's picture

" They used up all that zero interest money to buy back stock and give themselves bonuses instead of infrastructure upgrades, automation and other productivity enhancements."


True .. but hey, why innovate when you can masturbate  ?

Jacksons Ghost's picture

^ That is the truth curb! Sadly, maybe 1 in 100 know that we got robbed. Qe was robbery, a massive transfer of wealth to the 1% douches.

Squid-puppets a-go-go's picture

"it will have no choice but to unleash even more violent, "unorthodox", inflation-stimulating policies in the coming months"

do those dickheads at the Fed ever stop and think 'hey if we reset gold to $20 000/oz we could pay down a lot of debt and it will also prove an inflationary mechanism as oil/gold ratio and other commodity ratios catches up" ? (unless, of course, its vaults are EMPTY)

Xibalba's picture

demarketing failure

blabam's picture

It's all about the dollar. The market is still pushing it up... I'm keeping powder dry for miners. 

ebworthen's picture

The real policy errors occured in 1913 and 1972. 

Establishing the FED and unhinging from the Gold Standard allowed the rest of the insanity.  0.25% rate raise off of 0% is a "policy error"?  Crazy Town!

Niall Of The Nine Hostages's picture

Oh, they weren't errors. Wall Street knew exactly what it was doing---establishing a monopoly of credit, as a means to the end of a monopoly of capital that would expropriate and enslave the rest of mankind. 

They've made a lot of progress these last hundred years.

ebworthen's picture

Agreed.  Obscene how the word "policy" is used, or even "right" and "wrong" for decisions - when the entire foundation of the Ponzi is unethical and immoral. 

vinny vici's picture

August 1971 announcement out of Camp David, I think.

ISEEIT's picture

You win!

Just a date though....The plotting to establish this wicked elitist tool was much earlier (obviously).

Jack Burton's picture

Vindication. The entire world economy is unable to withstand even a .25 rate hike. I wrote that a couple days ago, but I stole it from Max Kieser, who predicted just this same fact a week ago. This is what the world has come to in the last days of FIAT. Imagine, .25 rate increase after years of ZIRP, and markets begin to fold.

25 years ago a concious decision was made to create a financial services economy, both in New York and London, the two great financial engineering centers, and twin capitals of the American empire.

Some have called it the "Empire of Stupid". History will judge, but I am onboard with "Empire of Stupid". The stupid being the 99% sitting back and allowing less than 1% to steal and loot, and call it all legal.

TheDanimal's picture

Doubt these are the last days of fiat.  Look at history, that shit comes back time and time again like herpes.

The Pope's picture

What comes 'next' is that a lot of GS jews hustle around and snatch themselves up paper sheckels in front of the manipulated steamroller. They've been perfecting this move since 1913. They have it down to a 'schmience' by now.

Niall Of The Nine Hostages's picture

I have a couple of questions. If Jews run the world's financial system:

1. Why is the Israeli shekel not a reserve currency?

2. Why did Israel have a hyperinflation in the 1980's because her credit was shot?

3. Why does Israel have a national debt at all?

3b. And why are the Wall Street "Jews" financing it? Jews aren't supposed to charge interest for loans either---least of all to other Jews. Why make debt slaves out of your own flesh and blood?

4. Where's that USD 500 billion she's still owed for Jewish property stolen or destroyed in the war?


angryoldbastard's picture

Isreal is a distraction.  It's really there for the "desert Jews", not the European/North American Jews.  Why the hell would you leave the USA for some godforsaken desert surrounded by insane Arabs if you didn't have to?  But it keeps the focus of the world there, not where it should be, which coincidentally is right where the Saudis aimed their attack on 9/11...


The world financial system is run from the desk of the NY Fed, with satellite offices in London, Hong Kong, etc.  That system has decided that the world is going to pay tribute again, hence the recent moves of the Fed, the rise of the dollar, and the collapse of oil.  The Saudis wanted a few more bucks after selling for $12 in the late 1990s, so they attacked.  Now, the tide is turning again and oil is going back to $20 - or $12 in 1999 dollars!


The next time the Saudis attack the NY Fed it will be nuclear.  Literally, with a nuclear weapon of some kind.

JRobby's picture

Need to drop nationalism and nationality from any discussion of oligarchs

Much easier that way, less distractions

We need to go wide shoe on the cartel - EE



In the meantime, starve the beast

optimator's picture

Wrong.  In Weimar they hung onto all the Deutschmarks they could get their hands on.  Gold Deutschmark coins  that is.  They also coverted Deutschmarks into U.S. Dollars so instead of losing value they increased their net worth by millions.  I can't think of any safe currency, but I know gold is probably the way to go.

Jack Burton's picture

The Fed is tightening into weakness, not the strength they claimed. This is because US economic statistics are lies, while they speak "strength", in reality they are just lies. Weakness in the real economy is fact. Rasing into weakness has bad results.

Yellen is not sleeping well the last few nights.

slowimplosion's picture

Yes but it is quite possible that there is no "strength" on the horizon and the Fed simply took the last plausible opportunity to act.  


You can't win around here, first the Fed is decried for pushing interest rates to zero and then they are pilloried for trying to make things more normal again.


It's laughable.  The world economy is a joke right now, ZIRP or not, the stock markets are a joke right now ZIRP or not.  Fuck it, I'm for returning to a world where big entities can't play with play money for free.

o r c k's picture

I hope She dreams of whirly-birds from the IRS at 10 grand a pop. Would help for a while.

Bob's picture

Free money for the "unworthy" is unthinkable.  They're shiftless, witless reprobates.  Blasphemous. Unthinkable. 

Joe Six ain't gettin no free lunch.  It would be bad for the . . . wait for it . . . nation's moral fiber. Money belongs with the people who know what to do with it.  We just have to believe. 

Better to start some more wars and kill some more people.  Joe will cheer.  Money will flow. 

Happy days will be here again!

Niall Of The Nine Hostages's picture

Joe's not getting a free lunch because Joe's job is to pay for the lunches of the top dogs, and the lunches of the people who gratefully stuff ballot boxes in favour of the top dogs every two or four years.

He gets whatever table scraps are left over, if he's lucky. 

The real question is what they'll eat when Joe has collected enough half-drunk glasses of wine and half empty beer bottles to drink himself to death. Fed-confetti's not that nutritious. 

83_vf_1100_c's picture

  I dunno y'all. Does the .gov even really give a shit about gold today. Yeah, there is that morning beatdown every day of the ETFs but is that the Fed, TPTB, or some Hunt like enity, maybe the Chinese?

  We have been screaming for the shit show to collapse. The closer it gets the tighter my nutsack gets. This ain't gonna be that much fun for the 50-60% folks like me.

Sleepless Knight's picture

No one has a f'n clue. This is day by day knee-jerk economics and every idiot has his own opinion. Do what you feel is right for you and relax. What else can you do?

TheFulishBastid's picture

Buy Gold! It'll work this time we promise!


Just keep buying gold. Nothing else, just gold.


Buy Gold! Buy! Buy!


Look just give me your useless fiat dollars in exchange for an elemental metal of no itrinsic value.  I'll take the fall with all these usless fiat dollars, I'll do that for you.


Buy Gold.

ImGumbydmmt's picture

you forgot to add


I like your wit on this topic, I too was deceived by the 2011 lure of Au/Ag while Greece was in riots, thought "the end was near!"

Buy Land or other real estate now, in depressed markets. build rental units.

tiny rental units with super high energy efficiency.

becasue no one (except the 0.1%) is going to be able to withstand the next down leg.

Millions will loose everything and be reduced to serfdom.

Stack them like cordwood.

1890s Tenement housing revisited.

until the "cultural revoultion" and they hang you for being  a "landord"

so sell them as condos....

My wife says " The Amish win in Collapse"

they already have a pre-industrial infrastructure and live off the land and have barter-able skills.

She may be right, until those with guns come to take their shit.

So I got no answer.

Long lead and brass. stock up on rice, beans barbed wire and buckshot.

Shaun of the Dead coming to a neighborhood near you before this is fully shaken out.



allgoodmen's picture

A paper currency always returns to its intrinsic value: zero.

Except this time cause 'merica.

besnook's picture

not necessarily. the british pound is still around in the same incarnation for several hundred years. it is not worth much compared to it was originally but it is still worth more than the dollar. just a techincalityas the curve is exponential so it approaches zero but doesn't ever have to get there. the saying comes from past empires that disappeared with their economy and money since almost all of them succumbed to excess and ended up printing worthless money. the dollar and the usa will be around a long time but the world status of the dollar is waning and that means you are in for very hard times just as the brits when the pound collapsed post ww2.

besnook's picture

as it turns out you would have been right to buy gold all along unless you just started buying within the last coupla years.

falak pema's picture

don't sing that song to me; i've jerked up the interest rate! PULEeSSe!

I can't hear that...

Vlad the Inhaler's picture

Policy mistake = too low, too long.

coast's picture

Look at it this way. The banking system as a whole does not need to borrow as it is sitting on $2.42 trillion in excess reserves. The negative impact of the “rate hike” affects only smaller banks that are lending to businesses and consumers.  A different way of putting it is that the “rate hike” favors banks sitting on excess reserves over banks who are lending to businesses and consumers in their community. In other words, the rate hike just facilitates more looting by the One Percent...
Paul Craig Roberts

Gold will continue to be manipulated down, probably oil too..

And for goodness sake: all this talk about a stock market crash is premature...It dropped 1000 in two days just a couple of months ago..and went right back up and then some...wake me up when it drops to say, 16,000

ISEEIT's picture

I'm actually hedged for just that scenario. I'm in love with the finest survivalist female quite likely alive. This woman is absolutely astonishing. She's lived it since about birth. She grew up hard enough to put tears in YOUR eyes.

It's all about timelines. Humanity always both lives and dies. These fuckers have their nasty little 'system'.

Fuck them.

We're all gunna both live and die.

jm's picture

This is a very good and thoughtful post, but there is a contrarian view that the short term of Op ex and short cover in general drove the price action after the rate hike, tsy the beneficiary due to the uncertainty.

The long bond is the best hedge. The question is whether credit really needs one, or should one look at corporates at these levels.


I Write Code's picture

Don't be yankin' my chain, the market hasn't spoken in seven years, but you'll know when it does.

David Rockefeller's picture

I wonder if ZH is a single writer, or many.  If many, that would explain the glaring contradiction contained in this article.  On the one hand, ZH concedes, on many occasions, the obvious fact that the gold market is manipulated.  On the other hand, in this article the basic premise is that gold prices reflect market forces, not manipulations. 

So, the bankers read ZH, and now that they have been told that gold is a marker for their success, they will keep the price down.   In fact, this is worth betting on:  In the next few days, because of this ZH article, the price of precious metals will fall.  My recommendation: Short gold, now.