While we’re on the subject of Mr. Bullard, the opening segment from this week’s NFTRH (#335) had a little fun with the Fed. Serious multi-market and economic analysis came later, but sometimes you just need to shake your head in awe and wonder.
The Fed is important because millions of market participants believe it is important and a critical mass of people are under the illusion that its policies have put the “Great Recession” in the past and laid a path for a sustainably good economy going forward. In short, confidence in the Fed has never been more pervasive as it reaps the reward (the respect and confidence of the majority) for a job well done.
Never mind for now that previous Fed policy is what fomented the “Great Recession” (i.e. a near liquidation of the system) and the supposed remedy has been similar but more intensive policy using official credit as opposed to commercial credit as the stimulant.
Through this cycle I have watched Gold Bugs that used to rail against “Helicopter Ben” fade to black, the Bond Vigilantes who would short the long bond (including one over exposed Vigilante, formerly of PIMCO) get their hats handed to them and the general backdrop of distrust and revilement toward the Fed simply get erased somehow.
It’s as if a majority of market participants are little more than black boxes with certain coding for certain cycles. Today the code might look something like this…
<caption>Sit quietly and we will control all that you see and hear</caption>
Continue reading Peak Fed
Bullard (on dropping “patient” from the wording): “We’ll be able to make a move, but we don’t have to make a move.”
“I think there was some dovishness because those dots all moved down and… one of the things about those dots is, ahem, for, for me for instance, I had a, a [*] liftoff in March; so it was the March meeting and we weren’t lifting off so I couldn’t say March anymore and we already swore off April so I had to say June.
So that moved my whole path down and according to my model that was the best we could do given where we were so I said okay we’ll lift off in June and go on from there. Well, that moved my whole path down ah, you know, 50 basis points. So I’m not sure that I’ve become sort of more dovish, it’s just that the committee ah, didn’t move in March when I said, so I had to move my dots down. So I think there is some misinterpretation about what this dot movement really means.”
“So you think the market is confused when it comes to reading the dot path?”
Are you kidding me Jim ‘…err we can always come out with QE4…‘ Bullard?
What kind of oatmeal is this dribbling out of my favorite Hawk’s (or if you prefer, Bad Cop’s) mouth? Where’s Fisher? Let’s get him in here to lay down the law! Bullard’s letting the dots bully him.
 I almost forgot, Richard stepped down and now sits on the Pepsi board. I don’t have an opinion about whether Pepsi is better than Coke, but I do have the opinion that they have a sterner BoD.
* Sounds to me like he’s reading a script stored in his frontal lobe, with the ahems, ah ah’s and a, a’s a pause to access the memory banks.
By Steve Saville
Tightening without tightening (or why the Fed pays interest on bank reserves)
When the Fed gave itself the ability to pay interest on bank reserves, it gave itself the ability to hike its targeted short-term interest rate (the Fed Funds rate) without tightening monetary conditions. In other words, it gave itself the ability to tighten monetary policy in the eyes of the world without actually tightening monetary policy. That’s one reason why it’s absurd that almost everyone involved in the financial markets is intensely focused on the timing of the Fed’s first 0.25% upward adjustment in the Funds Rate. It’s not only that a 0.25% increase is trivial, but also that, thanks to the payment of interest on bank reserves, it will almost certainly be implemented without making the monetary backdrop any less ‘accommodative’.
I’ve dealt with this topic a number of times at TSI, most recently last week. Here’s what I wrote last week under the heading “Why the Fed pays interest on bank reserves”:
Continue reading Tightening Without Tightening…
By Elliott Wave International
“Audit the Fed”? We’ve Already Done That (Well, Kind of)
Our conclusion: The Fed is not in control of the economy — here’s why
If there’s one thing the Federal Reserve Board of the United States is not known for, it’s assertive language. After all the obfuscation and verbal sidestepping, Fed speak is usually as easy to comprehend as Marlon Brando’s Godfather character Don “Mumbles” Corleone.
But on February 24, Fed chairwoman Janet Yellen was 100% candid in expressing her disapproval of the controversial bill known as “Audit the Fed” — legislation that would open the central bank up to full government regulation and scrutiny:
“I want to be completely clear.
I strongly oppose ‘Audit the Fed'”
No – Confusion – There!
But, whatever side of the bill you stand on — nay or yay — for us, the prospect of pulling back the curtain on the most elusive quasi-government body seemingly besides the C.I.A. is irrelevant. Because we at Elliott Wave International have long since conducted our own “audit” of the Fed — and the results are like nothing you’ve ever heard before from the mainstream pundits.
The purpose of our “audit” was simple: Determine, once and for all, if the most powerful monetary institution on the planet does, in fact, have the power to control the U.S. economy or marketplace.
Continue reading Audit the Fed?
By Michael Ashton
What a shock! The Federal Reserve as currently constituted is dovish!
It has really amazed me in recent months to see the great confidence exuded by Wall Street economists who were predicting the Fed will begin tightening by mid-year. While a tightening of policy is desperately needed – and indeed, an actual tightening of policy rather than a rate-hike, which would do many bad things but not much good – I was surprised to see economists buying the line being put out by Fed speakers on this (and I took issue with it, just last week).
Yes, the Fed would like us to believe that they stand sentinel over the possibility of overstaying their welcome. Their speeches endeavor to give this impression. But it is easy to say such a thing, and to believe that it should be said, and a different thing altogether to actually do it. Given that the Fed’s “preferred” inflation measure is foundering; market-based measures of inflation expectations were in steady decline until mid-January; the dollar is very strong and global economic growth quite weak; and other central banks uniformly loose, in my view it seemed that it would have required a historically hawkish Federal Reserve to stay the course on a mid-year hiking of rates. Something on the order of a Volcker Fed.
Which this ain’t.
Continue reading The Answer is No
By Michael Ashton
Retail Sales figures today were weak. Retail Sales ex-Auto and Gas (I usually just look ex-auto, but then they look really, really bad because of how far gasoline has moved) just recorded the two worst numbers (0.0% and 0.2%) in a year.
Retail sales are volatile, so one shouldn’t get too exercised by a couple of weak figures. Except for the fact that we also know that overseas sales are going to be suffering, thanks to the strength of the dollar. The disinflationary tendency imparted by a strengthening dollar is mild, and takes some time to be evident in the figures. However, the effect on overseas sales tends to be more rapid, and the effect on earnings more or less instantaneous (because earnings need to be translated back into the reporting currency).
So it isn’t just the weakness in retail sales that should give an investor pause here. It is difficult to sell stocks in an environment of abundant liquidity, but perhaps this chart (Source: www.Yardeni.com) is one reason to do so.
Continue reading Downside for Stocks, but Also for Fed Expectations
Mark Hulbert has a piece this morning at MarketWatch in which he de-correlates the first Fed interest rate hike from any supposedly corresponding stock market movements. I agree with some but not all of what he writes. Let’s take it a chunk at a time.
Investors, it doesn’t matter when the Fed raises rates
Are you obsessed with whether the Federal Reserve will begin to raise official interest rates in July, September or sometime next year?
No. I’ve wanted them to do it for years now. So I’m obsessed with why the Fed refused to raise rates, despite a strong economy and inflation signals that were not nearly so tilted toward the dis-inflationary end of the spectrum as they are now. I am obsessed with wanting to know why the mainstream media and financial establishment even take their oh so heavily anticipated policy decisions each month seriously. I am obsessed with the all too obvious underlying message that this is all about a stock market ‘wealth effect’ that eventually trickles a little stream down Main Street, with Grandma and other prudent savers thrown in the gutter.
A review of historical data fails to find significant statistical support for believing that higher rates are in themselves bad for the stock market. And even if they were, the difference of a few months in the timing of increases makes little difference when determining if equities are expensive or cheap.
I concede that both of those beliefs are far from conventional wisdom on Wall Street. But the job of the contrarian is to challenge norms.
Agree. But I am not sure why Mark is using the 10-yr yield in his article. With the Fed at work on all parts of the curve, the whole thing is corrupted and not subject to extrapolation of historical data anyway. But insofar as it would be, why not use the Fed Funds rate or the 3 Month T Bill? This chart from NFTRH has clearly shown that rate hikes did not matter to the stock market for extended periods on the last 2 cycles… until of course, they suddenly mattered… big time.
Continue reading Hulbert on Rate Hikes & Stock Market; a Response
Guest Post by Michael Ashton
Ten-year nominal rates continue to drift back towards the 2012 lows; the 10y Treasury yields only about 1.75% now. But 2015 is so very different than 2012 in terms of the cause of those low rates.
Nominal bonds are like the packaged sandwich you pick up at a gas station: no special orders. You get the meats in the proportions they were put on the sandwich; in the case of nominal bonds you get real yields plus inflation expectations and the nominal yield moves the same amount whether the cause is a change in real yields or a change in inflation expectations. If you buy nominal bonds because you think the economy is growing weak, and you’re right but at the same time inflation expectations rise, then you’re out of luck. You get what’s in the package.
If you look beyond the packaging, to what is making up that 10-year yield sandwich, then the difference between 2015 and 2012 is stark. When 10-year nominal yields were at 1.50% back in 2012, 10-year real yields were at -0.90% and 10-year inflation expectations were around 2.40%. The bond market was pricing in egregiously weak real growth for the next decade, coupled with fairly reasonable inflation expectations. TIPS were clearly expensive at the time, although I argued that they were less expensive than nominal bonds. (In fact, I may have said that they were expensive to everything except nominal bonds).
Today, on the other hand, nominal yields are low for a different reason. TIPS yields, while low, are positive (10-year real yields are 0.13% as I write this) but inflation expectations are very low. So, in contrast to the circumstance in 2012, we see TIPS as very cheap, rather than rich.
One way to look at this difference in circumstance is to study how the proportions of meats in the sandwich have changed over time. The chart below (source: Enduring Investments) shows the percentage of the nominal yield that is made up of real yields. The percentage which is made up of inflation expectations is approximately 100% minus this number, so one chart suffices. Back in “normal times,” real yields tended to make up 40-50% of nominal yields.
Continue reading Pre-Packaged Baloney