...everything looked plain and simple for investors and analysts...
DESPITE Janet Yellen's protests to the contrary, the 7-year long asset market bailout (ZIRP + QE's 1, 2 & 3 with a side of Operation Twist) has served to further enrich formerly troubled asset holders and provide a handy wealth effect for regular 401k holders to boot, writes Gary Tanashian in his Notes from the Rabbit Hole.
It's great as long as things stay so symmetrical that even a linear-thinking, professionally trained economist can understand it. Indeed, Mario Draghi has been implementing a 'me too!' QE plan in Europe in order to more or less ape the success that is the US bond market management program.
Set Fed Funds interest rates at zero, pinning T-bill yields to the mat and encouraging banks to borrow for free and lend at interest, and add Quantitative Easing in various forms sanitizing inflation signals and literally painting the macro backdrop as desired.
It all seemed so easy, so unquestioned by the market. There have been no obvious repercussions...until last week.
The Fed had previously been able to print US Dollars aplenty to buy distressed MBA and Treasury bonds (before finally terminating the operation) and hold interest rates at ZERO, years into an economic expansion ostensibly to bail out regular people.
Get this, it was institutions from Wall Street banks to mortgage companies to asset speculators to the Fed itself, that created the edifice of debt and leverage that fomented the "Great Recession" (a nice nickname, implying it is safely in the past) and now Janet Yellen argues that the Fed was acting to protect regular people by denying them their interest on savings? That's a good one.
Moving on, I listened to her speak to Congress last week and, as I thought about Ben Bernanke, I think she comes off as a decent sort. But the all-knowing, all-powerful status that market participants (including the black boxes, which I assume are programmed not to question) have assigned to these people is incredible.
In my opinion, official policy makers are the same dullards they have always been, but a hallmark of the post-2011 phase has been ironclad confidence in the Federal Reserve. It can't all be black boxes, can it? Let's call it a financial fascism, which has gripped the markets and served the Fed's agenda very well.
Until last week. The Euro Stoxx 50 index of Eurozone stocks flipped Mario Draghi the bird as the Euro launched and the US Dollar, despite the well-telegraphed US rate hike set for December 16, got harpooned.
Maybe it was just a contrary play in the markets, putting the now-bloated deflation/Dollar bull camp off sides (USD is in a cyclical bull market, after all) in a massive display of Euro short covering and corresponding USD selling.
But then again, maybe it was something more. Maybe it was something impulsive. The Fed may be a collection of linear-thinking economists, but they are not stupid. Indeed, Ms.Yellen talked about not getting too far behind inflation signals that may be beneath the surface. Last week may have ripped the face off of the deflationary facade that has served Goldilocks (here in the US) so well.
The markets were ostensibly underwhelmed by the scope of Draghi's move and this was probably a 'sell the news' event. We had projected a likely reaction or correction in the USD in an NFTRH update earlier in the week and now here it is.
Maybe this was not so surprising given the dominance of bull-market stories for US stocks (from the official start of Santa rally season to the November-April bull seasonal to an old chestnut, a bullish Coppock Curve signal) in the media. The media it seemed, was loving to be bullish and that is not a good thing if you are a bull.
Still, the S&P's failure at or below 2116.48 was needed to keep these bull spirits at bay. So far so good.
Of course, the bear case is not yet proven in the markets. Last week saw markets sell the news in European stocks and buy the news in the Euro, selling the news in USD and just selling US stocks, keeping the bear case in play as the favored scenario by a whisker.
Gold meantime is in a bear market, and gold is also in a bounce set-up with contrarian indicators now very bullish. Also, this most hated sector is going to come ripe for a long trend trade at some point. The fate of stock markets and economies will play directly into the prospects for this.