Janet Yellen, when speaking to congress June 21st was asked about the Fed's loss of credibility. Her answer was powerful. She said they are using expectations "less" and "not relying on forward guidance."
These are incredible words.
Not because of data dependence
We've reported multiple times that the Fed, this year has been incredibly indecisive (here and here). Many have said that is a function of a Fed mandate of data dependence. Data dependence is a recently designed Fed term. It is an official way of saying "we do not know which way things are going."
Yellen's most recent testimony, however, is much worse than "data dependence."
She is saying that even data dependence does not suffice and all economic models and forecasts, even based on data dependence, are not useful.
If the leadership is in the dark then so is the nation.
What happens to a company that pulls guidance?
Any fundamental analyst knows that a company that pulls guidance will see their stock drop. A lack of guidance means the company can't see into the future as they once did. They lost visibility.
What pulling guidance really means
We're going to go into a brief lesson of Fed speak. We're going to say a few Fed words and tell you what they mean.
Risk: Down markets
Volatility: Down markets
Not relying on forward guidance: Down markets
Using expectations "less": Down markets
That's what we think their words mean to them.
New Territory: We need to depend on OUR OWN work
All of the time spent tracking the Fed is now for naught. They don't know why their own policies are not working. They've admitted that we should not listen to their guidance, models and expectations, because they don't work.
So how do I track monetary policy?
In our Field Trip To The Fed we review what the Fed is actually doing based on the reported data. This helps us look through what they are saying. We designed this report after being disappointed multiple times hearing them go back and forth.
We see them pulling money from the system, reducing the monetary base, raising reserve requirements, and increasing capital requirements on banks.
The Fed Is Currently (Quietly) Tightening
In other words, despite their public indecisiveness, they are tightening. We can understand why they wouldn't want the public to think that.
We've shown based on public Fed statements, that they know they will hit markets if they tighten (see here for proof). They want to do it quietly.
We've been saying it is more important to track what they are doing then to listen to them.
So Why Is The Economy Not Acting Like The Fed Expects?
Why Is The Economy Slowing Faster Than They Expect?
The Fed can't figure out why the economy is not going up.
1) After a long run of loosening they are actually tightening (see here for proof).
2) Even though we are at full employment the work force is smaller due to the baby boomers coming out of the workforce (see here for proof).
3) Productivity is dropping based on some of the above factors which could drive inflation. Inflation likely blindsides them. (See here for proof).
If the CEO doesn't know what's going on we sell the stock
We have been bearish on the S&P 500 (NYSEARCA:SPY) as you know. The CEO just told us to sell her stock because she doesn't know what's going on. We think there is downside.
Good luck and please be in touch. All of your comments teach US a ton.
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Disclosure: I am/we are short EMINI FUTURES BUT THAT CAN CHANGE AT ANY TIME.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.