Guest Post by Doug Noland
Yellen comforts New York – and the Bulls.
“Fundamental to modern thinking on central banking is the idea that monetary policy is more effective when the public better understands and anticipates how the central bank will respond to evolving economic conditions. Specifically, it is important for the central bank to make clear how it will adjust its policy stance in response to unforeseen economic developments in a manner that reduces or blunts potentially harmful consequences. If the public understands and expects policymakers to behave in this systematically stabilizing manner, it will tend to respond less to such developments. Monetary policy will thus have an ‘automatic stabilizer’ effect that operates through private-sector expectations. It is important to note that tying the response of policy to the economy necessarily makes the future course of the federal funds rate uncertain. But by responding to changing circumstances, policy can be most effective at reducing uncertainty about the course of inflation and employment. Recall how this worked during the couple of decades before the crisis–a period sometimes known as the Great Moderation. The FOMC’s main policy tool, the federal funds rate, was well above zero, leaving ample scope to respond to the modest shocks that buffeted the economy during that period. Many studies confirmed that the appropriate response of policy to those shocks could be described with a fair degree of accuracy by a simple rule linking the federal funds rate to the shortfall or excess of employment and inflation relative to their desired values.” Janet Yellen, April 16, 2014
So is whatever spooked Dennis Gartman on Friday behind us now? The dovish Fed story is getting played today. It’s the ‘beat the crap out of ‘em and then wash-rinse-repeat’ market. Longs, shorts, everybody into the spin cycle. All because this market is still 100% enthralled with these clowns and that makes it difficult to manage.
SPX held support (60 min. view below), Semiconductors never lost the uptrend and now the Fed comes with some dovish love making for the market. A bounce at the least was in the bag.
But the SPX did hold at support as everyone should have noted and so people who missed the downside kick off should not have been shorting it above support. Only on a breakdown should the market be shorted; a breakdown followed by shortable bounces.
Guest Post by James Howard Kunstler
Guess what? There is none. Rather, the Federal Reserve practice of Delphically divulging its intentions ought to be understood as the master pretense of US economic life — the delusion that wise persons are actually in control of anything. The result of this guidance continues to be the mis-pricing of everything, especially the cost of money as represented in the operations of debt, and hence the value of everything denominated in money.
Guest Post by Doug Noland
Equity market internals have turned increasingly unsettled.
In last Wednesday’s press conference, Janet Yellen upset the markets with her comment suggesting that the Fed might commence rate adjustments as early as six months after it concludes its latest QE program. Several officials have since tried to reassure market participants that the Fed has not moved forward its plans to raise rates. Even hawkish Fed officials went to pains to communicate that rate moves were not in the immediate offing.
Yesterday Michael Ashton’s views were posted. Today, thanks to an NFTRH subscriber’s heads up we note Vince Foster at Minnyanville. These guys are what I consider expert interest rate watchers.
We do not have permission to directly publish so the material is linked instead.
MarketWatch has a nice article clearly laying out the ways that Grandma’s savings are compromised by monetary policy designed to bail out borrowers and reward speculators at the expense of people just trying to live by the old rules.
How the Fed is hurting seniors
Let’s be honest and call ZIRP what it is; an immoral manifestation of modern finance that rewards banks, inside players and speculators that jump on board for the ride. This is why I have to laugh (or cry) every time some bull wise guy tries to legitimize the bullish atmosphere as being something normal or moral.
It is not. It was created by decree of man to the enrichment of some and the detriment of many. Other than that I have no strong opinions on the matter.
The HUI Gold Bugs index got Ukrained to the extent that global crisis hype seeped into this market leading into the weekend. The S&P 500 got Ukrained the other way as people actually acted as if the Crimea question is a macro fundamental.
I think after today the books are square on Ukraine but not yet the FOMC meeting, which will provide another hype opportunity. Will they or won’t they ruminate about an eventual hike to the anti-Grandma Fed Funds rate, AKA ZIRP?
Guest Post by Doug Noland
Developments in China and the Ukraine weren’t enough to restrain the exuberant bulls.
For someone deeply engaged in monetary theory and policy, Thursday was special. While CNBC was carrying Janet Yellen’s testimony before the Senate Banking Committee, there was also a live feed available for a panel discussion on monetary policy at the Bundesbank Symposium on Financial Stability. The two discussions were separated by much more than the Atlantic.
Guest Post by Tom McClellan
February 21, 2014
One of the really fun leading indication relationships involves the yield curve, the spread between interest rates on similar securities across different maturities. The real yield curve has too many data points each day for visual modeling, and so a simplistic model of the yield curve can suffice to make for easier modeling. In this week’s chart, the role of the entire yield curve is portrayed by the spread between the 10-year T-Note yield and the 3-month T-Bill yield.