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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If your a consumer you have a asset to debt ratio. I think it's 25% to maintain a fairly decent credit record. Now the question is, and it may not be relevant, but what is the FED's ratio to government debt? Anybody got a comment on this? I'm seeing 4 trillion something at the FED and .gov at 18.9 trillion. I'm wondering if the FED is at it's limits. Or if they really work it in some kind of ratio like that.
The Old Man
You left out the Shadow Banking System. Educate on the Exchange Stabilization Fund. https://www.youtube.com/watch?v=2ssrcD5GdPQ (YouTube art 1 of 5)
ZH has a nice article on it from 2012, but the search function is not working and I do not have the link to present right now.
Edited: Found the ZH link; appears to use the same YT link above. http://www.zerohedge.com/news/presenting-exchange-stabilization-fund-5-p...
I would guess that the Fed won't do anything because those dumb nuts think that the only losses will be through equity investors and that the banking sector is not that exposed and can handle whatever losses they are projecting. This is where I think they will get it wrong.
The fact is, an interest rate of 1% or even 2% is still insanely low (still a very negative real rate). So the federal reserve could raise rates to 1%.
But only if the federal reserve also starts QE4ever.
Which is what the federal reserve believes they need to do.
Why so? Because they want Hitlery to be president. What they cannot tolerate is Trump, who (being a semi-outsider) might reveal "inconvenient truths" about the system when he discovers them. So the federal reserve believes they cannot take the risk that Trump wins.
They are in a bit of a dangerous situation, however, because Hitlery might be in jail before the election, and Sanders currently isn't exactly positive in his rhetoric about banksters.
However, being a socialist, Sanders will soon find that he cannot implement ANY of his desired programs without endless new debt creation by the federal reserve. Quite probably Sanders and the federal reserve already have an understanding that he will rant and rave about banksters, but when he gets into office, do what every recent president does... completely ignore and blatantly violate all his promises.
QE4ever may be a real whooper too. In which case, short the dollar and load up on physical precious metals [plus a small pile of call options].
Easy enough to talk tough at 1800. Show me a Brodsky when we take out 1500 --- on the way down.
If the market crashes now Yellen can blame it on the Bernanke Bubble.
If she manages to keep the game alive and carry it to a crash in 2017, it will be the Yellen bubble and the wrath of President Trump for the Fed will be terrible. There will be no survivors.
People in all sorts of government and corporate roles are now starting to think about the impact on them of a President Trump and to recognize it is likely to be very different to any other President if he thinks they are not performing.
There was a snippet in his Pensacola rally that illustrated the behavior. The mike or sound system was misbehaving, giving little bursts of static. At one point Trump stopped his political comments and said something like "This mike is terrible. It's creating bursts of noise. Don't pay for the mike. We should not have this shoddy equipment. Don't pay for the mike." and then he continued on. It was the "you're fired" moment. Someone's head will roll (figuratively). He made a public statement of his standards.
The approach is to find a problem, assess it, take action (including firing those who fail) and move on. No looking for excuses.
In truth, Hillary will probably be as savage with the Fed if it causes a market collapse on her watch.
So Yellen is now in the uncomfortable situation that if she keeps the bubble going and it collapses on the next President, the bubble will then be owned by Yellen, and either Trump or Clinton will take savage retribution against Yellen and the Fed. Alternatively let nature takes its course with the Bernanke Bubble and have it come apart during the last year of a lameduck President, who is going to own it with Bernanke.
I believe your presentation of the President's role vs the Banksters is the reverse of the actual.
Whatever the President wants, the bureaucracy knows where its bread is buttered. I believe that Presidents who don't go along suffer previously unrecognized health problems prejudicial to their further service, or become the victims of lone gunmen.
I do not know but suspect that Fed dealing to the banks has been so odious, and obviously so, that they cannot withstand an audit for that reason alone, much less for the record of their custody of public assets.
Honestly, if you know about rehypothecation and fractional reserve banking how is it even possible to presume that anything entrusted to this den of thieves is still there?
I believe a true record of their books would tell a far, far more sinister tale, where central bankers collaborated for the EXPLICIT purpose of manufacturing busts to facilitate bank acquisitions at more favorable prices, and then engineered policy for the EXPLICIT purpose of ensuring incompetent banker's success.
You can see much of the public corruption in every aspect of government the bankers touch. Why assume their internal dealings are less rather than even more corrupt?
Fictional Fight Club Tyler was on to something.
Where he erred was in blowing the financial records at night while the cockroaches were away.
While I agree with much of your assessment, I believe you make the mistake of assuming that the establishment is united. It never is. There are always substantial differences of interest in any oligarchy. The interests of the MIC (the people with guns) are not identical with those of Wall Street nor with the HIC, etc. Like any competing gangs, sometimes their interests align but often they are in conflict.
So the issue for a President is which does he really align with, under what circumstances, he which are more prejudicial enemies. You can't actually please them all, particularly when the economy and society are coming apart.
It's all rather simple, the Fed Put expired in-the-money, and we took delivery of a long future in a declining market. You should probably sell that before losses get out of hand.
Market short-sellers, Strength and Honor.
On my signal, unleash hell
https://www.youtube.com/watch?v=8IPzpaD4UOE
QUESTIONS WE ALL NEED ANSWERED OH MIGHTY FEDERAL RESERVE:
So Janet, please answer these pressing questions:
1) if the gambling public loses everything in their 401ks, will they be able to depend on Social Security in a few years?
2) Does it matter that the National Debt is flying past $20 Trillion and doubled in 7 years?
3) Will the new trillions that you are printing be able to buy things?
4) Will you be able to print enough to keep-up with new debt that is piled on going forward?
5) Will your hubris run out before or after the dollar crashes?
6) Has the Fed put ended-up being in the money, and have we been delivered a short future?
7) Who will replace you when the gig is up and you are put behind bars where you belong?
The Banks don't make their money by interest rate arbitrage.
And they no longer make it through asset appreciation.
They do it by manipulated Busts that put everything on sale, followed by manipulated booms that redistribute everyone else's wealth to them through monetary inflation.
If you continue to use a currency that they own, you're a volunteer in your servitude to them.
that is what is scary. the fed raised rates because banking activity reached a target level of activity. that is their metric for the economy. that is what they mean when they say the economy is growing modestly. that is why everyone is scratching their heads about what the fed is thinking. it has nothing to do with actual economy activity. for instance there are a huge amount of student loans out there but what does it produce. not much. car loans are better because a car has to be produced. the former driver of the economy are mortgages, especially new mortgages on new homes. that metric is still way below 2007 activity.
until the usa starts building new homes again the economy will languish for real people.
"Fed’s primary policy has shifted from protecting asset prices to protecting the exchange value of the dollar."
Definetely something to consider. Good article. Thanks for posting it Z.
Agreed. Very counter-intuitive to the assumed narrative and the guy lays out a credible case for his hypothesis.
The Fed decided that they wanted to cause a DEPRESSION when they put the rates up when everyone knows we are already in a RECESSION.
There must be a reason for this, but I surely cannot believe that sane people would wilfully do this to their own businesses and workers.
In conditions like this I hope you all have converted your "PET PAPER" & "PET DIGITS" into "PET ROCKS" which should hold their value during this coming FED CREATED DEPRESSION. _JOHNLGALT
This slightly edited post is from comments made several months ago.
These imbeci**s obviously don’t know sh** from cl*y. The last time the markets gave the FED data signals the ass fell out of the markets and they S*** themselves.
When the FED raises interest rates it will strengthen the already strong DOLLAR and strangle your exports, thus contracting your economy and sending it into a DEPRESSION. The U.S. has wonderful (read awesome) numbers, What is the score now, About 60% on food stamps, (whatever that is). My sympathies to all of you in the U.S.A. who believed in the “DREAM” of home ownership and independence.
To anyone who would like to get out of this World Wide Paper Ponzi Scheme (WWPPS) there must be a precious metals store nearby.
This (WWPPS) World Wide Paper Ponzi Scheme will only work well for "THEM" if the Mushrooms (people) of the world are kept in the dark and fed bullsh*t. "THEY" can't have the Mushrooms waking up and getting out of the Scheme and getting into "PET ROCKS". _JOHNLGALT.
I will have no sympathy for the people I've tried to explain this to, WTSHTF
There is a choice of keeping your life’s labour in airy fairy paper (“PET PAPER”) in which most of the thieves have told you they want to steal (through inflation) at least 2% of your wealth from you.
– If there is deflation you get to keep most of your work (value), If there is the thieves inflation, they get to skim the 2% or whatever off the top, DO NOT FORGET THAT “THEY” CAN TURN ON THE SPIGGOTS TO 10% OR 20% OR WHATEVER and just steal that amount of your life’s work from you.
Or you can convert your excess labour into HARD OBJECTS,
LAND, (can be taxed),
BUILDINGS, (can be taxed),
CARS, (can be taxed and subject to depreciated value),
ART OBJECTS, (subject to personal preferences),
BUSINESSES, (usually valued in “PET PAPER”) are subject to the honesty of management, ETC.) YEAH, RIGHT. We know all about that don’t we?
Getting back to the difference between “PET ROCKS” and “PET PAPER” and now – wait for it – “PET DIGITALS”. I nearly p****d myself when I heard you can give up your life’s work to (invest) in “PET DIGITALS” HEH, HEH, HEH. _YEAH RIGHT.
Give me a break. Do you think I’m a complete F*** W***.
As far as investing in “PET ROCKS” or “PET PAPER” or “PET DIGITALS”, maybe you should ask the Indians, Chinese, Russians, Germans (sorry you can have your GOLD back in ??? years) _because I am not licensed to give investment advice. Best to you all, and more PET ROCKS please. _JOHNLGALT
The Fed will not be able to save this market. Only war can turn this around so you can expect to see a really ugly situation soon.
Expect something like a Saudi oil terminal to be bombed, resulting in instant $200/bbl oil, XOM at $300 and US oil feilds buzzing again, and those nasty bond defaults going away. The shooting war between Iran and Saudia Arabia will strangely last 3 days and then POS Kerry will save the day, but the damage is done, 6mbbl/day off the market.
You think CITI et al is going to let a bunch of red neck oil workers drive them out of business? Never happen.
Paul Brodsky is overthinking it. The Fed's motive can be summed up in one link
https://www.google.com/#q=who+appoints+fed+chairman
While the banks are their customers, the prez and his/her party is the one keeping them in a job. Put it this way, do you do whatever your customers want or what your boss wants? Sometimes it may appear to be the same but only one of them hired and can fire you. Yellen knows that they're out a job if conservatives (or even Bernie) wins, so they're going to do their best to ensure Obama 2.0 wins by juicing markets thru propaganda, QE and NIRP. As long as it doesn't 'appear' as outright market rigging to the MSM and voting public, anything/everything goes...more so in the few months leading up to November. While we'll see corrupt manipulation of free markets, the MSM & public will only care that markets rally as they pour praise on the Fed for 'saving' us all.
// My fear is that much of my life will have been lived throughout a government induced recession with occasional interruption but never an end. Feels like I'll always have to keep fighting to stay out of its poverty inducing grasp, no rest in sight.
I think the dollar is not high because of the FED but despite of the FED (global positioning unwinding) and what is the purpose of hiking an already high dollar even higher with rate hikes? Probably something with derivatives.