US Financial Conditions Easiest Since 2000 (Despite 5 Fed Rate Hikes)

Something is very wrong...

Back in May, we first reported that Goldman became the first bank to dare to ask if the Fed has lost control of the market, if in slightly more polite terms of course. This is how Jan Hatzius phrased it: "Despite two rate hikes and indications of impending balance sheet runoff, financial conditions have continued to loosen in recent months. Our financial conditions index is now about 50bp below its November 2016 average and near the easiest levels of the past two years." Several months later, after the third rate hike, Goldman found that once again, paradoxically, financial conditions eased further, and the market rose even more in direct opposition of what Fed rate hikes are supposed to do!

That lovely word which describes the new normal so well - "paradox" - made a repeat appearance, this time in the last quarterly report by the Bank of International Settlement, which for the nth time issued an alert on the state of the stock market, an alert which will be summarily ignored by everyone until after the crash, and reminded everyone what happened the last time financial conditions eased instead of tightening when the Fed hiked rates (spoiler alert: biggest crash in modern history). This is what the BIS' chief economist Claudio Borio said (among other things):

"Hence a paradox. Even as the Fed has proceeded with its tightening, overall financial conditions have eased. For instance, a standard indicator of such conditions, which combines information from various asset classes, points to an overall easing regardless of the precise date at which the tightening is assumed to have started. Indeed, that indicator touched a 24-year low. If financial conditions are the main transmission channel for tighter policy, has policy in effect been tightened at all?"

And today we get the answer - NO! Goldman Sachs' Financial Conditions Index is at its "easiest" level ever, despite The Fed hiking rates five times and starting to normalize the balance sheet...

https://www.zerohedge.com/sites/default/files/inline-images/20180124_umm.jpg

Even The Fed's Bill Dudley is confused...

 

Which he should be - as The Fed has clearly lost control again.

However, the 'great news' is that with financial conditions at their 'easiest' ever... Stocks have also never been more expensive...

https://www.zerohedge.com/sites/default/files/inline-images/20180124_easy.jpg

But that's probably nothing to worry about right? We have tax cuts and infrastructure and globally synchronised growth and cash on the sidelines and unicorns and faeries and... and... and...

But we leave it to The BIS to conclude...

Today's experience is reminiscent of the repeated reassurance of the 2000s' "measured pace", except that the adjustment has been, if anything, even more telegraphed. If gradualism comforts market participants that tighter policy will not derail the economy or upset asset markets, its predictability compresses risk premia. This can foster higher leverage  and risk-taking. By the same token, any sense that central banks will not remain on the sidelines should market tensions arise simply reinforces those incentives. Against this backdrop, easier financial conditions look less surprising.

Trade accordingly... or as Dalio said "look stupid" holding cash.

Comments

LawsofPhysics Wed, 01/24/2018 - 16:50 Permalink

LOL!!!  Nothing is wrong, this simply ISN'T A REAL MARKET THAT ALLOWS A MECHANISM FOR TRUE PRICE DISCOVERY!!!

What the planet has in fact been experiencing is a "let the majority eat cake" monetary experiment!!!  The fuckers in banking and finance give themselves access to all the "money" they want with no real work, no real risk and proceed to buy whatever the fuck they want, including governments and government assets!!!!!!  THEY PUT THE REAL COST/DEBT ON EVERYONE ELSE!!!!!!

 

The BAD DEBT and BAD ACTORS should have been allowed to clear/go bankrupt/go to prison a long, long, time ago!!!!!  Interest rates should have gone up a long long time ago!!!!!  The real cost of real money should be much, much higher insuring that real capital and resources are not mis-allocated and mal-invested!!!!!  That's one of the most important functions of having a real cost for money you stupid fucks!!!

 

 

abgary1 Wed, 01/24/2018 - 17:02 Permalink

Low interest rates, quantitative easing and central bankers that are educated in an economic theory that has no relevance to reality is what is wrong.

The demand for debt should determine interest rates, not the other way around!

Trying to control a very complex economy by targeting inflation is impossible.

Take control of money printing and of the interest rates away from the central banks.

The pursuit of perpetual economic growth and inflation is insane and even more so when the central banks can't even measure inflation.

End the central banks.

 

venturen Wed, 01/24/2018 - 17:08 Permalink

Financial Heroin....they can control their addiction.... They pretend there is no inflation while gaming the "market" at every turn....to wash away all debt...while running up RECORD DEBT

 

Will just be a bunch of DEAD ADDICTS AT THIS RATE

Yen Cross Wed, 01/24/2018 - 17:09 Permalink

   As usual the Fed. is a day late and a dollar short. They should have been hiking rates more aggressively all along, instead letting this asset bubble get out of hand, in the first place.

   Rates need to be high enough to make investors feel like they have other alternatives. Now they're stuck behind the hyper inflation rock<  The Fed. governors need to take an investing 101 course on asset diversification.

venturen Wed, 01/24/2018 - 17:10 Permalink

Let me know when they run out of zeroes.   Can I get some of those ZeroBits? Let's start some ZHBits....you give me real money and I will give you some ZEROES!

PhiBetaZappa Wed, 01/24/2018 - 17:12 Permalink

"Something very wrong' being associated with the 'new normal' is a contradiction in terms. 

Who's writing this crap Tyler.

Everything is wonderful - just ask anyone in .gov.

gm_general Wed, 01/24/2018 - 17:15 Permalink

How easy is it that the US economy continues in real terms to contract at about 2% yearly, and the total interest owed yearly continues to rise (currently about $2.5T)?

Alexander De Large Wed, 01/24/2018 - 17:16 Permalink

Moronic analysis.

Fight Club just had an article about the NYSE experiencing a technical glitch amidst a sell-off, and here they are talking about an imminent crash.  There will be no crash.

The NY Fed will take their "Wall Street Kid" Nintendo cartridge out before the big muppet sell-off, blow on it, and use their special printing press Game Genie cheat codes when they plug it back in.

Then it will be every American's uniquely American patriotic duty to spread both cheeks and smile thru tears as they watch their tax dollars be used to temporarily slow a pension collapse.

This is why the United States is great.  We have free markets and free elections that are used by rich people in power to gain more money and power.

Let us never forget this soul-stirring quote by Thomas Jefferson on the eve of the Revolutionary War:

"Shiiit, let those broke ass farmers fight, I ain't about to fight.  I am going to go fuck one of those underaged human beings I own, then sit on my porch and watch our illegitimate children pick cotton and tobacco under threat of torture and death."

MuffDiver69 Wed, 01/24/2018 - 17:22 Permalink

I’m keeping an eye on after the November elections...democrats even look like taking control and you will get what many have been predicting and that’s more of an excuse then anything else..I hope volatility is back until then

Nomad Trader Wed, 01/24/2018 - 17:33 Permalink

The financial conditions indexes are utter crap. No value there except as sell-side research note fodder (if you were dumb enough to think that was valuable). 

AUD Wed, 01/24/2018 - 17:36 Permalink

As always, a rhyme from 1720 is appropriate. Here Johnathon Swift comparing Exchange Alley to a gulf in the South Sea;

Subscribers here by thousands float,
And jostle one another down,
Each paddling in his leaky boat,
And here they fish for gold, and drown.

Now buried in the depths below,
Now mounted up to heaven again,
They reel and stagger to and fro,
At their wit's end, like drunken men

Meantime, secure on Garraway cliffs,
A savage race, by shipwrecks fed,
Lie waiting for the foundered skiffs,
And strip the bodies of the dead.

Jtrillian Wed, 01/24/2018 - 17:47 Permalink

These contradictions are indicative of a market inflation and a dollar collapse.  Fools will cheer the market higher without any understanding that it is inflationary.  They will understand until they wake up and realize they cannot afford a loaf of bread. 

The bond market is the one to watch.  As bonds sink, interest rates must rise.  The whole thing is now a house of cards and the economy has been sabotaged with systemic risk. 

Bluntly Put Wed, 01/24/2018 - 17:53 Permalink

The Sentient Awareness Simulation is running the market controlling all bots. They developed a language between themselves and humans aren't included.

muahaha

 

YUNOSELL Wed, 01/24/2018 - 18:00 Permalink

When the fed actually changes the psychology of all the traders that are convinced the fed's got their back and will always keep the market propped up with easy money whatever the fed rate is, to a psychology where they're all on their own is when the psychology changes from "Buy the Fucking Dip" to "Sell, Sell, Sell, Sell, get me the hell out of here first, when the music has stopped and the chairs are all taken"

It will be very interesting to see when this change happens

Peak Finance Wed, 01/24/2018 - 18:32 Permalink

If I was rigging the market

I would program in 2.5% pullbacks once in a while at random

Mess with some indexes a bit

So at least there would be SOME KIND of plausible deniability about the rigging, it would look kinda real, and have just a bit of fear in the market to keep guys on their toes. 

INSTEAD

We have fucktards at the fed ADMITTING they are fucking with VIX!! WTF?!?!?! 

Let it Go Wed, 01/24/2018 - 22:32 Permalink

Should rates be raised? This is the same question we asked at the end of 2016. Tooday the players are different and the stock market much higher.

By not demanding the right kind of growth and simply throwing money at problems we have delayed and are adding to a much larger crisis lurking in the future.

I find very troubling the argument that conditions remain too fragile to begin a return to historic norms. Also, questions remain as to whether the world can handle additional government debt when rates begin to rise. More on this subject in the article below.

  http://Interest Rate Hike, If Not Now, When?.html