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Dec 21, 2018 05:20 pm
By Albert Lu
Photo Source: The Federal Reserve
Federal Reserve Chairman Jerome Powell spoke and the market didn’t like what it heard.
“Powell basically told you the Fed put is dead,” was hedge fund titan David Tepper’s assessment of the chairman’s prepared remarks delivered on Wednesday, following the Fed’s scheduled two-day policy meeting.
“Everything is tight. Chinese money growth is plummeting. ECB cutting the last of QE. And Fed still in tightening mode.”
True, monetary conditions are tightening. But are the days of the proverbial Fed put — the Fed’s tacit commitment to support stock prices with easy money in times of turmoil — really over?
Hard to believe.
MARKET SELLOFF
Equity markets were calm, even optimistic, going into this week’s policy announcement. However, sentiment changed abruptly on Wednesday following Powell’s announcement of a 25 basis point increase in the Federal Funds Rate, with two additional hikes planned for 2019.
The selloff continued through the rest of the week with the Dow Jones Industrial Average losing over 500 points on Thursday to reach a 14-month low. The NASDAQ entered bear market territory, dropping to 6333 on Friday. The Dow Jones Industrial Average and the S&P 500 monthly performance reached the worst point since October 2008, with the latter on pace for the worst December since 1931.
The losses extended to crude oil, which slipped 4.8% on Thursday to $45.88, a 17-month low.
The stock volatility and weakening dollar boosted precious metals. Spot gold jumped over 1% on Thursday to reach its highest price since July. Silver also rose, hitting a high of $14.82 per ounce, before falling back on Friday to $14.68.
THEY HAVE NO EMPATHY
No shortage of criticism has followed Wednesday’s decision. The Fed’s change in direction, though dovish on the surface, was clearly not dovish enough to please critics, such as DoubleLine’s Jeffrey Gundlach, who criticized Powell’s robotic approach to unwinding the central bank’s balance sheet.
Tepper also raised the balance sheet unwind as a key concern.
“The net biggest issuance of Treasuries and worldwide fixed income is coming next year. Something is going to get crowded out. Bonds stocks etc.”
James Bianco, president of Bianco Research, believes two rate hikes in 2019 is too many.
“The market was pricing in less than one rate hike for next year … the Fed, in September, was at three. They came down from three to two.”
“So, it was not dovish enough for the market on the initial reaction.”
Jim Cramer of CNBC was measured in his response, at least in comparison to his infamous 2007 on-air rant.
“The Fed is perfectly happy to gradually strangle the economy, the U.S. economy, in order to stamp out inflation, or the potential of inflation. And that’s bad news for corporate earnings.”
“Powell’s the one who’s wrong. His apologists have no sense of empathy for what’s about to happen to the working man.”
“[Janet Yellen] would have been a lot more prudent and a lot less reckless with these plans.”
But what Cramer believes is going to happen to the working man has already happened.
THE BIG INFLATIONARY LIE
Cramer believes that by removing the punch bowl just as wage rates are showing signs of rising, Powell is delivering a blow to the average worker. What he doesn’t understand is this damage was done long ago by people, such as Yellen, who are long gone.
Low interest rates benefit those who can borrow. Central bank asset purchases benefit those who own assets.
Neither policy benefits the poor paycheck-to-paycheck employee.
And since accommodative action by the central bank only raises wages after asset prices have already responded, the average person is far too late to the inflationary party to capitalize — they are last to the monetary buffet.
Yet, the experts insist the easy money policy is beneficial, even essential.
THE ‘STRONG ECONOMY’ MYTH
Economists want us to believe that all is fine — the economy is strong.
In Powell’s assessment, the economy has performed well in recent months while inflation remains low and stable. As economic growth continues, he expects wages to rise gradually and welcomes the trend. And, although some economic cross-currents exist, the Fed is confident in continuing its rate hiking exercise, albeit at a reduced rate.
Yet, despite his optimism, a wild presidential tweet or disappointing Fed policy statement is all it takes to send markets tumbling.
Something doesn’t add up.
THE FED PUT IS HERE TO STAY
Despite the Fed chairman’s tough talk and the market’s mini-tantrum, nothing has really changed. True, the Fed’s policy options are fewer than in prior years — it surely cannot waste policy bullets on every garden variety 500-point decline. Nevertheless, trust that when (not if) things get really bad, Powell and his cohorts will be back with their easy money — the only cure they know.
The put is not dead. The real question is: Will it work again?
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