"The Nightmarish Merry-Go-Round" - The Only Chart You Need To Trade This Market

Tyler Durden's picture

Today's steep selloff was launched by the latest jawboning by Lockhart and Williams who, now that the S&P 500 is back comfortably above 2000, once again hinted that a June rate hike is back on the table. Incidentally, the dynamic of the Fed responding to the market, and the market responding to the Fed, has been the only one worth paying attention to in recent months.

Confused? Don't be. Here is an explanation from none other than Bank of America.

Not so merry-go-round: By some accounts the Fed is stuck in an adverse feedback loop. They want to raise interest rates so they can "reload" their policy ammunition, but the markets won't let them. The chart of the day illustrates this nightmarish merry-go-round: the Fed threatens to hike, markets tank, the Fed delays the hike, the market recovers and the cycle repeats. The end result is repeated delays and very little actual policy tightening.



While we think there are elements of truth in this argument, we think it exaggerates the constraints on the Fed in two ways. First, if we are to believe the story, the timing of this feedback loop shifts from one episode to the next. In particular, in the first three episodes the market responded to the threat of tighter policy, but not to the actual implementation of policy; while in the December case the market was fine with the threat of hiking but only reacted weeks after the fact. So which is it: are markets forward looking or not? Second, the Fed merry-go-round story puts the entire onus on the Fed when a lot else is going on.

Of course, there is a very simple explanation for the above: as George Soros would certainly dub it if he were in a mood to write books, the term would be a "reflexivity trap."

As pertains to Bank of America's question, regarding the second, the Fed chose to take on the "onus" in 2009 when it decided to centrally-plan the world's most artificial market rally in history, so they will get no commiseration from us.

As for the first, "are markets forward looking or not", the answer is simple: the markets can only look as far forward as the next Fed statement... and since the next Fed statement is in turned driven by what the market will do at any given moment, it explains why the only chart traders need is Bank of America's "nightmarish merry-go-round."

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herkomilchen's picture

Well said.  That actually does sum it all up.

gatorengineer's picture

I think it needs two Gartman feed forward loops in it...

Automatic Choke's picture

somebody oughta teach 'em to tune a PID loop properly, take that instability right out.   sheesh.....

Stuck on Zero's picture

The loop has a large damping factor in it: on every cycle the insiders suck $100B out of it.

myne's picture

Monetary event horizon. 


Much simpler :) 

buzzsaw99's picture

yep. generate trading volume with churn. in simpler terms, btfd.

Dr. Engali's picture

Sooner or later the bots are going to figure out the fed is full of shit and they're just trying to manage this pig.

Luckhasit's picture

the bots are the market.  feel for the guy that doesnt use front running algos.

Amish Hacker's picture

You mean I missed the Big Move again?

knukles's picture

At 12:52 today we're just about back to 0% return on the S&P YTD.
Grand risk adjusted rate of return, no?

Maybe with a random number generator and a 3 sided coin I can figure out where we are on the chart....

buzzsaw99's picture

0% is still a winner. borrow on margin at 0.5%, buy the s&p, and collect the 2+% dividend. some big caps are upwards of 4% on the divi.

scintillator9's picture

Taxes and inflation sort of eat into those "winnings".

But, I am of the little people sort, so I gets to pays them.

N0TaREALmerican's picture
N0TaREALmerican (not verified) May 17, 2016 2:41 PM

The "wealth affect" for the wealthy.  

the grateful unemployed's picture

there's another loop, the wide circle of thresholds met and then ignored. (promises made and then broken) employment numbers, inflation (at 2%), data, no data, foreign markets, the dollar, the dog ate my homework, the fed is a traveshamockery. travesty, sham, and a mockery. when the time comes the treasury will dump bad paper and close the doors. poor janet will be the executive of a failed agency, no one to blame but yourself.

Theonewhoknows's picture
Theonewhoknows (not verified) the grateful unemployed May 17, 2016 2:45 PM

Don't forget about those stats being manipulated as hell - we should start using Shadowstats or Chapwood index much more often to realise how knee-deep in crap we really are.

Consuelo's picture



"They (want) to raise interest rates so they can "reload" their policy ammunition, but the markets won't let them."



What sort of range does one obtain out of a half-percent shot...?

Theonewhoknows's picture
Theonewhoknows (not verified) Consuelo May 17, 2016 2:46 PM

why would they want to raise interest rates when they just keep coming up with new excuses to use (whether to stimulate markets with gossip of a hike or cut). Janet doesn't even rule out NIRP so think about her with her options being open.

two hoots's picture


"They want to raise interest rates so they can "reload" their policy ammunition, but the markets won't let them." But they will, they must, out of desperation.


What are the chances Hillary has been briefed on a serious pending economic downturn and is throwing in the Bill saving the economy idea in advance?

venturen's picture

Well the market is near the top...the .0001% have purchased most assets.....what isn't to like?

LawsofPhysics's picture

"Full FAITH and credit"

tick tock motherfuckers...

Goofy Bastard's picture

Looks like an effective functioning market to me, nothing to see here folks

bluskyes's picture

Does the Fed buy IPO's. If so, we could skip all of this silly buying, and selling nonsense.

falak pema's picture

this is called a weather vane circular market.

No forward direction just rotation.

RMolineaux's picture

If stock valuations are too high, any attempt to restore normal conditions will cause the market to "tank."   Why should this be a cause for worry to anyone other than the crap shooters, least of all the Fed.  

Lockesmith's picture

>the cycle repeats

...until it doesn't