Notes From Underground: The FED has created a ball of confusion

The FED set the markets into a state of confusion. Just after the release of the FOMC statement, the markets reacted. The DOLLAR sold off and the equity markets are bouncing and trying to get to “GRACELAND.Upon further review the markets have realized that more than offering up easy money as the solution, the fact that the FED has made a 180 degree turn in four short months has the markets very nervous. Markets hate uncertainty and the FED‘s policy of maintaining the huge liquidity instead of removing the monetary stimulus is making them nervous.

What makes Mr. Market so nervous is that the FED has a broken compass. What if the economic models that are the basis of FED POLICY are totally flawed? How long will a group of academics depend on their models no matter how bad the results? No matter how many mathematicians become economists, a dependence on flawed numbers still results in flawed policy. As traders and analysts we pose the question: What will happen if the FED has gotten it totally wrong?

Now, this is what concerns the equity and financial markets. Bernanke is trying to buy time to have the FED analysis be proven correct and the policy stance appropriate. We keep hearing the word HOPE from the policy makers, but HOPE is not a policy, especially when so much is riding on the outcome. What’s interesting is that the markets are running to remove risk and are using the DOLLAR as a haven, but we will caution to be prepared for a sentiment change in the risk-off trade. Get your technicals in order so you will know where currencies and commodities should hold. What will the FED do to counter the action of PUSHING ON A STRING? As Joseph Schumpeter noted during the Great Depression, it is easier to stop a businessman borrowing by raising rates than it is to stimulate his borrowing by lowering rates.

It is a concept that we at NOTES have never forgotten and it’s now seeping into the mindset of our key policy makers. Whether we call it a liquidity trap or pushing on a string, the market has a sense that the FED has lost control and that its policy is flawed. This is where we are at and the markets are waiting to see if and how the FED reacts to what is certainly a mistaken belief in its own infallibility. The concept of the GREENSPAN PUT is a fallacy that is haunting a market that has been led down a path based on the view that low interest rates are the salve that cure all ills. Hmm,do you really want to buy U.S. 10-years at 2.75 percent and sleep easy? The market says yes but we approach it with a strong sense of cognitive dissonance.

* we will have a two-day hiatus as our editor is going PHISHING but the writer will respond to allresponses on out previous posts. If anything major appears we will try to respond but caution we may be unable.

Tags: , , , , , , , ,

11 Responses to “Notes From Underground: The FED has created a ball of confusion”

  1. ray mckenzie Says:

    The Temptations couldn’t have said it better.

    Fear in the air, tension everywhere
    Unemployment rising fast,
    The Beatles’ new record’s a gas
    And the only safe place to live is
    On an indian reservation
    And the band played on
    Eve of destruction, tax deduction
    City inspectors, bill collectors
    Mod clothes in demand,
    Population out of hand

    • Joe Says:

      …round and a round and a round we go…

      Tune was appropriate then, and it is again. I’m going to rummage for some old WLS surveys and see if their are other reruns from summer of ’70.

      Right on, Ray.

  2. yra Says:

    All I can say is that we have a great and diversified readership—great pick up of the lyrics Ray—Rockin the Fillmore and the FED could use some HUMBLE PIE



    The eastern world, it is exploding
    Violence flarin’, bullets loadin’
    You’re old enough to kill, but not for votin’
    You don’t believe in war, but what’s that gun you’re totin’
    And even the Jordan River has bodies floatin’

    But you tell me
    Over and over and over again, my friend
    Ah, you don’t believe
    We’re on the eve
    of destruction.

    Don’t you understand what I’m tryin’ to say
    Can’t you feel the fears I’m feelin’ today?
    If the button is pushed, there’s no runnin’ away
    There’ll be no one to save, with the world in a grave
    [Take a look around ya boy, it’s bound to scare ya boy]

    And you tell me
    Over and over and over again, my friend
    Ah, you don’t believe
    We’re on the eve
    of destruction.

    Yeah, my blood’s so mad feels like coagulatin’
    I’m sitting here just contemplatin’
    I can’t twist the truth, it knows no regulation.
    Handful of senators don’t pass legislation
    And marches alone can’t bring integration
    When human respect is disintegratin’
    This whole crazy world is just too frustratin’

    And you tell me
    Over and over and over again, my friend
    Ah, you don’t believe
    We’re on the eve
    of destruction.

    Think of all the hate there is in Red China
    Then take a look around to Selma, Alabama
    You may leave here for 4 days in space
    But when you return, it’s the same old place
    The poundin’ of the drums, the pride and disgrace
    You can bury your dead, but don’t leave a trace
    Hate your next-door neighbor, but don’t forget to say grace
    And… tell me over and over and over and over again, my friend
    You don’t believe
    We’re on the eve
    Of destruction
    Mm, no no, you don’t believe
    We’re on the eve
    of destruction.

  4. Paul Says:

    The rock history aside, let’s face it — the FED DOES NOT KNOW what to do or the true state of things is so dire it waits up on the second dip to put forth unpopular surgery measures. Too many unwanted people, too small and deep frozen money multiple. Markets are broken, nothing (out of the conventional toolbox) works.

    To buy some time by making the (e.g. equity markets) party go on is to guarantee so much steeper fall off the clif once the music stops.

  5. Arthur Global Practice Says:

    Mr. Market is ALWAYS right but Bernanke is clear: Deflation: Making Sure “It” Doesn’t Happen Here.

    Raising interest rates this fall o beginning 2011? Any chance?

  6. yra Says:

    arthur—I think you know that answer.The bigger question is when does the dollar cease being a haven bet—-turn off the algos for they are looking for love in all the wrong places

  7. Arthur Global Practice Says:

    Yes, I know it. Timing is everything. So, buy or sell? We ascribe to Lord Rothschild-s philosophy, which was to buy to the sound of cannons and sell to the sound of trumpets? As Jim Leitner said.

    Pls don´t forget enjoy PHISHING!

  8. Arthur Global Practice Says:

    Probability of deflation according to El-Erian: 25%

    Ask yourself the following question: would you accept a lift from a person who has a one-in-four chance of getting into a really bad car accident?

  9. yra Says:

    Who asked that question on CNBC–oh el erian—that is what the russians,japanese and chinese ought to be asking–but more then drunk I think they are too high from the GLUE they have used to build all those MODELS

Leave a Reply