Powell Ain't Yellen - Did The Fed Want This Correction?

Authored by Sven Henrich via NorthmanTrader.com,

When police try to solve a crime one of the key tasks is to determine who benefits from the crime. The beneficiary of a crime is not necessarily the perpetrator, but motive goes a long way to narrow the circle of potential suspects.

Who benefited from this sudden aggressive sell-off aside from anyone who was positioned short?

Certainly not hedge funds that capitulated long in January with their highest long exposure in 3 years literally right before the sell-off.

And certainly not retail that went full balls long on the aura of optimism:

This trend continued right into February 1 following the FOMO train. Remember Ray Dalio?

Now this:

Panic selling with record outflows. In record time no less:

From greed to panic in less than 2 weeks.

People got hammered big time as price gave back months of gains in a matter of days:

That’s a lot of trapped supply and will present a challenge for future rallies.

So benefits from all this? One man. One man in particular:

Jerome Powell.

From his vantage point the timing of all this has to be perfect. Absolutely perfect. And from Yellen’s position it’s perfect too actually. But it is Powell I want to hone in on in particular.

Suppose for a moment you have been nominated Fed chair. And suppose you have been part of a Fed that has been extremely dovish for years always eager to sooth markets whenever there was trouble around the corner. Case in point: Yellen retracted her rate hike schedule right at the point of the 2016 lows as we all remember. Financials bottomed on the same day:

After that it was “uncertainty” each time markets wobbled and despite tax cuts and supposed ‘global synchronized growth’ the Fed couldn’t bring it self to raise rates aggressively. Always cautious. Always tinkering.

Then came tax cuts and markets went wild.

Suppose you are that new incoming Fed chair and you see markets go wild on a policy that the Federal reserve sees contributing little to economic growth. Indeed you watch markets go into full parabolic bubble mode:

Do you want to be the sucker that owns this? Do you want to be the Fed chair associated with markets crashing under your watch? Let me suppose that no, you don’t.

So you have a very small window for the air to come out before you get blamed. How about precisely the day after you get started in your job?

It’s perfect timing from a narrative perspective. It didn’t happen under Yellen’s watch and it happened too soon under Powell’s watch to blame him.

I’m not saying the Fed is the perpetrator, but the timing couldn’t have been any better for Jerome Powell.

What symbolized the bubble? Record volatility compression and retail betting on ever lower volatility. So you tell me what the odds were that, after 6 years, $XIV suddenly imploded precisely right after Powell took over?

But it gets better. Uncertainty? Not a word. Halting rate hikes? Not a word. In fact, the opposite. The Fed’s messaging has suddenly changed.

Not only are Fed speakers coming out reinforcing the rate hike schedule, they are calling the correction small potatoes and they are almost literally saying the correction is great:

So they know there were excesses and imbalances in the markets. That’s motive folks.

Look, if you need ammunition to deal with a future recession and you are worried about a bubble blowing up (which would impact the economy negatively) you best take control of it and manage a soft landing otherwise you chase the fall-out.

I can’t suggest that the Fed engineered this crash because I have no evidence, and without evidence it would be silly to suggest so, but what I can say is that they certainly had the motive and the timing was perfect. Precisely when it needed to happen.

Now you can decide for yourself of course and perhaps it is all coincidental, but I’m putting it out there as a possibility.

But, based on their communications in the past 24 hours, the script has changed. Powell ain’t Yellen. No dovish signals on the first sign of trouble.

Now, if this theory, and that’s all it is, has any validity then this sell-off will end soon. After all the Fed doesn’t want any real damage and they don’t view the current correction as damaging to the economy. Kaplan already signaled this yesterday.

But if the goal was to let a bit of air out of the bubble without impacting the economy, then a low between today and the next few days would’ve accomplished this mission.

Of course if the Fed is just watching this and is hoping for the best then perhaps those scary $DJIA charts will come to fruition soon rather than later 🙂

Comments

TeethVillage88s DinduNuffin Sat, 02/10/2018 - 16:22 Permalink

Did we see the Secret Plunge Protection Team in action Friday (PPT)?
- They are in Chicago, right?
- Proprietary Trading Desk for Financial Stability Board?

I missed it. Where is the PPT Federal Supervisors & Link?

www.fsb.org
https://en.wikipedia.org/wiki/Financial_Stability_Board (Jim Rickards references)
https://www.federalreserve.gov/aboutthefed/files/pf_4.pdf
https://www.federalreserve.gov/econres/bsrstaff.htm
https://en.wikipedia.org/wiki/Black_Monday_(1987)
"After Black Monday, regulators overhauled trade-clearing protocols to bring uniformity to all prominent market products. They also developed new rules, known as "trading curbs" or colloquially as circuit breakers, allowing exchanges to temporarily halt trading in instances of exceptionally large price declines in some indexes; for instance, the DJIA.[15]"
https://en.wikipedia.org/wiki/Trading_curb
" trading halt occurs in the U.S. when a stock exchange stops trading on a specific security for a certain time period."
https://en.wikipedia.org/wiki/Financial_Stability_Oversight_Council (Don't think this is the oversight of Federal Reserve Market Stability Board)

In reply to by DinduNuffin

Quantify Sat, 02/10/2018 - 14:05 Permalink

How can a market be overvalued. Does not the buyer(s) mark the value of any item for sale though its demand.

Unless of course there are outside entities creating a false demand. 

Thebighouse Quantify Sat, 02/10/2018 - 14:33 Permalink

False demand.... like central bankers supporting massive debt increases with negative rates and buying any failing junk? 

And then taking their printing presses into the stock markets......

Understand this ...if one share of Apple goes down a single dollar...it takes the market cap down billions....poof....like Corzine...

Unlike bonds (which prior to obummer had first right to assets in a bankruptcy...remember GM?) stocks and market cap is ephemeral.   

A company may be "worth" 100 dollars a share, but it may sell for 20 or 2000....think tesla.....

So.........false demand......does the Bank of Japan care if its investment in US stocks tanks?????    You do, but does the Bank of Japan or ECB care if they "take a hit"????

In reply to by Quantify

Endgame Napoleon Never One Roach Sat, 02/10/2018 - 15:38 Permalink

When interest rates are higher, it is easier for ordinary people to save money, or so they said, back in the day when full-time jobs had wages high enough to cover rent.

The citizens who lacked spousal income or welfare / tax-welfare for reproduction did not have to spend more than half of monthly, earned-only income just on rent, leaving nothing left over for other necessities, much less for saving.

Due to our pay-for-sex-and-reproduction Swampers and their recent tax plan, if interest rates keep rising, womb-productive citizens, legal and illegal immigrants will have the option to make some interest on their now-doubled, refundable child tax credits that used to top out at $6,444. Rather than  financing $800 tattoos, electronics for all the kids or beach trips to copulate with boyfriends, they could earn 5% on that $6,444 x 2. 

Beleaguered, cash-strapped parents who...just....cannot afford daycare will refrain from getting a new SUV at EITC-refundable-child-tax-credit-welfare time, but not due to saving the money, just due to the demise of zero-down financing. 

They will have the money to save, because in addition to paychecks boosted up far above those of single, childless colleagues who work longer hours, many parents will continue to be free of other major bills due to free EBT food, free or reduced-cost rent, monthly cash assistance, electricity assistance and subsidized daycare in many cases despite all the moaning and groaning about this issue. 

They’ll keep working part time to stay below the earned-income limit for monthly welfare and the cut off for refundable child tax credits, working the system and milking it for mom-pampering $$$$ (I mean for baby). Don’t bet on a higher savings rate from the womb-productive citizens with the cash.

 

In reply to by Never One Roach

buzzsaw99 Sat, 02/10/2018 - 14:13 Permalink

Who benefited from this sudden aggressive sell-off...?

the sellers/owners of vix, duh.

Who could it be?  [/Church Lady, SNL  ]

you need protection, FROM ME!  [/Luigi Pappalardo, aka, the fed,  Deathrow Gameshow ]

...it happened too soon under Powell’s watch to blame him.

I just sharpened my pencil!  [/Arlo Pear, Moving ]

francis scott … Sat, 02/10/2018 - 14:17 Permalink

Every fool knows that the market needed a correction

 

Desperately.

 

The CROOKS gave it to us at the vry beginning of Powel's

term so that when the CROOKS decide to fix it, the world

will be down on it's knees kissing Powell's dusty shoes.

 

Endgame Napoleon wisehiney Sat, 02/10/2018 - 15:47 Permalink

Do the Fedsters sit around a big teak table, beneath shadowbox frames with historical gold coins and matted fiat, wireframing the spacial relations between all of these investors? Are they like programmers, figuring out if this financial input will result in that financial output? Can the Fedsters debug their code when they leave out a number, a symbol or a space? 

In reply to by wisehiney

Dr. Engali Sat, 02/10/2018 - 14:51 Permalink

“I can’t suggest that the Fed engineered this crash because I have no evidence,”

 

 

For Pete’s sake, the fedengineered every other bubble since their founding, why do you think this one is any different?

Conax Sat, 02/10/2018 - 16:13 Permalink

"People got hammered big time as price gave back months of gains in a matter of days"

Aww, cry me a river.  Go watch the silver action anytime.

Now that's ugly.

mily Sat, 02/10/2018 - 16:54 Permalink

Take a look at S&P E-mini COT report and you will see dealers had been accumulating shorts for long time and at the end of jan they were net short circa 888k freaking contracts, I say one or two more attempts to make higher highs, probably top at 1.618 extension ~3047 and "game over man", give it few more months max 1 year.

Something scary has yet to happen, something to remind gamblers about counterparty risk i.e. Bear Sterns/LCTM 2.0, maybe we will see some skeletons falling from the closet claimed by vol incident last week, who knows.... Trillions of $$$ and 12% correction kills the biggest bull market of the century? Feb 2007, July 2007 and then finally top in Oct 2007, let the dust settle and Cramer will be Bullshitting retail bagholders on CNBC 24/7  

GRDguy Sat, 02/10/2018 - 17:00 Permalink

They let the sheep grow their wool, until it's the time of their choosing to shear them.  The sheep never learn, because they can't learn history.

USofAzzDownWeGo Sat, 02/10/2018 - 17:02 Permalink

It's real simple.... they won't chew the jew but they'll destroy the goy.....

 

The chairman is just as much a puppet as the us prez. The people calling the shots, you'll never know or hear of their existence.