Submitted by David Stockman via Contra Corner blog, [11]
After the Fed’s cowardly capitulation to the Wall Street gamblers last week our clueless monetary politburo got quite the surprise. The post-announcement “rip” lasted all of 90 minutes, and by the market’s close on Friday the S&P 500 was down 3% from Thursday’s algo-driven spasm and 8% from the May highs.
That even left my head spinning. On Wednesday afternoon I had told Yahoo Finance [12] that in the event of no rate hike there would be a “short term relief rally” but that even “the gamblers were losing confidence” in the Fed’s con job:
………If the fed doesn’t raise rates, there probably will be a short term relief rally, but I think its becoming evident that even the gamblers in the casino are losing confidence in the Fed. Because however they come out this week, there will be signs of division, there will be evidence of confusion and indecision, and once that process begins to fully unfold, which it will for meeting after meeting as we go forward………(because) the Fed painted itself into a corner and has no clue how to get out…..once that process of division and confusion develops, the markets are going to lose confidence in the whole central bank bubble and were going to have a huge correction.
Alas, confidence was apparently so shaken by the Fed’s action that it’s as if they did ring a bell at the top. The relief rally got monkey-hammered on the spot.
Ironically the gong was Janet Yellen’s incoherent babbling at the post-meeting press conference. Over and over she said how everything is swell in the US after 80 months of ZIRP, and that the consumer and labor markets are nearing the pink of health. Nevertheless, she and her posse had elected to keep banging the Emergency Button, anyway, just in case something falters in Shanghai, Timbuktu or some other unspecified precinct of planet Earth.
Whether the inevitable thundering collapse of the latest and greatest of all central bank bubbles has now commenced will be known soon enough. But what is clear from last week’s market reaction is that the buy-the-dips algos have lost a lot of mojo. Perhaps they are even being reprogramed to trawl for signs of confusion, conflict and cacophony among our central banks rulers.
If so, the machines are already being pelted with some pretty hefty word clouds—–not the least from the Fed’s number one spinning top, James Bullard.
Recall last October when the market plunged by 7% he quickly cried uncle, suggesting the QE be extended, thereby triggering the Bullard Rip. Accordingly, by year-end the markets were up by 12% to an all-time high, meaning that the casino gamblers had been pleasured with another $4 trillion windfall gain.
Not this time. In a speech over the weekend Bullard lamented that the Fed had not taken even a baby step toward “normalization, and then hit the nail squarely on the head. As Wolf Richter aptly paraphrased Bullard’s unauthorized lapse into the obvious:
But “the case for normalization is simple,” he said. “The Committee’s goals have essentially been met”:
The Committee wants unemployment at its long-run level and inflation of 2%. The Committee is about as close to meeting these objectives as it has ever been in the past 50 years.
Most of the weakness in inflation was due to the plunge in oil prices, a “temporary” phenomenon, he said. “Oil prices will stabilize so that when you look at year-over-year inflation, it’s going to start coming back to 2% over the forecast horizon.”
And yet, “the Committee’s policy settings remain stuck in emergency mode,” with the Fed’s balance sheet having “ballooned to about $4.5 trillion,” from about $800 billion in 2006. And the policy rate has been stuck at about 13 basis points for “nearly seven years,” though “the Committee thinks the long-run level of the policy rate should be about 350 basis points.”
That’s 3.5%! That median of the long-run appropriate policy rate of FOMC participants [13] is a world away from the current 0.13%. It would mean a revolutionary concept: capital would have a real, if still small cost! Good luck trying to get there, in these horrendously distorted markets, without crashing everything in sight.
So Bullard finally asked the totally obvious question: “Why do the Committee’s policy settings remain so far from normal when the objectives have essentially been met?”
And the answer? Um, well…
“The Committee has not, in my view, provided a satisfactory answer to this question.”
It turns out, however, that Bullard was just getting warmed up for his appearance this morning on CNBC, where he delivered a Bullard Rip of an altogether different kind. To wit, he ripped into the very backside of Bubblevision’s most obnoxious easy money troll, telling his startled host to pass a message to “your friend Cramer” that:
“The Fed cannot permanently raise stock prices…… to have [Cramer] cheerleading for lower rates 24 hours a day is unsavory.”
But Bullard’s Blasphemy is just a foretaste of what’s coming. Indeed, as he pointed out this morning, a rate hike at the October meeting is well nigh impossible because no press conference is scheduled for that meeting. Were one to be announced, therefore, it would trigger a preemptive selling frenzy by the robo-machines like no other.
So the next opportunity is the December meeting, and then the rubber will most surely meet the road. That is, Yellen’s incoherent babble of last Thursday will sound crystal clear compared to whatever tortured explanation she attempts to muster when explaining that the Fed has deferred the rate hike once again.
Why? Because by year-end the “incoming data” will have exhibited, inter alia, “unexpected weakness”, global deflation will not yet have abated, rekindling of inflation will have proved unexpectedly illusive and China will have been arresting enemies of the state, not the collapse of its economy.
Indeed, Yellen essentially self-appointed the Fed as the world central bank at last Thursday’s meeting. That’s because it could find no ready excuse for its real reason for standing pat. Namely, its palpable fear of a stock market hissy fit and the implicit repudiation of its entire modus operandi.
Moreover, owing to its formulaic fixation on the utterly useless BLS establishment survey—– where Yelllen boasted about another 220,000 jobs per month—–the Fed group thinkers have become blinded to what’s actually happening in their own backyard.
So rather than recognizing the self-evidently developing business slump, it has leapt into the terra incognito of policy-making in response to the ebbs and flows of the planet’s entire $75 trillion GDP. So doing, it has also thereby hostaged itself to the wobbles of the world’s $300 trillion tower of credit market debt and traded equities and the great “known unknown” of its $700 trillion powder keg of what Warren Buffett called financial weapons of mass destruction (i.e. financial derivatives).
Yet if our Keynesian school marm had bothered to look beyond the 19 labor market graphs on her dashboard, she might have seen the ticking domestic time bomb depicted below. What it shows is that for the past two years—-as the global deflation has gathered force—- the US economy has been heading for the next recession.
To wit, since November 2013 total business sales (blue line) in the US economy have lapsed back to the flat line, while business inventories (red line)—–manufacturers, wholesale and retail—–have erupted by $100 billion or 6%.
In sum, the so-called recovery is not on the verge of lift-off, as the Fed and its Wall Street touts proclaim, but is perched precariously on borrowed time. It will require only one unexpected shock to confidence in the C-suites before today’s massive accumulation of inventories triggers a panicked liquidation sale, thereby knocking the props out from the Fed’s entire recovery narrative.
The S&P 500 closed today exactly where it first crossed 450 days ago. It is heading for a re-test of the Bullard Rip low at 1862. If it plunges below that mark the robo machines will rage—this time in cliff diving fashion because its now evident that Keynesian central banking has failed and the money printers are hopelessly lost.
[14]
^SPX [15] data by YCharts [16]
That’s what yesterday’s Bullard Rip was all about - it amounted to the bell at the top. In time it will become evident that the market is unable to break-out of the bubble finance channel it has established between 2075 and 2125 over the past year.
When December comes around and the Fed has to explain the growing signs of global and domestic recession, the robo-machines will have grown themselves an altogether new set of programs. Namely, an algorithm that says any day the Eccles Building is open for business is a good day to sell.
