Summary – A top-down review of interesting calls and comments made last week about monetary policy, economics, stocks, bonds & commodities. TACs is our acronym for Tweets, Articles, & Clips – our basic inputs for this article.
Editor’s Note: In this series of articles, we include important or interesting Tweets, Articles, Video Clips with our comments. This is an article that expresses our personal opinions about comments made on Television, Tweeter, and in Print. It is NOT intended to provide any investment advice of any type whatsoever. No one should base any investing decisions or conclusions based on anything written in or inferred from this article. Macro Viewpoints & its affiliates expressly disclaim all liability in respect to actions taken based on any or all of the information in this article. Investing is a serious matter and all investment decisions should only be taken after a detailed discussion with your investment advisor and should be subject to your objectives, suitability requirements and risk tolerance
1. Epic levels of miscommunication or New realization?
Which Fed statement was real? The one on September 17 that was perceived as hawkish, so hawkish that the 5-year yield rose by 9 bps on 9/17- 9/18? Or the Fed minutes released on Wednesday, October 8 that were so dovish that the 5-year yield fell by 9 bps on that one day?
These two are so different in tenor & content that one wonders whether the minutes really reflect what was actually discussed during the September 16-17 Fed meeting. If so, the Fed statement & Yellen press conference on 9/17 were “epic levels of miscommunication” in the reported words of David Zervos. If not, then the so-called Fed minutes were actually changed to reflect the change in global economic conditions in the 3 post-FOMC weeks.
Which specific economic condition bothered the Fed? You don’t need the minutes to see that the U.S. Dollar (UUP) rose by 3% from pre-FOMC Tuesday 9/16 to Non-farm payroll Friday 10/3. This is a scary rally in the U.S. Dollar that normally moves in pips and it clearly scared the Fed. Ergo, the “new” minutes?
The changed content & tone stunned all financial markets. The post-minutes rally on Wednesday 10/8 was explosive. All expectations of the Fed raising rates blew up on Wednesday. So short rates fell off the proverbial cliff. Stocks exploded in a vertical rally. The Dollar fell & precious metals shot up. But some asset classes maintained their Wednesday rally on Thursday & Friday and some didn’t.
- Yields across the 2-5 year curve fell hard on Wednesday and kept falling though Friday. After all, the Fed has direct control on the short end of the curve. The long end fell slowly but by Friday, both the 30-year & 10-year yields closed at new 2014 lows.
- Gold & Silver rallied hard on Wednesday and held on to those levels by Friday’s close.
- The U.S. Dollar fell after the minutes on Wednesday but rallied on both Thursday & Friday to recover all it had lost on Wednesday. This is a clear statement that the Fed has limited, if any, ability to change the global economic dynamic.
- The most stunning rejection of the Fed was by the U.S. stock market which wiped out all of Wednesday’s rally on Thursday and fell hard on Friday.
So the markets have acted sensibly – they have run with the new Fed message in markets the Fed can actually influence like U.S. interest rates and they have run against the new Fed message in markets the Fed cannot directly influence. And, above all, the markets have declared firmly that the Fed is now unable to change prevailing global economic trend.
That has to worry the Fed greatly, we think. The Fed’s strategy has been simple – engineer an economic recovery by “maintaining values of financial assets well above levels strictly warranted by fundamentals“, to quote Mohamed El-Erian and to increase inflation by keeping interest rates lower than they need to be. Last two days served notice that the Fed’s strategy is likely to fail.
The equity rally since August 2012 was driven jointly by Draghi & the Fed. Unfortunately, Draghi has been benched by Coach Germany and is. at least temporarily, out of the game. And the Fed has been retiring from the game for a year and will sit down on October 29. This means zero bond buying going forward – a huge drop from buying 1 trillion dollars of US bonds in 2013. The bond markets are sending the message that the Fed’s taper is not merely tightening but asphyxiation.
The prevailing trend in the world is an economic slowdown accompanied by a pernicious fall in inflation, so pernicious that it smells like deflation to financial markets. The awful economic data from Germany raises the risk of the largest GDP region in the world falling into Japan-like deflation. No one knows whether China is slowing gradually to rise later or whether China is sinking in to a credit bust a la Japan. Many emerging economies are slowing down. So the solitary hope for growth is USA. How does that square with raising rates by the Fed?
The big question is what can the Fed do if current economic & market trends continue? Can they call a timeout on their last taper tranche on October 29? Will that reassure markets or frighten them? Will they complete their taper and signal zero rates till much later by changing “considerable period” to “extended period”?
They may not if the stock market maintains its poise. If the stock market goes into a real correction before October 29, then the Fed will have a “conundrum” on its hand on October 29.
2. A “tradable bottom right here” or “a train at the end of the tunnel“?
After an ugly close on Friday, the S&P is perched right on top of its 200-day moving average. Will it bounce or will it break that decisively next week? Guy Adami of CNBC Fast Money emphatically declared “a tradable bounce is right here” on Friday. He thinks the S&P could open down 8-handles or so on Monday morning and then bounce viciously by 20-25 handles. His FM colleague, Steve Grasso, opined that the S&P needs to spend a couple of days below the 200-day and then rally above. He think the key test could be the 50-week average at 1885. Scott Redler of T3Live seems to concur;
- Friday – Scott Redler @RedDogT3 – Tech 2 weak with semi’s & high beta for any real bounce. I’m still in the camp for $spx 1885-1905 next week. Take trades, keep risk down
Ryan Detrick seems to worry that a bounce delayed may morph into a bounce denied:
- Friday – .Ryan Detrick, CMT @RyanDetrick If going to bounce, better do soon. After $VIX
term structure inversion bounces happen fast. $SPY http://stks.co/g19ab
A more detailed discussion of bounce or no bounce was provided by Dana Lyons in his article Amid heavy selling, a light at the end of the Tunnel? His graphic is eerily lovely.
- “If the 2012-2014 market playbook is still valid (we have serious reasons to doubt that), the
market should bounce almost immediately. Even if that is not the case, however, history
suggests there is still a light at the end of the tunnel. The tunnel just may be a little bit
longer. A few months from now the market “should” be higher by a fair amount.”
- “Although, as risk managers we cannot dismiss the possibility that the light is actually a train.”
What does stock market history tell us? Larry McDonald answered on CNBC Closing Bell on Thursday and in his proprietary Bear Traps newsletter on Friday.
- “3 consecutive days of 2 standard deviation moves; that has happened only 4 times in last 30 years; 1987, 2008, 2011, 2013”.
The actual dates are October 16, 1987, August 10, 2011, September 19, 2008, August 10, 2011, April 17, 2013, as he wrote on Friday. What happened next on these four occasions?
- “in the following 3 days in each, 12 total days, the market has been down 8 of those 12 with a lot more volatility; so more selling, more volatility; Buy fear, real fear; we are not quite at the capitulation fear yet & sell the rallies for at least next two weeks”
He told on CNBC Closing Bell that “coal stocks are a spectacular buy down here” because, in their view, Republicans have a 65%-70% chance to win the Senate.
From our simplistic & empirical view, there were two media-sentiment positives on Friday.
- Zimmerman-Closing Bell signal – CNBC Closing Bell under Maria Bartiromo had a habit of inviting Walter Zimmerman for a scary bearish forecast just as the stock market is about to bounce. This Friday Walter Zimmerman said on CNBC Closing Bell that “the bear market is just getting started“. He predicted a 28% decline for the Russell 2000 and a 22% decline for the S&P from their highs. He also said that the S&P has broken its uptrend from 2011. We will find out next week whether the classic Bartiromo-Zimmerman signal was in reality a ClosingBell-Zimemrman signal.
- Marc Faber-Fin TV signal – We have noticed that BTV & CNBC both invite Marc Faber to be bearish near the end of the decline and that the week after Faber makes a major negative call, the stock market rallies. This Friday, BTV “In the Loop” invited Marc Faber. One difference though – Faber did not make any stark bearish prediction on Friday. He merely said that “fundamental reason” for the decline is “investor recognition that global growth is not accelerating; it is actually slowing down“.
Frankly, there is nothing more to be said or written. The markets, in this emotional state, will do what they want to do next week. No analysis or prediction is going to mean squat.
Send your feedback to firstname.lastname@example.org Or @MacroViewpoints on Twitter