'Et Tu?' The Only Question That Matters

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by: Mark St. Cyr

The latest minutes release from the Jan/Feb policy meeting of the FOMC (Federal Open Market Committee) came and went with little to no "market" reaction other than to provide dessert for the parasitical, co-located, light-speed, front-running HFT (High Frequency Trading) algorithms to feast upon anyone (or any other machine) foolish enough to dare hedge, or short this "market."

If you're wondering why I used "dessert" rather than lunch? That's because they already do that (i.e., taste every-trade first) all day, everyday with near 100% efficiency. And you thought when they (the HFT industry) talks about "efficient markets" that is was something beneficial too you, right? But I digress.

As I digested the statement itself, listened and watched reports coming from the financial/business media, I was struck on just how D.O.A. everyone wanted to spin a possible rate hike in March. The only spin I found more dizzying than most of the conclusions was the "market's" repricing of the odds. i.e., it rose 2 percentage points, than fell back down to unchanged where it ended where it started, at 36%. For those not familiar with this metric, it basically measures the "market's" outlook or odds for an upcoming rate hike, anything beginning with a 3 handle or less is considered "complacent" or "thin chance" of it happening.

Although I appear to be alone in thinking the minutes, and the reaction to them via the financial media and "markets" is setting the stage even further for an "Ides of March" surprise, I found I'm not. Mohamed El-Erian, Alliance SE™ chief economic advisor, and former Co-CEO of PIMCO™ fame, is also warning that the markets are too complacent, and believes based on his take the probability of a March hike should stand about 50-60%.

Although our reasoning for such differs on the specifics, his assumptions based on his own reading and acumen (and he's one of the few I listen to) raises the odds above coin-toss status. And that's a very critical distinction, and reasonable conclusion. For these "markets" are now pricing (and acting) as if "there is no coin." The chances for surprise abounds. From the minutes, to wit:

In discussing the outlook for monetary policy over the period ahead, many participants expressed the view that it might be appropriate to raise the federal funds rate again fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations or if the risks of overshooting the Committee's maximum-employment and inflation objectives increased.

Benign enough one might say, or, just more of the same old same old "cover your derrière" Fed speak we're all used to (and tired of). But it was the following line that should be noted, which followed directly after the above. Again, to wit:

A few participants noted that continuing to remove policy accommodation in a timely manner, potentially at an upcoming meeting, would allow the Committee greater flexibility in responding to subsequent changes in economic conditions.

You know what that line states in Fed speak? You've been warned. And here's why…

First: Who are the "few?" Were they voting members? Was either the Chair, or Vice Chair one? Or, (heaven forbid!) was the possibility that both were? The minutes don't say specifically, it only speaks in generalities.

Second: With recent speeches, testimony before congress, Ms. Yellen's own presser in December of 2016 and subsequent professing (or defending) that even more hikes could be forthcoming sooner, rather than later, the "balances sheet" now squarely at the forefront of all Fed discussion via Fed members themselves, a "market" subsequently in melt-up mode (e.g., New All-time Highs a near daily occurrence) one is supposed to assume (and be positioned for) the time to raise will be later rather than sooner?

It would appear against this backdrop we're told via the business/financial media, Ivory Tower academics, next-in-rotation fund managers, Ph.D "think-tank" aficionados, along with the shoeshine club: Absolutely, YES!

I'm sorry, but I'm just not buying it. Figuratively, as well as literally. And as I've warned so many times earlier: I believe, neither is China. China continues to throw everything at their economy and markets as to try to forestall any further deterioration caused by an ever-increasing flow of capital flight. Everything that is - except the yuan.

The yuan USD/CNH cross rate improved ever so slightly recently. But (and it's a very big but) that improvement was all caused by a weakening of the dollar in a knee-jerk fashion response to the release of the minutes. (i.e., the market sees little chance of a hike = less chance of dollar strength.) The issue? The dollar is remaining, (once again and strengthening) above the 100.00 level. And that's far from a "good thing" for China. Unless: You want (and need the excuse) to send a message, to wit:

"China Responds To Fed Jawboning March "live" - Weakens Yuan. Spikes Money Market Rates"

This was on Monday (China time) after the incessant jawboning by Fed members that not only was March live, but was coming from none other than the Chair herself, Ms. Yellen (e.g., as expressed via outgoing Atlanta Fed. president Dennis Lockhart).

This allows for a very nasty supposition: With the Fed minutes allowing for the interpretation of "remains hawkish" to stand. Every single word, syllable, facial gesture, body posturing, intoned Fed speak, and more is under the microscope. And the ramifications for upsetting this "band-wagon" of ever-the-higher equity prices is fraught with danger.

Everyone (especially the "markets") seemed to breathe a sigh of relief after the minutes were released in what turned into the most recent, seemingly never-ending, BTFD, horns-over-hooves reflexive moment. However, I would argue the next "dip" buying opportunity is encroaching ever-the-closer to a cliff's edge, rather than another wall-of-worry to be ascended. And here's why…

The minutes I'll contend (and I believe Mr. El-Erian to be of the same mindset) did not lessen the chances of a March "live" event, but rather, strengthened it. There was nothing by my reading that made the case as to "soften" the hawkish tone. And today, not saying anything has just as much implication value (and sometimes even more so) than saying more.

Again: What the Fed did not imply (let alone openly state) was anything which could be construed (via my prism) as any case for others to infer a more dovish - as opposed - to hawkish stance. The release, when added to current jawboning, strengthens the case far more to the hawkish side. Period. Reasoning? Where's the counter balancing argument? Again: anywhere? (And "anywhere" is by the Fed itself, not the media after all, even Ben Bernanke is confused.)

There are a few upcoming dates and events that still demand attention for anyone in business trying to be at the forefront of what could very well be another upheaval in the economy fueled by currency, and/or monetary policy reflexive reactions:

On Wednesday you have the "Beige Book" (i.e., the layout of the agenda for the next FOMC meeting) along with an evening speech by Fed Governor, Lael Brainard. Any detail which alludes to "hawkish" rather than "dovish" will make news. Especially if it comes forth from Ms. Brainard.

Then on Friday comes what could be one of the most market shaking events if - and I do mean just that - if - any hawkish tones are inferred from either Vice Chair Stanley Fischer, or Chair Janet Yellen. Both are due to speak at two different events at approximately the same time. Mr. Fischer in New York 12:30 p.m. ET, and Ms. Yellen in Chicago, 1:00 p.m. ET.

If it can be deduced that they are on "the same page" and it lends itself more to interpretations that March is indeed "live?" The "markets" I believe will react much the same way as Caesar did on March 15th: completely unaware, and by total surprise with disastrous implications.

Again, it will be one thing if only one of the above implies that March is "Live." It will be quite another if the other does the same and drives their own monetary "dagger" deep into this current "Bulls-t market." The only question is: Who will receive the question screamed in terror by the unsuspecting "Bulls"?

Et tu, Janet? Or: Et tu, Stanley?

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