Fed Doves Take Flight…


A ‘wild card’ segment has been added to NFTRH reports because I wanted the freedom to go out of bounds in any direction, beyond our usual areas of disciplined coverage. Last week it was a look at the Semiconductor sector.

This week it is Fed policy with a side trip down memory lane, trying once again to illustrate why today is not at all like the ZIRP era and why the post-2015 re-connect between the Fed Funds rate and the stock market does not bode well for stocks, assuming the Fed really is going soft.

Excerpted from tomorrow’s edition of Notes From the Rabbit Hole, which will also include loads of actionable analysis along with the more theoretical stuff below…

Fed Doves Take Flight (But We Are Not in Kansas Anymore)

Wise guys trading Fed Funds futures see no more rate hikes in 2019, and a few even imagine a rate cut before year-end. Here are the projections for the next 3 meetings, showing an overwhelming view that the Fed will hold the current 225-250 target rate. Graphics: CME Group

Continue reading Fed Doves Take Flight…

This Isn’t the First ‘Fed Pause’

By Jeffrey Snider

And we come full circle back again. It’s not what they say, it’s what they do. Kansas City Fed CEO Esther George was at least consistent, unlike all the other voting FOMC members. Throughout 2015 and 2016, the rest of them would say the economy was strong but then vote the other way, no “rate hike.” December 2015 was the lone exception (and perfectly fitting).

President George, on the other hand, was almost irredeemably optimistic about the economy and voted that way, too. While the majority held steady, Esther was the one who would dissent against the then Fed Pause. The few times she didn’t was in early 2016 when the US economy approached recession conditions.

You knew it was serious when the hawkest of hawks stopped walking how she talked. In March 2015, George had said:

Continue reading This Isn’t the First ‘Fed Pause’

What’s Bad About the Fed Put…and Does Powell Have One?

By Michael Ashton

Have we re-set the “Fed put”?

The idea that the Fed is effectively underwriting the level of financial markets is one that originated with Greenspan and which has done enormous damage to markets since the notion first appeared in the late 1990s. Let’s review some history:

The original legislative mandate of the Fed (in 1913) was to “furnish an elastic currency,” and subsequent amendment (most notably in 1977) directed the Federal Open Market Committee to “maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.” By directing that the Federal Reserve focus on monetary and credit aggregates, Congress clearly put the operation of monetary policy a step removed from the unhealthy manipulation of market prices.

Continue reading What’s Bad About the Fed Put…and Does Powell Have One?

Treasury Repo Index Explodes And US Treasury Curve Kinks

By Anthony B. Sanders

U-3 Unemployment And The UST 10Y-2Y Slope

The first trading day of 2019 comes in with a … bang.

First, the US Treasury Repo index exploded.


And the US Treasury curve has developed a serious kink between the one year tenor and 3 year tenor. Better known as curve inversion.

Continue reading Treasury Repo Index Explodes And US Treasury Curve Kinks

Rising Rates Falling Assets, Report

By Keith Weiner

Last week, we wrote about the concept of discounting. This is how to assess the value of any asset that generates cash flow. You calculate a present value by discounting earnings for each future year. And the discount rate is the market interest rate. We said:

“If the Fed can manipulate the rate of interest, then it can manipulate the value of everything…

There is no other rate to use, other than the market rate. You don’t know the right rate any better than the people who centrally plan our economy. The problem is not that the wrong people are in the job. The problem is not even that they use the wrong magic formulas to determine what rate to set.”

The Fed cannot make a company more profitable, but it can reduce the discount rate so that market participants are willing to pay more for its shares. We noted that no one knows the right rate any better than the Fed. Thus, the only rate to use is the market rate. But we did not really make the case in favour of using the market rate.

Continue reading Rising Rates Falling Assets, Report

The Long Pause

By Charlie Bilello

The Federal Reserve hiked interest rates for the 9th time this month, bringing the Fed Funds Rate up to a range of 2.25% – 2.50%.

The move should have surprised no one, as the bond market was pricing it in for some time. Over the past 3 years, at every FOMC meeting where the market expected a Fed hike (9 meetings), they got one.

While many were critical of the move, a hike was necessary for the Fed to maintain its credibility. They had been signaling a December hike for months, and had they refrained many would have viewed it as a sign of weakness, bowing to political pressure from President Trump.

Continue reading The Long Pause

Thoughts on Liquidity

By Doug Noland

“Money” challenged – and often confounded – economic thinkers for centuries. It functions both as a “medium of exchange” and “unit of account.” Simple enough. Too often the focus has been how to use money to stimulate economic activity and achieve political gains. From my perspective, money’s importance rests with its fundamental roles as a “Store of Value” and as the bedrock of financial systems. Unsound money has been a root cause of a lot of turmoil throughout history – including the monetary fiasco that collapsed in 2008. Yet concerns for the soundness of contemporary “money” these days are viewed as hopelessly archaic.

My thinking on contemporary “money” has been adapted from a much earlier focus on money’s “preciousness.” Traditionally, money was precious either because it was made of or backed by gold/precious metals. It retained preciousness only so long as its quantity remained carefully contained. Throughout history, the value of “paper money” has invariably moved inversely to the quantity issued – fits and starts, enthusiasm and revulsion and, too often, a path to worthlessness.

Continue reading Thoughts on Liquidity

Jerome ‘Dead Eye’ Powell


One of the most disturbing scenes in the series Breaking Bad was when Todd shoots and kills a boy on a dirt bike after he witnessed Heisenberg, Jesse and Todd heist 900 gallons of methylamine. Jesse: “Todd, that Opie Dead Eyed piece of shit…”

That is similar to the feeling I got after the Fed hiked the funds rate as expected, but then declined to offer the stock market much relief for its ongoing temper tantrum.

What’s this? The Fed is not doing as the vast majority of market participants expect it to do? The Fed is not taking active measures to boost asset prices?

My theory has been that since the 2016 election the Fed has firmed its resolve to extricate itself from a dangerous situation; caught with its pants down as Trump/Republican fiscal (i.e. politically instigated) stimulus was going to be laid on top of already extreme monetary stimulus.

Continue reading Jerome ‘Dead Eye’ Powell

Breaking Bottom: S&P 500 Down 15% Since September As The Fed Grinch Speaks

By Anthony B. Sanders

SMART Money Flow Index Keeps Tanking

The S&P 500 Index extended its drop since September to almost 15 percent on Wednesday, barreling through its February intraday low and leaving the equity benchmark about 162 points from its first bear market in a decade. The chief culprit: Federal Reserve Chairman Jerome Powell’s indication that market volatility has done little to change the central bank’s rate path or to alter efforts to reduce its balance sheet.


The SMART Money Flow Index continues to fall as The Fed Grinch keeps talking.

Continue reading Breaking Bottom: S&P 500 Down 15% Since September As The Fed Grinch Speaks

Powell: Still Strong; Markets: AYFKM

By Jeffrey Snider

The official statement that accompanies each every FOMC policy action is by nature bland and sterile. Still, despite the sparseness of printed words those that are included can say a lot. Here’s its essence for what just wrapped up in December 2018:

The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term.

The statement used the word “strong” three times in the paragraph before, too. You can see just how much the unemployment rate grabs these empty suits in spite of so much else.

Markets reacted uniformly with AYFKM. What else can they say, and trade, at this point? Powell has trapped himself in Yellen’s prior position. If he’s not careful, he’ll smile his way past that all the way to Bernanke’s “contained.” Things are accelerating to the downside, not stabilizing.

Continue reading Powell: Still Strong; Markets: AYFKM

FOMC at Center Stage (NFTRH 530 excerpt)


Below are the Opening Notes and Bond Market segments from last Sunday’s edition of Notes From the Rabbit Hole, NFTRH 530. Jerome Powell was actually more firm than I expected. Atta boy Jay! Aside from my prognostication the more important stuff (IMO) begins at the 4th paragraph. That is where I put on my tin foil hat and tell what I think. It does seem to dovetail with what we saw today out of the Fed chief.

Opening Notes: FOMC at Center Stage

It is likely that the Fed is going to raise the Funds rate on Wednesday because this is a confidence game and a Fed suddenly showing weakness and doubt could exacerbate the market’s already frayed nerves. As a side note the 76% reading of CME futures traders expecting the hike to happen has not changed in the last few weeks.

But US and global authorities can read charts and as a person with some short positions I am well aware that they have people who can read charts as well. It’s not complicated; the market (SPX) needs to hold here or it could be an express (or possibly a slow moving) elevator to SPX 2100.

Continue reading FOMC at Center Stage (NFTRH 530 excerpt)

FOMC Preview: Desperate RHINO’s (Again)

By Jeffrey Snider

The FOMC had voted to taper the final purchasing levels of its third and fourth QE programs at the end of October 2014. Just two days later, the Bank of Japan’s policy committee would vote to expand theirs (already with the extra “Q”). The diverging outlooks punctuated a period of high uncertainty.

No more so than global asset markets. When Federal Reserve Chairman Janet Yellen appeared in front of the cameras the following policy meeting in December 2014, she did so with WTI in total freefall. Whatever anyone tried to make of it, the oil crash was rightly unnerving. These things just don’t happen like that, not during normal times.

On December 18, the front month oil contract fell below $55 for the first time since 2009, the big one five years before. The 3-month calendar spread, that is the difference between the first contract on the board (effectively the spot price) and the one three months later had just surpassed $1 in contango (a higher front month price). Functioning oil markets in balance fundamentally, as would be the case with economic growth picking up, should have meant a backwardated oil futures curve not contango.

Continue reading FOMC Preview: Desperate RHINO’s (Again)