Slope of Hope Blog Posts

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Fed Rate Hikes, Fiscal vs. Monetary Policy and Why Again the Case for Gold?

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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.


He’ll Bring Them Inflation

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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.

cme fed funds futures


No, Ms. Yellen……

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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.


Meanwhile, Back on Earth

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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.


The Fed Wind Always Blows

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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 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.


Watch the Yen

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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.


Yellen: Deeper Down the Rabbit Hole We Go

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featured.yellenWhere once Alan Greenspan was vilified for dropping interest twisty.smallrates too low for too long and thereby inflating a credit bubble (before his bouncing baby bubble forced him to try to head things off at the pass, eventually jacking the Funds Rate back up to 6%), today these very scary clowns talk boldly about buying stocks and other risk assets in order to keep the pretense of a normal economy and stock market intact.  I mean guys, this stuff is supposed to be the product of tin foil and gamma rays, not reality!

Meanwhile, every month or so we are treated to a massively stupid ritual of ‘will they or won’t they?’ as the committee chaired by this woman talking crazy talk is taken seriously by many as it makes its profound decisions (like doing nothing, for instance).

What the hell is monetary policy tightening anyway when you’ve got a backup plan to buy the whole damned stock market and some corporate bonds to boot?  It’s a joke. I can understand why perma bears are perma bears.  This thing is so fake it’s… not laughable… it’s surreal.  It’s Wonderland.  And the whole financial services industry laps it up and plays it straight, as if it is providing a very sensible and buttoned down service to its clients.

Newsflash:  If you’re depending on one of the 95% of advisers out there operating on conventional metrics you are playing little more than a game of ‘gee, I hope the Fed’s latest plans to rig the stock market will work’ because that is the game that the financial services industry is playing.  That is not my bias speaking; it is Janet Yellen speaking.

Yellen says Fed purchases of stocks, corporate bonds could help in a downturn

The Federal Reserve could get benefits from buying assets other than long-term U.S. debt if in a future downturn it could not buy any more government bonds, Fed Chair Janet Yellen said on Thursday.

Referring to asset purchase stimulus programs in a video conference with a minority bankers meeting in Kansas City, Yellen said: “If we found, I think as other countries did, that they could reach the limits in terms of purchasing safe assets like longer-term government bonds, it could be useful to be able to intervene directly in assets where the prices have a more direct link to spending decisions.”

She’s literally saying that if we run out of safe assets we can purchase unsafe assets (i.e. risk assets) when things go off the rails.  She is also saying that she would hope to leverage that risk into goosing consumer confidence if they show any signs of backing off.  Ladies and Gentlemen, these are the “tools” of the next phase of Federal Reserve experimentation.  I thought that Operation Twist, with its stated goal of “sanitizing” inflation signals by manipulating the Treasury bond market was ballsy; Bernanke after all, made Greenspan look like child’s play.  Yellen?  She’s simply guiding us deeper down the Rabbit Hole.

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BoJ, FOMC and Where to Now?

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Below is the opening segment of the September 25 edition of Notes From the Rabbit Hole, NFTRH 414

The Bank of Japan gave us a glimpse as to just how far down the rabbit hole we may have to follow global policy makers as we try to make sense of ever more complex and shall we say, innovative ‘tools’ being used in the effort to engineer individual economies and asset markets within the global financial system. BoJ announced it would conduct “JGB purchase operations” in order to “prevent the yield curve from deviating substantially from the current levels”.

The market initially interpreted this to mean BoJ stood in support of a rising yield curve, which would for example, help the banks (ref. MTU and SMFG, which exploded higher off of the support levels we had projected), but by the end of the week the Japanese Yield Curve had eased substantially and there seemed to be confusion about what the policy’s intent, or would-be effects, actually were. I wonder if the BoJ even fully knows what it is doing now. Lots of moving parts in a complex system.