Submitted by David Stockman via Contra Corner blog, [14]
With apologies to Bob Dylan, its clear that the casino does believe that the Fed is the monetary equivalent of heaven’s front door. Ever since QE officially ended last October, the market has been chop, chop, choppin’ higher on the slightest hint that 78 months of free carry trade funding may not end after all. This latest run-up makes the ninth time since the original Bullard rip seven months ago.
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^SPX [16] data by YCharts [17]
That the Fed and other central banks have unleashed the speculative furies is an unassailable and baleful reality. Yet yesterday morning’s instant 40-point Dow drop in response to the posting of “incoming” housing data that looked slightly optimistic at the headline level was unusually absurd. Indeed, that this short-lived (~45 minutes) “housing is back” story spooked the market with fear that the Fed might finally cut off the juice - well, that is a canary in the trading pits that’s worth noting.
What is going on here plain and simple is a one-sided game of chicken. The robo-traders and hedge fund buccaneers on Wall Street press the market higher on virtually no volume or conviction whenever macro-economic weakness presents itself, virtually daring the Fed to maintain is ultra-accommodative stance still longer.
At the same time, the utterly clueless posse of would be monetary central planners domiciled in the Eccles Building invent one new pretext after another to justify delay, which only encourages the gamblers to press their advantage still harder. We have now reached the point where the casino is literally calling the Fed’s bluff, but these academic scribblers and power-drunk apparatchiks don’t even seem to know it.
This condition is especially ironic because the school marm who currently presides claims to be engaging in an unprecedented level of “transparency” with regard to the Fed’s intentions. In fact, however, the Fed’s communications regarding the sign posts it is watching are not simply transparent; they are essentially a content-free blank slate.
Thus, we are at 5.4% unemployment. Despite its flaws as a metric of labor market conditions owing to 91 million adults not in the labor force as reckoned by the BLS, the U-3 rate is a tangible marker; and for decades it was considered tantamount to full employment for government purposes. But it’s no longer any guidepost at all. Its actually more like the proverbial goalpost that has been moved time and again—–in this instance by Fed speakers and post-meeting minutes.
Indeed, Yellen actually has 19 labor market guidposts on her dashboard, and is apparently watching all of them without any indication as to the weighting because she doesn’t know, either. The Fed chairman is just insouciantly making it up as she goes along, using a 40-year old macro-model that bears no resemblance whatsoever to current reality.
Its worse on the so-called price stability mandate because 2% inflation has become a pure rubber ducky. Fed speakers have so obfuscated the issue as to which measure they will use, and for what run-rate over which period of time—–that their inflation guidepost might as well be reduced to this: Look ma, no inflation!
So based on all of this transparent pettifoggery, the Fed has managed to communicate that even a tiny 25 bps June rate hike is off the table and possibly September too. However, upon this morning’s Census Bureau release, the robo traders were shocked by a housing starts number that was higher than expectations, but actually just a tiny wiggle in the sub-basement.
Shown below is what had the market sweating at the Fed’s front door——a three month moving average of housing starts that is still below the bottom of every recession since 1955!
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But actually the head fake was even more pathetic. It turns out that the northeast region accounts for barely 15% of US housing starts, but contributed nearly two-thirds of the gain over last April. Stated differently, excluding the aberrant flare-up in northeast region starts last month—-which will surely be revised—there were 87,000 starts in the US this April compared to 84,000 last year.
Yes, a 3.7% gain from last year’s level, which was the third lowest April ever recorded in modern times, was enough to spook the machines. And the reason is straight forward: The “fundamentals” have been abolished and honest price discovery has been destroyed by 15 years of non-stop central bank manipulation of financial markets.
In fact, like all the other “fundamentals” the housing starts and residential investment trend-line has fallen off a cliff. At 3.0% of GDP it is 40% below the historic average and 50-70% below prior recovery highs.
So housing is down in the pits with all of the other important economic fundamentals. Since the turn of the century there have been no new breadwinner jobs; real household median incomes have fallen by nearly 5%; real net business investment is down by 20%; and labor hours consumed by the non-farm business sector have not risen appreciably in 15 years.
