I’ve been thinking about the current Fed Funds rate hike cycle, which is logically gaining forward momentum now that the Fed can stand down from its 8-year, ultra-lenient monetary policy cycle. That is because the Obama administration’s goals required a compliant Federal Reserve to continually re-liquefy the economy as its fiscal policies drained it.
With the coming of Trump mania and its very different fiscal policy goals, we will witness the end of much of what I considered to be the “evil genius” employed by the Federal Reserve, mostly under Ben Bernanke. When he oversaw the brilliant and completely maniacal painting of the macro known as Operation Twist in 2011, I knew we were not in Kansas anymore. We’d gone off the charts and off the balance sheet into a Wonderland of financial and monetary possibilities.
What else would you call a plan to sell the government’s short-term debt and buy its long-term debt in the stated effort to “sanitize” (the Fed’s word, not mine) inflationary signals on the macro? It was evil, it was genius, and it worked. So too did various other financial manipulations that took place before and after Op/Twist. And here we are.
I used to make fun of the FOMC rate hike “decision” language in the mainstream media because under the Obama administration and its economic policies overseen by the Fed’s monetary policy, there really was no decision, was there? It was ZIRP-eternity, interrupted by a lone and token rate hike in December 2015 (the Dec. 2016 hike does not count because the transition to a new administration and policy regime was already known; in effect, the Fed has already made its first hike under Trump).
According to the traders who make up the Fed Funds futures, there is no decision tomorrow, either. From CME Group, we have virtually no one predicting two successive rate hikes.
Federal Reserve Chairperson Janet Yellen was recently asked if she was comfortable with the Dow approaching 20,000. She replied “Rates of return in the stock market relative to – remember that the level of interest rates is low – and taking that into account. I believe it’s fair to say that they remain within normal ranges.”
Janet Yellen is not the first person to claim that high stock market valuations are normal when interest rates are low. In theory owners of stocks expect a risk premium over the risk-free rate available to holders of government bonds. When the risk-free rate is itself zero, the yield on equities will be nothing more than the risk premium, and a low yield on equities translates into a high price earnings ratio.
Same old FOMC yesterday with a lot of wind, a lingering smell, and a vast amount of analysis of a move that was difficult to detect without a microscope, and is largely irrelevant to real world interest rates in any case. Moving on …
SPX tested my target trendline for this move on Tuesday and I was watching for likely resistance there. With the 29 handle decline into yesterday’s low from there I think it’s fair to say that there is resistance there, and SPX may now be in the topping process for the December high, and as I’ve mentioned, we are expecting this high to last well into 2017.
FOMC day again today and as ever I’m astounded by the number of people hanging onto Yellen’s every word, and what a market moving event this tends to be. Even more amazing is the importance that everyone seems to attach to the Fed’s ‘control’ of interest rates, and in the event that they show a small sliver of backbone today and take the tiny step of increasing the fed rate from almost nothing to a little more than almost nothing, then this will be extensively debated over coming weeks as though it really matters.
The truth is though that the fed rate only really impacts very short term interest rates, and that anything longer term is determined by markets in the form of the yields on the ten year (TNX) and 30 year (TYX) treasuries. The Fed has little influence over these as far as I can tell, and doesn’t appear to employ any technical analysts good enough to allow the Fed bigwigs to comment intelligently about them. On a good day their forecasts for these are fairly random, and on a bad day (late 2013) almost perfectly inaccurate. Anyone genuinely interested in bond yield direction should be watching Chart Chat at theartofchart.net twice a week, or at minimum coming to our December forecast for the next year, which this year (for indexes, bonds and currencies) is after the close tomorrow and free to all. You can register for that on this page here if you’re interested.
The final appears of the year by The Creature of the Grey Lagoon takes place today. I, for one, will be glad when it’s over, since I can hardly stomach dealing with the market machinations when the old biddy is yammering away at these press conferences.
One item to watch in particular is the Yen, whose inverse relationship with the dollar is shown below. It’s a terrific top, and I’d expect a hard slump beneath this pattern once the interest increase everyone expects is finally out of the bag.
Take twenty trillion dollars in debt…….