What If There Is No "Fed Put" - Paul Brodsky Thinks Yellen Will Not Bailout Markets This Time
Earlier today, Art Cashin summarized most (very desperate) traders' thoughts when he said that as a result of today's market crash, "the Fed will try anything" to prop up the wealth effect it had so carefully engineered with seven years of central planning in the aftermath of the financial crisis. Perhaps the only question left is "where is the put", or where on the S&P 500 is the Fed's breaking point beyond which Yellen will have no choice but to make a statement, or take action, in support of the market.
Yet one person who is far less sanguine abou the latest in a long series of central bank bailouts of the stock market is Macro-Allocation's Paul Brodsky, who believes that instead of the Fed Put, the time of the Fed Call has come.
Here's why:
The Fed Put Call
Investors are blaming Fed rate hikes, and hence a strong dollar, for weakening global output, commodity prices, and global equity prices so far in 2016.
The Fed knows exactly what it’s doing.
Equity returns are certainly dismal thus far in 2016. Through January 14 at 14:00PM EST, the MSCI World Index had declined by 8.6%. Accordingly, “the markets” had begun to doubt the Fed’s resolve to hike rates four times in 2016. Fed funds futures implied the December Fed Funds rate at 0.70%, up only 34 basis points from the current rate (0.36%). This implies the market is betting the Fed will hike once or twice more.
Clearly, investors see the equity markets as the leading indicator of Fed policy. We disagree. The Fed no longer works implicitly for equity investors (i.e., “the Fed Put”); it is primarily working for the U.S. banking system by stabilizing and increasing its deposit base, and for the state by providing an incentive across the world to invest in Treasury debt. By raising rates, it increases the exchange value of the U.S. dollar.
We have argued that global output growth would have to naturally decline given the extraordinary leverage already built into the global economy, leaving observers to acknowledge in 2016 that recession is near. We have argued further that the Fed is very aware of an imminent global slowdown, and that a logical strategy in such an environment would be for it to import global capital by keeping the dollar un-challenged as a store of value (see King Dollar).
We would like to reiterate and refine our view: despite increasing discomfort among equity investors, we think the Fed will remain resolute in its effort to maintain or increase the interest rate differential between U.S. and foreign sovereign rates.
The one thing that would change the Fed’s current policy would be if global growth shows signs of increasing – not decreasing.
If the world economy were to strengthen then the Fed’s incentive to keep the dollar strong would fade.
Investors should consider this meaningful shift in policy when deciding how to allocate across asset classes. As we noted in The Pain Trade last year, falling long-term Treasury yields are the last thing speculative (i.e., levered) investors expect. Following this week’s auctions, it may be time for them to cover shorts.
His conclusion: "Global equity markets are suffering so far in 2016 because the Fed’s primary policy has shifted from protecting asset prices to protecting the exchange value of the dollar. Buy USDs and Treasuries"
If he is right, watch out below, especially if hints such as this one by San Fran Fed president John Williams, who famously admitted several days ago the Fed was wrong about the "benefits" from crashing out, are an indicator of broader Fed thinking:
- WILLIAMS DOESN'T SEE SIGNS ASSET VALUES DEPRESSED, BELOW NORMAL
With the WSJ adding that "Market Volatility Unlikely to Deter Rate Rises Over Next Few Years" - hardly what the abovementioned desperate traders wanted to hear...
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It's time for some Bob DiNiro from Copland:
You blew it!
https://www.youtube.com/watch?v=hqPRwq3QJsk
It all depends upon how a handful of banks are positioned.
F the rest of the country and world.
And let it all come down on their Magic Negro's watch? I can hear the jew run media now..."well people thought TRUMP was going to be elected President so it's his fault, not Obama's"
Exactly. The NWO lackeys will do anything to postpone the crash until Post-Zippy. "The Narrative" must be maintained.
Wait until new Prez, lower the boom, add a full-court press by the State Media and Voila! It's someone else's fault.
They do that with Trump and they are going to be doing very painful jail time. If they crash it on Obama's watch Trump will probably let bygones be bygones but if they try to stick him with the bill he will take it out of their hides -- and they know that.
Based on his past experience, The Donald will have no problem leaving banks with the proverbial bag.
He's done it many times before, y'know....
On the other hand, the last two crashes were in the last year of the last two presidents, and all three here are 2 termers.
Put aside your opinions and watch the garden gnome.
What she does will tell you loads, not some racial boogeyman you are tormented by.
dup.
We are voting in Trump, so the elites will unleash the punishment.
Good. I hope he get elected and they royally piss him off. I read the other day that the FBI is in a tizz. It would make for great TV to unleash them on the criminals.
If the Libertarians have sense enough to put Jesse Ventura on the ticket, it will be him vs Bernie Sanders, whether Sanders is the D's candidate or not.
If the L's do any credible speaker who takes on 9/11, they will win. That story and the wars is less and less effective as ever-more evidence comes out that our major enemies, the killers of innocents around the world, is our government playing both sides of the conflict, creating terrors intentionally and unintentionally in order to fight them as a way of maintaining political powerr.
Pretty simple message, hard to distort, and the evidence is obvious and ample and convincing from many points of view.
I wish people would give up on this "third party to the rescue" fantasy. Here's why:
The 1992 prez election
https://en.wikipedia.org/wiki/United_States_presidential_election,_1992
Clinton - 43% of popular vote - 370 electoral votes
Bush - 37.5% popular vote - 168 electoral votes
Perot - 18.9% popular vote - ZERO electoral votes
The electoral college is the two party duopoly perpetuation machine.
You'd probably be surprised at who all is on Trump's side.
It's much more then just punishment of the sheeple for potentially electing Trump. It will have to so brutal that the sheeple will NEVER ever think of considering an OUTSIDER again. That is what this is all about, and is all it is EVER about.... CONTROL.
Exactly so. 2008 caught them all unprepared and BK.
First by inflation, then by deflation ......
This is the time for the vultures to swoop, and clear the casino baize clean.
Tell me what is cheaper than in 2008? <crickets>........ Thought so.................
Heroine
And Ass for sale on Backpage...................
Truest economic indicator out there.
Ergo why no one asks anymore why we are still in Afghanistan
Does this mean we will finally acknowledge the Greater Depression of 2008?
Once the increase in the DOW/SP from that point are recognized as fiction manufactured by the FED we should show stats (once the B(S)LS, revises to correct numbers) that blow the Great Depression out of the water.
Its the great depression of 2000 - if you apply real inflation numbers to the GDP, it has been negative since 2000, except for a small portion of 2004.
The One Bank. It really is that simple.
"Paul Brodsky Thinks Yellen Will Not Bailout Markets This Time"
HA HA HA HA HA HA HA HA HA
If you're not out of debt and out of equities by now, u r dummmmmmmmmmm. You had ever warning in the world. People followed their leaders into debt (mass delusion) without the wherewithal or the juice to get out. Oops.
Wrong, the fed is full of broken window theorists.
I don't believe that the Fed could save the market even if it wanted to. After seven years straight of monetary heroin, the high is no longer salvageable.
Reality has never once stopped a junky from chasing that dragon one more time.
Until they die.
They think they are hot shots, so give them one.
What a stupid comment. I know at least a dozen addicts who voluntarily gave up their drug of choice.
Were any of that dozen Heroin addicts?
Heroin relapse rates are above 90%. REALLY, REALLY hard to succesfully recover.
Diminishing returns.
Anyone hoping for the 330PM ramp today, might be severely disappointed.
3:30 will bring blue skies and rainbows for Janet.
3:30 ramp? Yes - in a downward direction. I expect many will want to dump their long positions over this long weekend in fear of surprises.
Hmm ... looking at IWM technicals, looks like a > 50/50 chance of a run to the highs starting shortly, not perfect odds, but could be damaging to late-entry shorts ...
Done. Pissed at myself for ignoring a 2:00 long signal (don't like opening new trades on OPEX days post noon). Unless the VIX's reverse course, late shorts could get crushed ... assume many just did a standard, late "crash back to VWAP trade", still a good chance it could work out after this little scare, given earlier carnage ...
(not sure who thumbed you down for that...) but I was thinking that 3:30 ramp capital is now "3:50 hit every bid you can capital" and I think you may have a good point.
Dude ramp started at 2:30..... pay attention, whether it works or not is the question
its failing
There is no recession until they stop faking the GDP numbers. If the truth were told, we have been in recession for a long time.
proof?
Freeport and BHP bankuptcy filing in 3...2...1...https://finviz.com/futures_charts.ashx?t=HG&p=m5
for this thing to get real legs this is the domino....
"We disagree. The Fed no longer works implicitly for equity investors (i.e., “the Fed Put”); it is primarily working for the U.S. banking system by stabilizing and increasing its deposit base, and for the state by providing an incentive across the world to invest in Treasury debt. By raising rates, it increases the exchange value of the U.S. dollar."
Even if the assumptions are correct, just look where the BOJ ended up seeking precisely those same goals.
Yeah, I think you can't have your equities implode and expect the world to still clamor for your currency and government bonds. The categories are linked by confidence in the U.S. economy.
There is a floor that the Fed will protect.
666?