The Fed is important because millions of market participants believe it is important and a critical mass of people are under the illusion that its policies have put the “Great Recession” in the past and laid a path for a sustainably good economy going forward. In short, confidence in the Fed has never been more pervasive as it reaps the reward (the respect and confidence of the majority) for a job well done.
Never mind for now that previous Fed policy is what fomented the “Great Recession” (i.e. a near liquidation of the system) and the supposed remedy has been similar but more intensive policy using official credit as opposed to commercial credit as the stimulant.
Through this cycle I have watched Gold Bugs that used to rail against “Helicopter Ben” fade to black, the Bond Vigilantes who would short the long bond (including one over exposed Vigilante, formerly of PIMCO) get their hats handed to them and the general backdrop of distrust and revilement toward the Fed simply get erased somehow.
It’s as if a majority of market participants are little more than black boxes with certain coding for certain cycles. Today the code might look something like this…
<caption>Sit quietly and we will control all that you see and hear</caption>
The next cycle is going to feature quite the opposite. I noted a tone shift among market participants last week that has become just a bit less in line with the all-powerful Fed. More people are catching on to the idea that it is little more than a macro circus act.
Picture this; things get a little complicated on the global macro and the stock market begins to adjust. It then makes an unruly move and one piece of bad news is followed by another and suddenly the code kicks in: if (DJIA decline > 3.1%) text = “LIQUIDATE POSITIONS”. The black boxes are networked so the code is exactly the same and it is received at exactly the same time by all of them.
Enter James Bullard, a renowned Fed Hawk actually getting in front of a mic and announcing that ‘you know, we can always implement Q4’ in REAL TIME, as the market was taking what turned out to be just routine correction. This actually happened and it is just one small example out of 6 years of what most participants should have recognized as desperation but instead just calmly sit through. Yes, I am going to make you wade through the Outer Limits thing again…
There is nothing wrong with your television set. Do not attempt to adjust the picture. We are controlling transmission. If we wish to make it louder, we will bring up the volume. If we wish to make it softer, we will tune it to a whisper. We will control the horizontal. We will control the vertical. We can roll the image, make it flutter. We can change the focus to a soft blur or sharpen it to crystal clarity. For the next hour [indefinite period, now 4 years and counting], sit quietly and we will control all that you see and hear. We repeat: there is nothing wrong with your television set. You are about to participate in a great adventure. You are about to experience the awe and mystery which reaches from the inner mind to – The Outer Limits.
I am not focusing on this to waste your time or to be cute. I am doing it because I am in awe at how in line the financial media, and by extension, naive market participants (a majority) are behind this entity. With a little luck and a hell of a lot of ingenious, signal-distorting policy it is almost as if the natural system never almost ended in 2008. But the key point is that it was ending in Q4 ’08 and Q1 ’09.
Periodically, in the years since then a little clown car zooms to the center ring and they come piling out, performing tricks and feats of daring do at every little disturbance within the financial markets, the economy and/or the system itself. But back in Q4 2008 it was fire trucks, and not just from one locale. Neighboring units were called to the 4-alarmer, as were the information police. Calling all cars!
It was no joke. But now, in the wake of the ridiculous QE4 shtick by Hawk-in-drag Bullard, and with the Fed still in ‘no decision’ mode on the Funds Rate two solid years into an economic expansion, I do believe the Fed has hit the apex of this confidence cycle. They could not even withdraw “patient” from the March FOMC statement without putting in some other mealy mouthed wording to replace it.
A new code to watch for might look something like this…
if (6/30/15 FFR < .5%) text = “cease current programming, initiate confidence removal”
 Adding a little effect. Hear all that dissonant noise? Now try to think rationally about the financial markets with that going on in the background. You can’t, can you?
“They’re coming to save the day!”… ha ha ha.
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Gary Tanashian of biiwii.com successfully owned and operated a progressive medical component manufacturing company for 21 years, keeping the company’s fundamentals in alignment with global economic realities through various economic cycles. The natural progression from this experience is an understanding of and appreciation for global macro-economics as it relates to individual markets and sectors.