Notes From Underground: Why the Fed’s Credibility Is Suffering

As Harry Nilsson sang in “Everybody ‘s Talkin'”: Everybody ‘s talking at me, I don’t hear a word they’re saying, only the echoes of my mind.” This is true of the words from St. Louis Fed President James Bullard as he had the audacity to opine in the middle of Friday’s S&P and equity rout that: 1. “The Fed doesn’t react directly to equity markets”; and 2. “More sanguine than market on global outlook, China.” (source: Bloomberg). This is the very same James Bullard who is credited with halting the significant break in the SPOOS on October 15 when he mentioned that “the Fed should be open to continue its QE on the back of low inflation expectations.”

Well, Mr. Bullard, if you thought inflation expectations were low last October how do you respond to the recent lackluster wage gains and the six-year low in the CRB commodity index? There is a lot of talking emanating from the Fed members but very little worth hearing. It behooves Janet Yellen to assert her Chairmanship and quiet her “teaching assistants.” If the dissonance continues one must wonder if the FED is looking to provoke market chaos to take the fluff out of the equity markets but that will then leave the fluff in the BOND markets as investors buy more bonds driving yields in Treasuries lower and elevating the risk level of all debt instruments.

***Last week I advised that the global stock markets were acting in sync to trade below their 200-day moving averages. The missing pieces on a weekly close basis were the DAX, SPOOS, Nasdaq and CAC. Each one did settle below the 200-day on Friday but he Nikkei barely breached the level and it was when Japan had already closed for the weekend. (The Nikkei priced in YEN terms has the 200-day at 19,089 on CQG daily continuation.) Be attentive to this level as a possible correction point for the global equity markets. After being caught in the doldrums we got dynamic moves last week. Pay attention to all the surrounding resistance levels for the yen and euro, especially the GOLD, to get a sense of any corrective rally after last weeks value decimation.

In an effort to lend some support to the market, Larry Summers takes James Bullard and Dennis Lockhart to task in an tomorrow’s Financial Times without mentioning either by name. Professor Summers warns that there are several reasons to be cautious, including igniting  a new round of financial instability into a fragile global system. He warns against preempting a rise in inflation by increasing borrowing costs. “Much more plausible is the view that, for reasons rooted in technological and demographic change and reinforced by greater regulation of the financial sector, the global economy has difficulty generating demand for all that can be produced. This is the ‘secular stagnation’ diagnosis, or the very similar idea that Ben Bernanke … has urged of a ‘savings glut.'”
In his conclusion Larry Summers asserts to the Fed: “New conditions require new policies. There is much that should be done, such as steps to promote public and private investment so as to raise the level of real interest rates consistent with full employment. Unless these new policies are implemented, inflation sharply accelerates, or euphoria in markets breaks out, there is no case for the FED to adjust policy rates.” Summers has a louder voice than most.
***In case you missed it this morning, I’ve included the link to my appearance on Wall Street Week. Hope you enjoy watching as much as I enjoyed appearing with Anthony and Gary. It was a great experience and humbling to say the least.


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12 Responses to “Notes From Underground: Why the Fed’s Credibility Is Suffering”

  1. ray mckenzie Says:

    Everybody’s talking and can’t you see Im walking here? Well the Fed is going to have a lot of splainin to do this week Yra. Lucky for them “I Guess the Lord must be in NYC”. I have a feeling whats going on in China will continue, and it will be time to “Jump Into the Fire”

  2. Rohr (Alan Rohrbach) (@MacroMeister) Says:

    Right On Yra!!
    I think CSNY Long Time Gone applies here as well. And while the Comandante Schumer-directed Fed ‘got to work’ providing the political class all the drugs it needed to ignore the pressing need for structural reform, it was indeed “a long time comin’.”
    And once the Fed blows its cred on the ineffectiveness of QE alone to provide growth (which btw both Mario Draghi and Shinzo Abe have been vocal about for a long time) it will indeed be “a long, long, long, long time before the dawn.”
    As you are well aware, if Bernanke had a backbone he would’ve agreed with Sen. Corker on the need for Congress to do what was necessary back in 2012. But he was too busy ‘popularizing’ the Fed, and taking credit for a QE enhanced cyclical recovery.
    I say the market dysfunction time machine just dropped us back in 1975… with a discredited central bank, the equities won’t be back to the highs for, well, a long, long, long, long time.

  3. ShockedToFindGambling Says:

    Yra- The USA debt market is now around $60 Trillion, and is probably more overpriced than the stock market.

    QE is the worst possible thing the FED can do now……..they will put bonds at levels from which they will have no choice but to crash, which will be far more destructive, than a stock market crash.

    The FED and other Central Banks have created a bubble many times larger than that of 2008.

  4. yra Says:

    Shocked–I agree but when are the liquid for blowing serial bubbles it is hard to deflate the entire system—.As I have stated over and over–QE2 and QE3 were the results of not knowing what to do and not wanting to appear to be doing nothing—-so the FOMC added more layers and absolved Congress and the executive branches of their responsibilities–as long as the stock market was rising and campaign coffers full–what’s the problem

  5. GreenAB Says:

    careful everybody. let me quote the following from December 2014:

    “unrelated to this post i´d like to share the following article:

    “Securities-based lending, also known as non-purpose lending, is Wall Street’s hottest business. From UBS to Bank of America Merrill Lynch to JPMorgan, high net worth investors are being enticed to take out loans against their brokerage accounts at a blistering pace. ”

    the whole thing is worth a read. imo it spells risk once the stock market experiences a real correction of 15% or more and it explains why so far we haven´t seen one for a long time. it´s not only CBs that have interest in a steadily rising stock market. i always believed that (investment) banks can´t be happy with the low volatility we are seeing these days since it hurts their trading profits. well, turns out that wall street has found a new cash cow and shifted towards security loans.

    the whole scheme reminds a bit of “bullet proof” mortgage lending. but once prices drop deep enough, a wave of liquidation (additionally to traditional margin calls) might set in…”

  6. Chicken Says:

    I guess the FED was simply earning their future employer wages by orchestrating QE for a big pump and dump.

    Only question remaining is when they twist the knife?

  7. GreenAB Says:

    i tried to requote a posting of mine form December, but the system wouldn´t let me. so here´s a link you might want to keep in mind, why there´s probably more selling to come:

    “Securities-based lending, also known as non-purpose lending, is Wall Street’s hottest business. From UBS to Bank of America Merrill Lynch to JPMorgan, high net worth investors are being enticed to take out loans against their brokerage accounts at a blistering pace. ”

    what´s a bit puzzeling in todays selloff is the action in TREASURIES, which aber down at the time of writing (with the S&P down 46 points). usually when the market sells off and volatility shoots up like today you would see money storming towards treasuries. but it doesn´t look like that´s the case this time. so i´m wondering:

    -are the Chinese forced to sell paper?
    -are equity investors still complacent?
    -is it just an ackonwledgement that the FED can´t do much to come to the rescue (like QE4)?
    -or is this a very early sign, that confidence in US bonds (and the financial) system is fading…?

    • yra Says:

      nice rebut –in my mind and i noticed the same thing–presently i would point to the yield curve steepening in the face of the FED not moving in September.The 5/30 especially moved dramatically over the last two months flattening almost 30 basis points and the FED’s credibility is raising some concerns

      • GreenAB Says:

        thanks Yra.
        the same strange action in treasuries today again. something looks just not right… maybe it has to do with the fact that the world used Euros and Yen as a carry to fund Dollar and treasury buys. if there´s a big forced unwind ongoing, which puts pressure on the dollar and treasuries (opposed to textbook moves), then i wonder where it stops. if confidence in treasuries is breaking, this could get very ugly.

        btw: what IS a safe haven here? anyone?

  8. yra Says:

    Green AB–may have to do with an unwinding of “risk parity”–Great Caesar’s Ghost

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