Making Up Terms 'Greater Gradualism'

by: Scout Finance


The market has had no returns in 16 months.

The Fed cannot push the market higher because the cycle is slowing.

Rail car traffic is falling quickly.

If you listen to just my market calls, then you would acknowledge I had been right at the start of the year and wrong in the past few weeks. Of course that doesn't help you too much as an investor because blindly following anyone's advice without doing your own research is silly. While the market is up more than I anticipated, my narrative remains solid. Besides being negative on stocks, my narrative includes that the economy is weakening, that the Fed will not raise rates, and that the Fed can temporarily prop up stock prices by being more dovish. I think those three points have all been validated. I'll add a little more support to my ongoing explanation of these narratives.

The concept that the market is being affected in the short term by Fed policy was on full display today as Yellen gave yet another speech. Almost every day the Fed is in the news because the market needs to be supported since GAAP earnings have now declined for two consecutive quarters. The market has been very uncertain in this situation because while it relies on the Fed, the Fed relies on it to make policy decisions. My point is that the economic data will start to matter in the coming months causing the market to start ignoring the Fed. This ending of faith in the Fed will cause even more volatility than what occurred in the 2008 financial crisis. As I have said previously, my proof that the market cannot be boosted to unlimited heights by the Fed is the range bound stock market.

The term of the day was 'greater gradualism.' The Fed is great at coming up with new terms to try to make a statement without making a statement. It can't say it is stopping its path of rate increases because then it would be admitting that the 25 basis point raise in December was a mistake. The reality is the Fed has stopped raising rates. This is an objective point which I have been accurate in predicting. Even if you just go back to my post a few days ago, the chances of a rate increase have declined significantly. On March 24th the chances of a December rate increase were 74%. As you can see below, the chances have now declined to 60%. My prediction is the probability will go to near 0% at some point in the next few months. This change in policy from 2 rate increases to 0 could have a short term positive impact on equity prices.

While the bulls can talk about the rally in the transports, the data remains negative. On a year over year basis rail traffic fell 14% in week 11. As you can see from the chart below, rail traffic has been weakening. I have a friend who works on the rails in New Jersey who has told me his co-workers are discussing the possibility of another crash in the economy. I wouldn't be stating this point if it didn't jive with the data. It is nice to have anecdotal evidence 'on the ground' to paint a picture of what direction the economy is going in.

To summarize, the narrative remains the same as it has for many months now. The Fed will become dovish. There isn't much more it can do to ease besides eliminate the plan to raise rates twice (jawboning), cut rates once (to 0%), and start another round of QE. If you remember 2008, the Fed cutting rates didn't stop the crisis from causing equity markets to crash. This time the Fed has even less ammo, which doesn't even work well to begin with.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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