Via Mark St.Cyr,
As we sit here waiting to see whether the Federal Reserve does, or does not, raise interest rates; one thing is becoming clearer: This time – it’s different.
Say what you will for all the prior calm that the “markets” seem to be expressing, or argue as so many next-in-rotation fund managers scrambling to any open microphone or camera to explain their reasoning that the “markets” have “priced in” any such policy changes.
Or, maybe you are taking solace in the arguments now being professed by the merry band of Ph.D economists, “think-tank” aficionados, or Ivory Towered academics as they explain why “The numbers show the Fed. is on the right track and pace.” Even though just a few months prior (October to be exact) this same cohort argued and backed Ms. Yellen’s own assessment and proclamations. To wit:
The Federal Reserve may need to run a “high-pressure economy” to reverse damage from the 2008-2009 crisis that depressed output, sidelined workers, and risks becoming a permanent scar, Fed Chair Janet Yellen said on Friday in a broad review of where the recovery may still fall short.
Yet, that was then, and this is now. Or said differently – that was right before the election when the results were all but a lock, and this is after, when all those “locks” were smashed into oblivion.
It was also when the “markets” were (here’s that term everyone seems to have forgotten) – once again – rolling over and feeling a lot like all those times previous where the next stop “Bullard Bottom” – once again – seemed inevitable.
Below is a “picture” as “The Valley” likes to call it to bring back a few memories. To wit:
(Chart source)
Just to refresh those memories a bit more: those saves and bounces off that “Bullard Bottom” over the past 24 months or so has not been the result of some sudden “great economic numbers!”, or “improving data!” No, those are all the result of one Fed. official after another rushing to any open microphone, camera, or publication as the “markets” were – once again – rolling over to make the “markets” explicitly aware, “They were at the ready, and would consider even more QE or other measures if needed.”
The last time the “markets” seemed to need more handholding because the economic data was showing that there really was no foreseeable catalyst to warrant further gains was? Hint: “High Pressure” speech.
Then – Donald Trump became the President-elect. And the “markets” suddenly turned on a dime and the resulting price action can easily be seen on that chart above.
Now here’s where the title of this article comes into play, and for this reason: What was the catalyst?
A: Real economic data improvement and numbers? Or B: Hopium?
If you watch, listen, or read most financial/business mainstream media and the gaggle of so-called “experts” being paraded out to now spin everything with such ferocity it makes a washing machine envious, you might be inclined to say “A.”
If you can still confidently state regardless of being laughed at, disparaged, or ridiculed by most mainstream academics that 1+1 still equals 2? Then you know full well the only correct answer is B. Period. And that’s a very big problem for the “markets” as they now stand.
The Federal Reserve appears hell-bent to not only raise interest rates, but raise them at a pace the “markets” only some 90 days ago assumed that 2, and maybe if that (and that maybe was more assumed to be 1 if not none) further rate hikes were possible. You know, based on the “data.” Then – the election results became known.
And with that “doves” became “hawks” and not only did the “Dot Plot” signal even more hikes possible, but the Chair in her subsequent presser after the second hiking in nearly 10 years all but shouted not only were more hikes forthcoming, but possibly even more than the “market” ever contemplated as expressed via her responses to questioning about how the Fed. would deal with any forth coming fiscal stimulus proposals emanating from the new administration.
Yet, there’s now a real issue hanging above the “markets” like the “Sword of Damocles.” All that priced in “hopium” is meeting resistance far more treacherous than any terrain that ever greeted a wheel. e.g., Politics, politicians, and their pet peeves.
Suddenly healthcare reform appears to be an ever-growing political nightmare. Both for the GOP, as well as Trump. And it’s setting the stage (and viewpoint) of just how well every other “promise” or “initiative” is going to be treated once it hits the light-of-day (or backroom shenanigans) of congress.
Add to this how the CBO (Congressional Budget Office) is scoring things and the administrations now open war with it, the Democrats sudden 180 that now “debt does matter”, the coming debt ceiling show-down within days if not weeks, and the Fed. about to raise the borrowing costs not just once in 90 days, but twice, and might signal even more.
Emerging markets (think China) will almost surely buckle and moan under this new aggressive rate hiking. Japan signaling it will reduce its own QE program, along with the same type signaling coming from Mr. Draghi. Never forgetting – QE and central banks foray into the capital markets (just one example: Swiss National Bank) along with the allowing for corporations to borrow at nearly free money and buy back their own shares is the only reason there has been a market these past 8 years.
And suddenly (it appears) that it’s all about to end. For we are now in the cycle of the Trump presidency where all those “promises” are to begin taking shape. e.g., “Where the rubber meets the road.” Anxiously awaited for by both Republican controlled houses of congress.
A trifecta which should be beneficial for getting or passing a pro-business, pro-tax reform, pro-healthcare reform, true infrastructure spending (as opposed to “shovel ready jobs’ that required no shovels only party affiliation) and much, much more as witnessed by the exuberance of “markets.”
And yet a lot of voter, business, et al hopes, along with support, are beginning to vanish into the cloud of smoke filled haze of political bickering, inter-party standoffs, a sudden “debt does matter” opposition party, and a Federal Reserve about to make anything current, and anything forthcoming, a whole lot more expensive. Both here in the U.S., and around the globe.
And it’s only March.
This current display of political gamesmanship as witnessed by the current debacle and spectacle playing out in healthcare reform alone is morphing ever greater by the day into an unmitigated political, and empirical disaster as currently formed. A lot of the so-called infused “hopium” that we’ve witnessed in the “markets”, as well as electorate, are beginning to deflate. Along with the realization that it’s quite possible – so too maybe entire Trump agenda. We can only wait and see.
Yet, the “markets” have that all priced-in I hear.
Sure they do. Just like the Fed. is “data dependent.”