"Nobody Really Knows Anything Right Now"

Tyler Durden's picture

Submitted by Nicholas Colas of Convergex

Three Fed Thoughts, One Conclusion

We learned one thing yesterday: the U.S. Federal Reserve is in the same position as the rest of us when it comes to forecasting the future path of economic growth.  Nobody really “Knows” anything right now.  From that touchstone observation, we add two additional points.  First, if you think the Fed is going to reverse course any time soon, be aware that neither Fed Funds Futures nor the 2 Year Treasury agree with you. Both discount a slow but perceptible increase in rates this year.  Second, it pays to think a little more long term than just 2016.  For example, consider that Chair Yellen has exactly 2 years left in that role before the next U.S. President can opt for someone else. What does she want her legacy to be?  Not, I think, the Chair that failed to get (and keep) Fed Funds off the zero lower bound.

There is an old adage in economic circles that “Stock market indexes have predicted nine of the last five recessions”. The author of that statement is none other than Nobel Prize winner Paul Samuelson, who concluded the observation with “And its mistakes were beauties”.  Fair enough – equity markets are notoriously fickle.  But market watchers would be fair in asking, “Fine…  But how many recessions have “Blue chip” economists called correctly?”

It is in that philosophical cage match that investors and the Federal Reserve find themselves just now. Global equity market volatility combined with ever-lower crude oil prices are like a traffic signal turning from yellow to red.  And red is also pretty much all you see on the screen.  The economics-minded stewards at the Fed see an entirely different picture: low notional unemployment, the dry powder for consumer spending in the form of lower oil prices, and easy monetary policy around the world.  For them, the light is turning green.

But one side will be right, and one side will be wrong. The dichotomy is too stark for any other conclusion.

Looking through the Fed’s statement today, I had three observations about how the central bank is weighing these facts versus how capital markets perceive them.

Point #1: The Federal Reserve’s cautious stance shows they don’t know any more than capital markets do about the current trajectory of global economic growth.  They see the volatility in equity markets and oil’s slippery slope but are keenly aware that markets are fickle.  Just think back to the August 2015 bout of volatility and how the Fed seemed to put off a September rate increase because of it. Whether that was optics or reality, it set a precedent that global equity market volatility could alter Fed policy.  Look for the Fed to wait on the real economic data that surrounds its dual employment and inflation mandate before it fundamentally changes course.

There’s one exception to that observation, at least by historical Fed policy standards: a market crash caused by external events.  A 1987-style meltdown isn’t enough since the central bank playbook there is to simply ensure the system has the liquidity it needs.  If there were a geopolitical shock, however, that’s a different page in the playbook.  Barring such an event, however, the Fed is going to take its time in 2016.  An S&P 500 that grinds lower by another 5-10% isn’t likely going to change that.

Point #2: While plenty of market watchers are calling for a return to zero interest rates and maybe more quantitative easing, some tell-tale capital markets disagree those events are in the cards.  Fed Funds Futures peg the chance of a July rate increase at 50% and put the chance of higher rates by year-end at 68%.  Two year Treasuries – the hair trigger of the yield curve for changes in Fed policy – yield 83 basis points.  That’s down from over 100 basis points late last year but still higher than September 2015 when the market was sure the Fed was going to increase rates.  The point here is that these markets are not forecasting a return to zero interest rates.  Not even close.

For the sake of completeness, there are two markets that have their doubts.  Gold prices are up from their 2015 lows of $1,050/troy ounce to $1,125 currently.  Given that the yellow metal has been in a vicious bear market since 2011, that is a notable reversal of fortune and could be the canary in the coalmine chirping a warning about further fiat currency debasement.  The other market worth a mention is the 10-year U.S. Treasury note.  At a 2.0% yield, it signals a vote of no confidence in the Fed’s hope that inflation will return to desired levels any time soon.

Point #3: Fed Chair Janet Yellen has exactly 2 years left in that position before the next President has a chance to consider reappointing her or choosing a new person to fill the slot. Think of the Federal Reserve as either a blue chip public company or major branch of the U.S. government.  In both cases, the people that run them give serious thought to their legacy – what they did to shape the organization’s goals and what specific accomplishment they achieved.

Through that lens, the conversation about Fed policy in 2016 takes on a different hue.  In retrospect, every Fed Chair has their emblematic “Achievement”: Paul Volcker (tamed inflation), Alan Greenspan (the 90s expansion), Ben Bernanke (saved the financial system).  For Janet Yellen, her prospective accomplishment must be “Got things back to normal”.  That means getting interest rates far away from the zero lower bound if at all possible.  If for this reason, and no other, the Fed is going to raise rates in 2016 barring a shock to the system.

The conclusion here: you dance with who you brung, and this Fed is our date to the prom. They don’t have any greater level of clarity about how this year is going to shape up than the marginal investor setting equity prices or an oil trader looking for direction in that market. This is patently different from the period from 2008 – 2015, when the Fed was clear about its perspective and knew exactly which policy levers to pull. Perhaps they were wrong, but they were never in doubt.

Now, there’s enough doubt for everyone: markets, central banks, consumers, governments. Everyone. The best thing we can say about that: if markets accept that the Fed is no better informed than they are, maybe investors will devote more time to stock fundamentals and intrinsic value analysis. Without a doubt there are cheap stocks in the current global equity market.  Now, perhaps, we have the time to look for them instead of worrying so much about the Fed.

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Father Thyme's picture
Father Thyme (not verified) Jan 28, 2016 8:17 AM

DoughNough Nuffin!

Looney's picture

Dear Janet,

Potty training should’ve been done before the SHTF, not after.  ;-)


y3maxx's picture

"There’s one exception to that observation, at least by historical Fed policy standards: a market crash caused by external events"


Bet on this happening

RaceToTheBottom's picture

A Fed Reserve of the one Reserve Currency can easily cause "an external event" to happen.  

Emerging Markets, China, European refugee crisis, etc.   All susceptible to the FED Machinations.

WS has a strong interest in having this happen as well.

JRobby's picture

Rick Rieder was just on Bloomberg saying it is all good. America is doing very well

TheFutureReset's picture

My bets are on a Euro explosion, a Saudi/Iranian war, a natural disaster, or terror attack in Russia or China. 

A  bailout of the oil industry in the US will be first, like TARP but for the oil companies (of course it's really a bank bailout), since oil companies are part of the elite class like the banks. This can be aged off as a patriotic duty. 

Then comes an external event that can be scapegoated, right or wrong, for massive QE. They might be able to hold this evil system together for one more round. 

Kirk2NCC1701's picture

Where do you apply for this job?  What qualifications and affiliations do you need? And what does the Compensation Package look like?

JRobby's picture

"Oh, uh, there won't be any money, but when you die, on your deathbed, you will receive total consciousness." 

new game's picture

Adolf Hitler

  • Terrorism is the best political weapon, for nothing drives people harder than a fear of sudden death.

  • I have not come into this world to make men better, but to make use of their weaknesses.

  • What good fortune for those in power that people do not think.

  • I have sympathy for Mr. Roosevelt, because he marches straight toward his objectives over Congress, lobbies and bureaucracy.

  • [I]n the simplicity of their minds, [people] more readily fall victims to the big lie than the small lie… It would never come into their heads to fabricate colossal untruths, and they would not believe that others could have such impudence to distort the truth so infamously. Even though the facts which prove this to be so may be brought clearly to their minds, they will still doubt and waver and continue to think that there may be some other explanation.

draw your own conclusions...

Father Thyme's picture
Father Thyme (not verified) new game Jan 28, 2016 8:22 AM

Hitler was lucky he still knew people who feared death.

Now? All they fear is being called politically incorrect.

new game's picture

muzzies believe death is the solution, wow, what a new twist. instead of bullet and bombs, program a human to walks the bomb to the target. i believe, ha...

Father Thyme's picture
Father Thyme (not verified) new game Jan 28, 2016 8:30 AM

Muzzies are "painted half-apes that ought to feel the whip."

Hitler said that. Problem?

new game's picture

no problemo, not looking for one either...

they come without a knock...

iinthesky's picture

The public is no better informed that they are? No shit? That can easily be interpreted as "all our information is public domain!"

Can someone call the NY Fed today and ask them when it will be convenient to schedule a time to stop by and make copies of 'everything they know' since they are no better informed. Cool!

Oh and tell them to please clear out the army of Federal Reserve Police--they give me the willies!

buzzsaw99's picture

They see the volatility in equity markets and oil’s slippery slope but are keenly aware that markets are fickle.


Mick Shrimpton's picture

"...maybe investors will devote more time to stock fundamentals and intrinsic value analysis."


Ha!  That's a good one.

BeaverCream's picture

What investors?  Sorry but computers don't care about any of that.

LawsofPhysics's picture

Correct.  What is the average time a stock is actually held now?  This is gambling, period.

Lore's picture

You have a dark sense of humor. 

Calculus99's picture

One cheap stock is HHC.

Very asset rich. Been battered recently due to Houston real estate problems but give the market time, it will revalue HHC a lot higher over the next several years.

Buy here, add on any dips.  

RaceToTheBottom's picture

Cause realestate is not dependant on FED machinations?

Arnold's picture

Raise the rate, Granma.

For the savers.

Kirk2NCC1701's picture

That, by its very nature and definition of Debt-Currency, is what creates the Compounding effect of fiat money.

And you call yourselves Austrian Economics followers. That's OK, as Christians don't really follow Jesus, and he'd be arrested if he showed up on our streets.

lester1's picture

The Fed's covert stock buying program, PPT will prop up the markets.


What's to stop the Fed from buying stocks covertly? 

KansasCrude's picture

What's to stop the Fed from buying stocks covertly? 


With Derivatives its a lot cheaper to "Rent Them or Lease them out"  Our biz accountant and I are always guessing on how many 10s of $Trillions the Fed, PPT and ESF have thrown against the markets to support them...  I have a feeling we are still way to low given what we already know about the money ejected from our institutions since 2000.  I would not be surprised if the number is closing in on a $100 TRILLION to go with the $200 TRILLION or so in unfunded liabilities.    Try amortizing those turds  with a $15 Trillion dollar and sinking fast eCONomy that is well over the $trillion dollar a year level in deficit.


Secret Weapon's picture

At this point the Fed is as important as the engine room on the Titanic after it hit the iceberg.

Kirk2NCC1701's picture

Correct. The Titanic needed the Engine Room to keep running long enough for the 1st Class Passengers to leave in their Lifeboats. The Fed is the same: the Engine Room for the rich.

GRDguy's picture

What Janet is really sayin' is that the Feds are running out of ways to lie and steal without the sheep getting upset.

youngman's picture

The Nasdaq guy this AM said 90% of all trades are computers....fundamentals...not

LawsofPhysics's picture

By design.  Please, the bankers and financiers know they got away with the largest fraud the planet has ever known. They bought D.C. in order to avoid prosecution.

No matter, such "let the majority eat cake" monetary experiments have been tried before.  This one will end no differently.

The best Sun's picture

What a load of rancid puss!
This article is filler right?

beijing expat's picture

I've consulted a Sage and a geomancer. They assure me that in the year of the monkey nobody knows what's going to happen. Invest accordingly.

optimator's picture

WRONG, Janet knows.  she quadrupled her net wealth since getting the Chair.

Grandad Grumps's picture

People always seem to want to "guess" what the Fed is thinking. Admittedly, it is difficult to understand the situation when the Fed admits that it lies to get people what it wants them to do.

I think that so called analysts would be better off:
1. Look at the history of central banks and what they have historically done, not said.
2. Look at who owns the Fed and what their ultimate motivations might be.

The Fed refuses to be managed. The Fed refuses to be audited. What does this tell us? I will take a guess: The Fed is not working in the best interest of the people of the world. They work in their own best interest and the interests of their owners. Is that dangerous? HELL YES!!

There are so many people who have been corrupted and are sucking off the toxic teit of the Fed that it will be very hard to find and follow a path that is best for humanity.

PhiBetaZappa's picture

It's always the same choice for the Fed - lie and deny or extend and pretend.

Nothing new here, move along.

Skeeterworborton's picture

BULLSHIT......they know

two hoots's picture

Audit the Fed.  They have tipped their hand to quackery and malpractice.  It is time.

skohiu's picture

Fed totally knows (and intends) to lead the sheeple to slaughter (again). 

Batman11's picture

Which way is up?

The new economics looks as though it is upside-down.

40 years ago most economists and almost everyone else believed the economy was demand driven and the system naturally trickled up.

Now most economists and almost everyone else believes the economy is supply driven and the system naturally trickles down.

Economics has been turned upside down in the last 40 years.

All the Central Bank stimulus programs have been Neo-Keynesian, in line with the new economics. The money is pushed into the top of the economic pyramid, the banks, and according to the new economics it should trickle down.

What we have seen is that the money stays at the top inflating asset bubbles in stocks, fine art, classic cars and top end property.

The old economics looks as though it was right all along.

Keynes and the old economics suggested spending on infra-structure projects to create jobs and wages which will be spent into the economy and trickle up.

When the Western consumer went on life support in 2008, China used Keynesian stimulus to keep its economy going through infra-structure spending and job creation. Unfortunately, it has reached max. debt before the Western consumer has recovered.

The West has done totally the wrong thing in the intervening eight years and just blown asset bubbles rather than helping its consumer base recover.

After Keynesian stimulus you have new infra-structure that you can hopefully use in the future.

After Neo-Keynesian stimulus the asset bubbles burst and you have a deflation problem on your hands.


skohiu's picture

Fed totally knows (and intends) to lead the sheeple to slaughter (again). 

RaceToTheBottom's picture

At some point they have to ask whether the girl they brought to the dance (Neo-Keynesian Economic thought) even knows how to dance.....

I hope that role is not relinquished to the Historians.  They are always bought and paid for.

12357111317's picture

Janet is our date for the prom?   :-)

Chuckster's picture

Dear Mr. Race:

This post just oozes with intelligence!  High I.Q. for sure!

TheDanimal's picture

I'm really beginning to feel like we should get women back the fuck out of the workforce, especially out of HR.  They just interfere with the real work too much of the time.  I'm sick of their bullshit, but damn you gotta have them.  Also:

"the dry powder for consumer spending in the form of lower oil prices"

What fucking planet are they living on?




I ain't 'Nobody', dork, got it.

BitchesBetterRecognize's picture


12357111317's picture

HELP!  I can't read ANY Fed statement without thinking of "The Madness of King George", his advisors all closely examining his stool every time, apparently hoping to determine whether he could still run the Empire by reading his stool as if it were tea leaves.    :-)

Infield_Fly's picture
Infield_Fly (not verified) Jan 28, 2016 10:53 AM

They never did.


This 7 year exercise was designed by Obama to pump his "abilities" to run an economy.


These last 7 years have been all about optics - fuck reality, look at my shitshow instead.


Honestly Barry, go fuck yourself in the heart!!!

quasi_verbatim's picture

...stock fundamentals ('just another goddam piece of paper') and intrinsic value analysis ('you get nothing').