Yesterday we got the latest confirmation of what the Fed will never openly admit and which everyone knows. Or rather, the Fed would never openly admit previously, namely that all it cares about are stock prices, or as we first dubbed it here a year ago, the Fed is "Dow Data Dependent." The admission came courtesy of Bill Dudley who during an interview yesterday said:
- DUDLEY: FED RATE PATH WILL BE SHAPED PARTLY BY MKT REACTION
In other words, the Fed's actions will be shaped by the market, which in turn is shaped by the Fed. Or, as anyone who has used Excel will observe (apparently not the former Goldmanite head of the New York Fed), a circular reference (and one which #Ref!s out whenever there is selling and exchanges have to be closed).
That in itself was bad enough, but things got substantially more laughable when the big banks were forced to defend his words in the context of the Fed's dual mandate, because - well - simply there is no defense that doesn't point out the obvious: the Fed could care less about jobs or inflation and all it does care about is the Dow Jones.
Enter Bank of America, with what may be the peak farce not of the so-called recovery, and the following sentence in particular.
While Dudley clearly does not want stocks to decline a lot, he also wants to avoid meaningful increases... Also very apparent is that Dudley wants bond prices to go down – not a lot but clearly down.
And there it is, central planning courtesy of the US central bank, writ large. The USSR is spinning, and laughing, in its grace not only because it knows how such "planning" ends, but because it is truly ironic that decades after winning the (first) Cold War against Russia, the US has succumbed to the same methods that ultimately destroyed the "evil empire."
So to add some humor to the farce, here is the full note from BofA's Hans "Great Rotation any minute now" Mikkelsen:
While the Minutes of the March 17-18 FOMC meeting were fairly neutral relative to market expectations judged by the lack of market reaction, the more market relevant commentary from the Fed continues to originate from New York Fed President Dudley. Instead of focusing on the precise date for liftoff Dudley continues to address his views on the much more important question of the path for rate hikes after liftoff. And rather than the specific path he emphasizes its dependency on financial market conditions. At today’s Reuters Newsmaker interview in New York Dudley said, among other things, the quotes we highlight below. These comments are consistent with his speech this Monday (see: Data relief+more ZIRP=Good news). In fact Dudley detailed his views four months ago in a December 1, 2014 speech at Baruch College.
While Dudley clearly does not want stocks to decline a lot, he also wants to avoid meaningful increases. In other words, for the coming rate hiking cycle he wants a “Yellen Collar”, not a “Yellen Put”1 While prior to the financial crisis it was a Fed put, given the policy mistake represented by the 2004 rate hiking cycle – where financial market conditions did not tighten, in fact they loosened significantly contributing to the housing bubble and the financial crisis – Dudley now argues for a Fed Collar. Also very apparent is that Dudley wants bond prices to go down – not a lot but clearly down. Should the Fed start hiking rates this summer/fall - which we expect – and if Dudley’s thoughts are shared more broadly by the FOMC it would appear that we should prepare for this year not being a good one for total returns. We maintain a 0% total return forecast for high grade in 2015. “How we react after liftoff is going to depend in part on the market reaction we get.”
- “Lifting off is designed to slightly tighten financial market conditions.”
- “If financial conditions tighten a lot – bond yields go up a lot, stock prices go down a lot, credit spreads widen, then presumably we are going to slow down or even pause for a while.”
- “Conversely if the market doesn’t react at all - stock market goes up, bond market doesn’t move, then presumably we are going to want to do more.”
In other words, the Fed is there to backstop habitual gamblers and 1 year old E-Trade babies every step of the way, just don't everyone go buying everything at the same time, or Bill Dudley will be angry. Of course, this kind of "strategy" works never, as can be seen by the virtually straight line rise in the S&P since 2009, or most recently, by the 10% surge in Hong Kong stocks in just the past two days.
As for how this all ends, just ask one man who has seen it all: Julian Robertson, who earlier this week said:
I think [the Fed is] not crazy enough just to let this thing boil over into complete explosion. I am looking at a bubble that is almost sure to pop at some time and I don't know when it's going to happen, but I know it's going to happen. The bigger this bubble gets, the bigger the burst. I don't think it's at all ridiculous to think of a selloff like we saw in 2008."
Unfortunately, Julian, the Fed is crazy enough, and as shoudl be obvious by now, the Fed has no choice but to let it all boil over into a "complete explosion." Because as Dudley proves beyond a doubt, the Fed is now too terrified to try anything else, period.