Is the rally getting long in the tooth? The recent rally, much like the sell-off that preceded it were not based on economics, earnings, or even geo-political events – it fell squarely on the shoulders of the Fed’s interest rate decisions.
FOMC moves the Market
The market sold off in August and then broke supports as the anticipation of the Fed’s rate hike was coming in September. Investors wanted out and to get out before the Fed acted. The market saw the liquidity on the buy side shrink and selling became fueled by margin calls.
The September FOMC meeting came and to the surprise of many there were no rate hikes. The market rallied, but that rally was short lived as Yellen and other Fed governors again laid forth expectations that the Fed would hike rates, either in October or December. The market sold off again at the end of September.
FOMC – courtesy of wikipedia
The probability of a rate hike in October was already reduced as it is one of the FOMC meetings that is not followed by a Press Conference and release of Economic Projections. The general consensus is the Fed will not make policy changes if the meeting is not followed by a Press Conference, as to allow the Fed to discuss the reasons why they changed policy.
March (Press Conference)
June (Press Conference)
September (Press Conference)
December (Press Conference)
(Low expectations for policy changes – rate changes – for the January, April, July, and October FOMC meetings)
Additionally, as economic data and earnings started pouring in, it was clear – if the Fed was as “data dependent” as they said they are, there was going to be NO RATE hike in October. That was just the nail in the coffin.
As it became more clear rates were not going to rise, the market began to rally – despite the earnings warnings and weak economic data. It was – as it has been over the years – a “Bad news is Good news” story. The bad news is weak or tepid growth economic data, which means the good news for the market and asset prices, is the Fed will remain accommodative and NOT raise rates.
There is one meeting left on the calendar, December 15-16th, which is followed by a Press Conference and the Summary of Economic Projections. Again, regardless of the tone and expectations the Fed continues to utter about raising rates, I really don’t see it happening.
Here are my reasons for NO RATE HIKES in December:
- Economic data has been weak: If we look at the economic data alone – which I have been posting in recent Market Previews. If the Fed is data dependent, the data is not supporting a rate hike.
- Disinflation / Deflation: The Fed is mortally fearful of Deflation. We must remember they are Keynesian Academics who believe the boggy man of the Great Depression was Deflation. They have set a target of 2% inflation (based on the CPI) and we are seeing disinflation (contracting inflation growth). The Fed’s policies have been trying to spur inflation and raising rates will only create more disinflation and risk deflation.
- Dollar Strength: Earnings have shown the impact of the dollar strength. The western world and now China are lowering rates and ramping their easy monetary programs. If the Fed raises rates, it will further strengthen the dollar, which hurts trade and increasing deflation risk. We are running a $40+ billion trade surplus per month and starting to hit highs not seen since the 2008-2009 crisis.
- Interest on Debt: The US currently pays almost $500 billion per year on debt service and to think we are running a Zero Fed Funds rate (note it is between 0 to .25) and the yield curve out to 10-years is fairly flat at 2.2%. Raising the rates, even 25 bps, will raise the entire yield curve and could even steepen it if the market feels that this is the first of many rate hikes. A rate hike will increase the interest and also increase the deficit.
- Earnings Weak: Forecasts for earnings and the holiday season have been lowered. There are already concerns we could see a contraction in consumer spending growth. A rate hike will curtail consumer borrowing and also spending – heading into the holiday.
- Jobs: The recent Labor Report was very weak and below even the low expectations. A rate hike, which will strengthen the dollar and hurt the multinationals and deflate asset prices, will also curtail hiring.
- Wage Growth: The strong dollar and disinflation pressure is keeping wages stagnant. You can’t have wage inflation in a disinflationary environment. A hike in rates will keep a lid on wage growth.
- Holiday Sales: Lastly we are heading into the Holidays and what people want to do is SPEND and to SPEND they need to BORROW. A hike in rates is a message the Fed wants to slow the borrowing and thus slow the spending. It is the wrong message at a time in which the retailers want consumers to SPEND money – not SAVE it.
- Market: The market would sell off and so would bonds. We just saw how fast the market drops heading into the high expectations of a rate hike in September. The last thing the Fed wants to do is kill the Santa Claus rally.
Any one of the above is a justifiable reason why the Fed will NOT raise rates, but add them all together and it is clear – they really cannot raise rates without radical consequences.
Rate Hike Believers
So I am still baffled why the likes of Steve Liesman and others are so hell bent on thinking the Fed is going to raise rates. My feelings are that those like-minded Keynesians and believers in the Fed’s policy also have to come to terms that it was an EMERGENCY and TEMPORARY measure to save the economy and therefore it must end. The Fed also perpetuates that belief. I don’t think Liesman and other Keynesians can come to terms that their policy hasn’t really worked at all, in fact it has shifted economic growth onto the shoulders of the Fed and interventionism (buying bonds, buying mortgages, TALF, Swaps, Money Supply increase, etc.). These Keynesians would have to accept the fact that their greatest experiment and core belief of “interventionism” has diametrically changed the economy – perhaps forever.
Rise of the NEW NEW KEYNESIANS
How can we end this massive “interventionism” that even among the staunches of Keynesians is only ever supposed to be temporary to get the economy back on track? To not end it, to accept its permanence, is to accept that Keynesian economic theory has failed, AGAIN. Their last grand experiment, Bretton Woods – failed and with its failure almost sent our nation into Hyperinflation.
It saddens the very fiber of my being is that this massive Fed intervention policy is here to stay in some form or another. There is even a (not so) new economic ideology given birth from the failed Keynesian, ironically called New Keynesians, which has been around for decades, but with each failure they update their plans – which means increasing their reach. Seriously – you can’t make this stuff up. Rather than admitting their failure, they change the rules and add in MORE interventionism ideas and slap on the “NEW” label. Except it really isn’t new, it is just the old belief with more rules.
The latest update to the New Keynesians (note they update after every failure – not realizing they are part of the cause- blame everyone but themselves) will most likely be a permanent ZIRP and QE policy.
The reason these Keynesians are still around is that they are in power, they are the economic leaders in our prestigious academic institutions. How are people to learn any different if you only teach and practice ONE economic theory. Of course it is the economic theory that our government practices and thus it is the only one taught in school. Ask an economic grad about Classic Economic Theory, Austrian Economics, Adam Smith, Mises, Hayek, or anything that is NOT Keynesian economic theory and they will look at you with a blank stare. I reviewed my nieces economic text book and there is NO mention of anything beyond core basic Keynesian economics. Any other theory, idea, or criticism of it – and its historical failures have been scrubbed from the text.
It is important to note that President Obama hand selected another NEW Keynesian to become a Fed governor, Lael Brainard. She grew up as a U.S. expatriate on the WRONG side of the Berlin Wall – I am sure that didn’t influence her (sarcasm intended). Then their is the latest appointment, Kathryn Dominquez (yet to be confirmed) another NEW Keynesian economics professor. One only has to read their academic papers – which read of socialism and socialistic economic theories. The papers are choked full of interventionism and protectionism.
Lael Brainard – courtesy of wikipedia
Socialism needs an Economic Engine
A system of government needs an economic engine to run. FDR ushered in the New Deal and sweeping socialistic programs. It needed an interventionist economic theory and Lord Keynes gave birth to Socialistic Economic theory – now named after him.
Today – as our nation surpasses $19 trillion in debt, mounting deficits, unfunded liabilities, new massive government social programs like Obamacare, the government needs a NEW economic theory – the old one just doesn’t work – so let’s create something that is MORE interventionist – NEW Keynesians.
There is no going back – what we are doing has been tried before – one only has to look to Japan. Is it hypocritical that we criticized for years even decades their economic interventionists policies and zero rates? Now here we are – walking in their exact footsteps for years – and today our Fed governors champion and endorses Japan’s economic policies.
Socialism is on the march and in every case the rise of socialism starts with economic and monetary interventionism.
There will be NO rate hikes in December.
If there are to be any – it will be a gesture to show the Fed has control and knows what they are doing, but I don’t think they have the cojones to do what is right and raise rates, decrease the money supply, decrease their balance sheet, stop buying bonds and mortgages, and end this New Keynesian ideology and to let the Free Market work – for better or worse.
Sorry for my rant – but it was just one of those mornings.
Support & Resistance
We broke above that 17,400 level that marked the level we fell from, now it has become support. I would look at 17,800 as short-term support, with 17,400 as broader support. 18,000 is in the cards, but we should see some resistance in there.
The tech heavy index has rocketed higher, blasting through the 4500 resistance. Expect big volatility and look at 4600 as support in the short-term.
The S&P 500 pushed through that 2060 level and then 2080 and now 2100. We are getting a little long in the tooth with this really and should start seeing some resistance selling pressure in the 2100 – 2120 range.
The Russell still hasn’t really confirmed a broad market rally. I did get back above the 1180 level, but not with huge strength we would expect to see that would mirror the Dow Jones and S&P 500.I would look at 1160 as short-term support on any pull back.
The Russell’s weakness concerns me about this market rally. It seems to be getting long in the tooth and lead by a few over-weight stocks and certainly not the broader market that we see with the Russell.
If the Russell pulls back below 1180 and revisits the 1160 range – we could see a short-term and sharp sell-off in the other indices. Not sever – but at least back to those short-term support levels.
The VIX is holding up well – relative to my concern. While it is below the 15 level, which in this market seems slightly complacent, it is not at a level that shows broader based blind and unconcerned optimism. Perhaps it is holding up in the 14-15 range because there is still concern about December rate hikes and/or not fully buying into this rally.
We can certainly be setting up for a break-out Santa Claus rally – but so far the Russell and the VIX are not totally buying into that yet.
Are the narrower based indices ahead of themselves – the Russell thinks so.