By Mark St.Cyr
In about two weeks the Federal Reserve will meet as to decide whether another interest rate hike will be enacted. The odds of another hike still stands at near 100% even in the face of an evermore deteriorating macro environment.
The Fed. has stated over, and over, and over again via the openly mocked, and ineffectual tool known as “Forward Guidance” that it would raise rates in accordance with what the “data” provided. This became the genesis for the watch phrase “data dependent” to actually mean something to those looking for any “guidance” from the Fed. without being openly stated by the Fed. itself.
“Forward Guidance” was supposed to work something along the lines of the following. i.e., It wouldn’t take a rocket scientist to conclude there was an imminent launch forthcoming if a fueling truck was seen openly topping off the tank on a launch pad.
So, in theory, it shouldn’t take a Nobel Laureate economist to conclude if the fundamental economic measurements of the macro economy were either “in-line” or obviously healthy and moving in the right direction (as in, up), one would expect a forthcoming hike or other normalization event at any given FOMC meeting whether openly stated, or not. Conversely the opposite would also apply.
However, unless you were one of the fortunate to be on former Richmond Fed. president Lacker’s phone calls understanding anything emanating from the Fed. has been an exercise in deciphering economic gobbledygook, doublespeak, incoherent measurements and outlooks. And what maybe worst of all – the seemingly oozing of disdain for anyone who dare question their reasoning or insinuations – effectual results be damned.
One of the other catch words of Fed-speak that’s used more often than a revision of data downward, is the word “transitory.” This has been the go-to nullification tool of anything even hinting that the Fed. may be in fact on the wrong side of any economic efficacy. e.g, Bad retail sales numbers? Transitory – hike is coming. Bad employment numbers? Transitory – hike is coming. Bad GDP estimates and final prints? Transitory – hike is coming. Idea that the economy could be put into recession via hiking too much, too soon; aka policy error? Transitory – hikes are coming.
Again, if everything is doing so well: Why does the Fed. still feel the need to launch (or condone) off-the-reservation type arguments such as the latest from St. Louis Fed. president Bullard proving (once again) that soothing-tones are needed when the “market” experiences what was once known as “typical” price movements at record highs? Hint: Starts with “T”
The other catch-phrase that has taken the “markets” by storm is, of course, the increasingly disavowed mantra of “it’s different this time” which had been the rallying cry of “The Valley” as to stave off what they declared as business fundamental heretics. For the new “religion” of tech came directly from the book of “IPO genesis.” i.e., Get funded, Get Listed, Get Out. Cha-ching! Rinse, repeat. Or, said differently: BQE, and AQE.
“It’s different this time” now means the exact opposite of what it once implied. In other words, it has gone from meaning “fundamentals are no longer meaningful” to “no fundamental business practices means – no more business.” See the now “unicorn trail of tears” for clues.
Yet, as I implied, “it’s different this time” also applies to the Fed. for it is now (in my opinion) on a similar trajectory. And I don’t believe it’ll be transitory.
Back in May I made the following observation. To wit:
“The real issue that sits squarely in-front of the “markets” is the realization that the entire “reflation” trade may in fact be D.O.A. much like the legislation that was supposed to foster its existence to begin with. Let me put it this way since we’re talking about “derivatives” and their potential for highly correlated monetary wealth destruction vehicles.
The “reflation” trade that is now omnipresent in the “markets” which has facilitated the non-stop rocket-ship ride since the election of Donald Trump is nothing more than a “derivative” vehicle (or expression) of the underlying legislation that was to be its foundation or “backing asset.” e.g. Signed into law legislation.
In other words – If the legislation (i.e., tax cuts, Obamacare repeal, et cetera) don’t become signed into law legislation amounting to precisely what the “value” of those cuts and more represented (i.e. $1 TRILLION in infrastructure, Obamacare total repeal equivalents, massive corporate tax restructuring et cetera) the entire run up from Nov 2016 to today becomes de facto null and void. e.g., The “derivatives” (as in the profits made) based on “the trade” become? Hint: It’s not good.
The only thing that could (or will) make matters worse was if the Fed. had raised interest rates in anticipation. Again, hint: Not only have they raised, they’ve raised twice, and looking to raise for a third. All into further deteriorating economic data.”
As of this writing not only has the economic data deteriorated further, some of that previously reported data has been revised down ever further.
What was supposedly “transitory” as implied by the Fed. at its most recent meeting, (i.e., the reported and referenced bad data was “transitory”) has gone from bad to not just worse – but much worse.
Why? Because it wasn’t just one data point that was revised lower. It was the preceding, along with the expected, all face-saving “rebound” that was supposed to show its transitory status was in fact applicable in the first place. Hint: See Friday’s “Jobs” report and its subsequent revisions downward toward abysmal for further clues.
So blatantly perpetual has the so-called “transitory” effects of a weaker than stated economy manifest, that even Goldman Sachs™ own Jan Hatzius has now all but jettisoned the idea of a hike in June, Sept., and any balance sheet reduction announcement to now only – a rate hike in December. i.e., Skipping June along with Sept. altogether and implying no impending balance sheet reduction either.
That’s not just a flip – that’s a stunning reversal of thought when it was all but a given via Goldman’s own calculations that a June hike alone was all but certain. Now? See above.
Then there’s that other “it’s different this time” behemoth for causing not so transitory effects: China.
I have been arguing, along with warning, over the last few years that the effects caused by the Fed. raising interest rates will be brought to bear most evidently in the “land of relentless GDP growth”, made manifest only via financial products and banking that would make a Non-GAAP devotee envious aka China.
We got a glimpse of just how “unsteady” things were in China back in August of 2014 when they nearly brought down the entire “market” singlehandedly.
Since that time it has only been arrested via the politburo throwing everything including not just the kitchen-sink, but along with it, the entire house at every hiccup that keeps emerging like a mutant financial game of “Whack-a-mole.” And things have not gotten better. They’ve only not been reported as existing, but the clues and traces of desperation are there – if – one cares to look at all.
Currently (as has always been the place to watch for clues) the Yuan is rising. But it’s not rising because there’s some form of confidence behind the move enticing others to invest. No, what’s currently taking place is total politburo manipulation as to try to defend against speculators (e.g., Shorts) and quell the ever-increasing fear of mainlanders pulling their money out of China and stashing it away in other countries or assets (see Canadian home sales for clues.)
What has been the unusual twist in this operation (no pun intended) has been the head-scratching near continuous plunge in the $Dollar. All things being equal: A hiking of U.S. interest rates alone should have gave rise (or strength) to the $Dollar as fundamental economic theory suggests. However, as of today, the $Dollar has been on a one way slide downward. The reasoning for this has left many currency pros themselves perplexed. Some, far worse, as in caught in the proverbial: right thinking – wrong result, resulting in large losses.
Why the $Dollar has been acting this way for right now is immaterial. What does matter currently (and in my opinion the only thing which has mattered) is the breathing room it has allowed China to invoke whatever ramshackle monetary “band-aid” it has as to try to get ahead of whatever else might be coming down the pike. Whether internally, or from abroad.
So far, it seems to have halted the outflows. But then again, so too did the proverbial finger-in-the-dam. And we all remember what happened next.
If the Fed. does indeed raise rates once again at the June meeting into what is obviously nothing that even resembles “transitory” worsening data? It could be the spark that sets the entire monetary fire keg ablaze. For the if the $Dollar reverses, and reverses hard (as is evidently possible, if not, plausible) you have as I stated earlier a “trifecta” for policy error shaping up. And it won’t just be China borne.
The “markets” and their reliance for spiking higher from the “tech” sector would also be in jeopardy. Because as has been documented by this site and others – without the ever-present central banking interventionism into the capital markets everything falls apart. See SNB, ECB, BoJ, Fed proxies such as Citadel™ and others for clues.
If the $Dollar suddenly reverses and takes heed to the sheer relentless jawboning of “balance sheet run-off” along with actually raising rates into an ever decreasing data driven backdrop? Others just might be panicked and decide the recovery was the thing which was transitory and its time to jump back in with both feet and hand-over-fists back into the “safety trade.” aka “the flight to safety.”
This could (or more than likely, would) send other central banks scrambling to dump their once “prudent” equity investments held via their “piggy bank” (aka Sovereign Wealth Funds) as to defend or stabilize their own currency fluctuations in any panic, exacerbating the entire process into what could easily become a self-reinforcing negative feedback loop. Think about it.
Bonds, along with yield curves are already showing those stresses may have already begun. For yields are falling as the “markets” are rising. Somethings not right with this dynamic if everything is so “hunky dory” as the Fed. likes everyone to infer from their “happy talk.”
We could very well be at that moment when all the so-called “experts” economists, their Ivory League brethren, along with their “think-tank” cousins continually pile on that further rate hikes is “just the thing” only to be precisely that – and it breaks the “markets” back like that other proverbial story about a piece of straw and a camel.
Nobody knows for sure, but those of us caring to look can see a disaster in the making should the wrong move come at precisely the wrong time. And this could be that time, but only time will tell. Again, no pun intended.
However, if you want clues as to see just how well the supposedly “best and brightest” of the economic guild are? I’ll just point to the current economic disaster in Venezuela happening with all its tragic human, and national costs, that shows no sign of letting up in the near future.
You know who never seen it coming? Hint: Nobel laureate economist, professor, former vice-president at the World Bank™, and widely hailed economics aficionado Joseph Stiglitz. Here’s what he was saying in 2007. To wit:
In his latest book “Making Globalization Work,” Stiglitz argues that left governments such as in Venezuela, “have frequently been castigated and called ‘populist’ because they promote the distribution of benefits of education and health to the poor.”
“It is not only important to have sustainable growth,” Stiglitz continued during his speech, “but to ensure the best distribution of economic growth, for the benefit of all citizens.”
10 years has past, so I have only one question: How’s that all working out?
And if you just had that sudden twinge in your gut? All I can say is: Yep, you’re feeling that queasiness for a reason. Because the Fed. is populated with people holding the same sense of sureness and economic interpretations. And it’s also now been 10 years since the beginning of their open insertion into the capital markets.
So again: How’s it all been working out? Can’t get any worse, right? That is, if you also see all that deteriorating data as “transitory” why be concerned in the least? After all, as they always imply, don’t worry…
“They’ve got this!”