(Picture: Future investors waiting in line for the backyard bail-out bounce. I'm next, no I'm next.)
We've heard many hoping and expecting for a central bank bail-out. Hopes for QE eternity still ring in the air. Crisis, in this millennium equals bail out. We think for many reasons it is too early and ultimately not likely. We think, if anything, past bail-outs have created a complacent false sense of security.
Fed Speak For No Bail-Out
It's important to know what the Fed already told us. It doesn't look like they are bailing us out. This is not the language of a bail-out. This is the language of just the opposite.
On Friday the Fed said, "The Federal Reserve is prepared to provide dollar liquidity through its existing swap lines with central banks, as necessary, to address pressures in global funding markets, which could have adverse implications for the U.S. economy."
Bail-outs are meant to restore order and have soothing "implications." The Fed told us in the quote above, however, their moves will have "adverse implications."
That's not bail-out language.
The Market Is Not Responding To Last QE
Banks, we think would be hesitant to ease after not seeing the positive response to past major moves. Past economic weakness is a black eye to all the money spent on such strategies.
Here's the economic response to past moves, slowing.
False Sense Of Hope Means Market Risk
The world is all grown up. We can do it on our own. The Fed and other central banks did everything they could again and again. The economy is slowing and, in many parts of the world declining.
Throwing more money after bad is a tough sell to all central bank governors right now.
Meanwhile investors, we think, now have an altered sense of risk. Investors think there is always some bail out bounce news. It's inevitable. We've been lured into complacency by past moves.
Waiting for governments to step in is not a sound longer term fundamental investing strategy.
The Fed Knows They've Already Done Too Much
The Fed in 2014 wrote to expect a path to "normalization" to reduce excess Fed reserves. They know it's "not normal" and they need to "normalize."
This crisis, thus far, is not a crisis. We don't see the consequences yet, just the initial news. If they do it at all (which we don't expect) a bail out would only come when credit spreads are jumping and markets are crashing.
We're not there.
The Market Is Not Really Down Much
We're 5-6 % off the highs for the S&P 500 ETF (NYSEARCA:SPY). That's also not crisis territory. A crash is usually said to be a 20% move. We're not there. It's way too early to consider it.
Fed Futures Pricing In Some Chance For Rate Cut
Fed Futures have started to price in a chance for a rate cut (although small) even by July.
We think market participants are showing their cards hoping for a bail-out. It's a false sense of complacency.
Fed Said Last Week Rates Already At "Lower Band"
The Fed said to congress just last week that being near zero Fed funds is the lower band of rates. We don't think they want to dare talk about zero rates. Fed Chair Yellen said last week she would not consider negative rates (a change from a month or so ago).
The rate commentary was at the same congressional testimony that heard Ms. Yellen repeatedly mentioned that she believes there are risks with Brexit.
Even though there are risks she was not considering lowering rates.
We don't expect a bail-out bounce. We don't expect much of a bail-out. We are way too early in any event with markets only down 5-6% off the highs.
The Fed is talking about slowing rate hikes, not cutting rates.
The Fed is talking about "adverse implications" which is not the verbiage of bail-outs.
(If you want to get in line for a backyard bail-out bounce though, we're ok with that, just take your shoes off first.)
Elazar Advisors, LLC specializes in earnings and predicts, analyzes and reacts to earnings and earnings events as well as developing current company and macro stories with a hedge fund perspective.
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