Fed policy: clear as mud, apparently

It probably tells you everything that you need to know about the current state of the Federal Reserve and monetary policy that even in the first ten minutes of Yellen's Q&A, much of the questioning revolved around issues such as bank regulation/capital requirements and the diversity hiring policies of the Federal Reserve System.   While these are no doubt worthy issues that deserve an airing, rarely are they seen to be sufficiently paramount as to trump questions on the economy and the policy outlook.

Such, it seems, has been the soporific nature of the Fed's policy profile over the last several years that even Senators cannot be arsed to drill down as to what the Fed is really thinking.  Indeed, based on yesterday's evidence, they cannot even be arsed to learn what Fed policy actually is!  Indeed, one could virtually see Sen. Bob Corker leap into the saddle of his high horse as he started to fulminate about a hidden major policy shift and a stealth QE4....only to be gently reminded by Yellen that yes, the Fed has been reinvesting the proceeds of maturing securities for quite some time now.

One can only imagine what similarly ill-informed participants might ask witnesses in other Senate committees:

Agriculture: "How long are we going to risk our children's lives by permitting the use of DDT on food crops?"

Armed Services: "Can the general explain how the US proposes to drive a wedge between the Soviets and vulnerable Warsaw Pact states?"

Budget:  "Did you know that there is such a thing as a debt limit for the United States?"

Energy and natural resources: "How can we expect hardworking Americans to live with such high oil prices?"

Finance: "Why should downtrodden American corporations be forced to shoulder such an unfair tax burden when private citizens are able to skive off with an all-in tax burden of only 45% or so?"

Foreign relations:  "Isn't it true that there only three kinds of countries:  Uhmurca, those worth invading, and those not worth invading?"

Homeland security: "Admit it: do you ever look at the images from the 'naked scanner'?"

Judiciary: "Is it really appropriate to hold confirmation hearings when your term ends in four years?  Do we really want to saddle America with a Supreme Court justice nominated by a potential lame duck president?"

The mind boggles.

Equally befuddling was Yellen's comment that the Fed isn't really engaging in much forward guidance at the moment (Ed: what about those damned dots?), but that participants' remarks about possible policy outcomes might constitute forward guidance.

Uh, OK.   If guidance is part of your policy tools, and you're not even sure what constitutes guidance or not, is it any wonder that the market keeps getting wrong-footed?  As Macro Man observed a few months ago, the Fed would do well to speak less but say more.



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Bruce in Tennessee
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June 22, 2016 at 12:18 PM ×

MM,

It isn't just Fed policy that is clear as mud...it is where the global economy is heading. Just reading through the comments here daily, and it appears everybody is now Jeff Gundlach...not only do you have to figure out where the next trend is...you have to jump on it a little bit early, and get out a little bit early too. If not you get whipsawed...and at least to some of us it looks like credit underlies the basis of our improvement over the last 8 years and are we just expecting Janet and Mario and Abenomics and etc. to just continue in this surreal environment for another 8 years? None of that is clear to me...I want to vote with my investments for a reset, but there are very powerful forces that want more of the same old sameness...

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Error404
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June 22, 2016 at 12:55 PM ×

Bruce in Tennessee @ 12:18

Spot on.

On the subject of 'Spot', I was watching my hound running around the beach yesterday. His paws left clear imprints in the soft sand. "Ah, dog-plots", I thought to myself (because I'm sad, and need a real life). I wondered if the pattern offered any hint, or should I say 'guidance', as to which way he would turn next. It didn't seem to, so I called him back to offer up some 'testimony'. "Bark once if you're leaning towards that end of the beach", I instructed (pleaded, actually) "...and twice if you're leaning towards the other headland". He looked at me blankly, yawned, stretched, and ambled off in no particular direction. Then a random sea-gull flew across his path and he ran full-tilt after it. I tried calling him back, but he was no longer under any form of control - so yelling (sp.) was pointless.

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Bruce in Tennessee
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June 22, 2016 at 1:00 PM ×

BTW..Every time I see Janet on television, I get this image of Aunt Clara from the old Bewitched series...the lovable old confused witch who never seemed to get her spell right and was always leaving Samantha a bigger problem than she was trying to help with...

http://bewitched.wikia.com/wiki/Aunt_Clara

...Am I the only one who sees this?

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washedup
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June 22, 2016 at 1:35 PM ×

@error404 - next time use an appointment letter from a major bank, preferably Goldman, to guide your dog - I think you will marvel at the results.
@BinT - I try very hard to put myself in their (fed's) shoes, and really cannot come up with a malicious picture - I think they are almost surely well intentioned, but given their very public role its tough to say 1) I was probably wrong all these years or 2) we applied this medicine a bit too much and its time to try something else. What they most likely will do, is start nudging politicians with an increasing level of desperation to do fiscal stimulus while becoming increasingly silent about the monetary dimension. Its straight out of their textbook.
They may of course find that the hurdle to convince politicians is a tad higher than to convince long only equity punters. The chances of policy mistakes (in this line of work a delay is the same as a mistake) compound when multiple factions are involved

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Anonymous
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June 22, 2016 at 2:21 PM ×

@Bruce in Tennessee
"Vote for Coolidge"
;-)

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abee crombie
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June 22, 2016 at 2:49 PM ×

@BinT

I hear ya, and agree in theory but in practice, markets seems to mainly trade with the short term cycle. Oil and EM bottomed in Feb, that is a powerful stimulus for a few months.

As for the LT consequences, CB's have boxed themselves into a corner with asset purchases. The market is going to force their hand come the next crisis. You think any pension plan will be viable if S&P is down and stays down 50%. Nope. Thats a systemtic problem for the Fed. Much easier just to keep buying assets and worry about the real problem, inflation, later on. Its just trying to figure out what margin of safety you need to buy. Right now I agree the Fed doesnt have your back so easily (they are trying to tighten) and after this EM/Oil bounce has made its mark the markets are vulnerable to an attack from the short side. Lets see

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Leftback
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June 22, 2016 at 3:46 PM ×

@Error 404: So your dog is called James Bullard? Interesting.

We are playing this week as though it were in fact an OpEx week (which was really last week), only in this case it is Brexit vol that is expiring. Once that is out of the way and $VIX is crushed on Friday, then we can begin to re-examine the trading landscape.

Largely sitting this out, but added a bit to a USDCAD long on the last surge in crude, meanwhile we are still eyeing AUDUSD, USDJPY and EURUSD for entry points. We added a bit to a pile of longer-dated USO puts and UUP calls, but playing very small until after the next event risk is out of the way.

Now it's back to the Hammock™ to watch the footy.

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Anonymous
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June 22, 2016 at 3:52 PM ×

Fed policy is abundantly clear: ZIRP forever, and don;t let equities fall ever.

Trade accordingly... it's only worked non-stop for 8 years...

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Justabeancounter
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June 22, 2016 at 3:56 PM ×

@Error404 - comment of the month!

@ Abee, absolutely agree, I've haven't been around a long time but I honestly cannot see how CBs get out of this.

You know I absolutely agreed with the 1st waves of QE and twist etc and it had tangible positive wealth transmission effects across a broad spectrum. But now you only need to read the "Classic Cars Better than Hedge Funds", "Fine Wine prices to the Moon" and "Empty 10 bed mansions in Fitzrovia" headlines to see how distorted things have become and how that weath transmission has now only concentrated on the (very) narrow band at the top. No wonder peeps are crying about widening inequality.

At least helicopter money would target the right areas and is why I would advocate this rather than narrow asset purchases. Finally one would hope that eventually Capitol Hill will actually get around to doing something vis a vis fiscal policy which would give the Fed some breathing room to do something.

Maybe pigs will fly also.....

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Anonymous
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June 22, 2016 at 4:05 PM ×

This is the Fed policy

Howard Silverblatt ‏@hsilverb
$SPX Q1,’16 buybacks 2nd largest at $161.4B (Q3,’07 was $172B) increases 10.6% from Q4,’15 $145.9B; 12-month Mar’16 sets a record at $589.4B


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abee crombie
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June 22, 2016 at 5:35 PM ×

@Anon 3:52

Just bc it has worked for 8 years doesnt mean its always that easy. As MM would say, bugger off.

Look whats happening in EU or JP. NIRP and Japan even buys ETFs and the market falls. Just bc US Equities havent fallen doesnt mean they wont. They will have a big sell off, probably sooner vs later, but you need to have the cash to buy that sell off with both hands. Not be stuck long and offside in some GoPro stock. By the time the Fed reacts to the next move lower, I think prices will already be 10 - 15% lower, if not more. Heads up

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Anonymous
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June 22, 2016 at 6:51 PM ×

Shad Rowe of Greenbrier Partners:

"Let’s consider pension funds, looking at each 20-year period – roughly the typical career length of a policeman or fireman – on a rolling basis over the past 50 years.
That is, we’ll look at 20 years, starting in 1965, then 20 years starting in 1966, and so on. Returns on investment in the S&P 500 stock index for each period have fluctuated between 8% and 12%. Each period contained some bad years, but there were always more good years and they outweighed the bad results for every 20-year stretch.
While the actuarially assumed rate of return for most public pension systems is approximately 7.5%, the stock market has managed to climb the proverbial wall of worry and offer superior returns, compared to virtually all available alternatives – if you stayed fully invested in the index for the full 20 years. Here is a prediction: A gigantic market move to the upside is coming, as investment committees assess their costs and reach the conclusion that the stock market is their best and only hope to meet their obligations."

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abee crombie
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June 22, 2016 at 9:35 PM ×

BinT, check out this recent speech from Grants, I am sure you will like as will most of other MM minyons

http://www.grantspub.com/pdfssky/articles/5607.pdf

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Anonymous
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June 22, 2016 at 11:06 PM ×

In the week to June 15, outflows from UK equity funds were the 2nd highest on record, a net $1.1 billion.

Assets in the UK fund management industry have fallen by almost 20% over the past year -- down by about $300 billion.

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Skr
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June 22, 2016 at 11:11 PM ×

I see Copper is on the verge of a breakout... Worth watching.

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