Big Fed Lie

In real life you can always tell when someone has something to hide when they get really evasive in their answers.

And boy was Jay Powell evasive in his press conference yesterday. Twice he was asked about the Fed’s policies causing risk assets to rise, twice he skirted with a non answer:

He may as well have said that asset prices work in mysterious ways. It was a complete copout and dodge and therefore the non answer was very revealing in itself.

Look, I can’t believe we still have debates on this issue. There are still Fed apologists out there in apparent denial beating the drum that nothing the Fed does causes risk assets to rise directly. The Fed just manages the economy via interest rates and liquidity does not go directly into stocks. It’s just the underlying economic conditions and earnings growth that causes stocks to rise.

Please, just stop.

Who are you going to believe, the Fed or your own lying eyes?

And of course we can point to 2019 when earnings dropped and stocks flew higher on nothing but a constant Fed jawboning and policy operation with Jay Powell personally marking the lows during each correction:

I don’t want to rehash the debate arguing why the earth is not flat with flat earthers.

And I don’t need to: Jay Powell’s non answer was the answer.

If the Fed’s policy wasn’t causing asset prices to rise he could’ve just flat out denied it. Instead he muddled in generalities.

Which tells me one thing: He didn’t want to go on the record because he knows it’s true. But he can’t admit it, hence my point yesterday:

The Fed is a dishonest organization. I can go further and call it the Big Fed Lie.
The lie that asset prices are not directly on the Fed’s mind when managing policy.

Go no further then watch Bill Dudley in its vehement denial that repo impacts asset prices directly ( we already discussed this here: Repo Lightning) admitting the very point: The Fed is indeed watching asset prices in determining policy:

He literally said: “They (the Fed) certainly have to consider the financial asset prices when making their monetary policy decisions”.

And there it is.

And they do:

Does the Fed think we’re stupid or are they in self denial?

In yesterday’s press conference Powell listed every possible reason for a slowing of global growth in 2018 except of course the real reason: That central banks reduced liquidity and stocks tanked as a result which slumped confidence and spending.

The linkage between stock market direction and economic growth was even acknowledged by Bill Dudley in the interview above.

The effect is obvious: Stocks drop hard and confidence takes a hit, spending slows the economy slows, stocks rise confidence goes up spending increases the economy grows. Nothing magical about that and hence the real incentive for the Fed is to manage the economy via the stock market and put in the conditions for the market to rise.

And liquidity, easy financial conditions do the job. What? You think it’s a coincidence that the Fed is running the loosest financial conditions in 27 years right now?

Of course not.

Here’s the truth the Fed can’t and won’t admit. The near 20% drop in stocks in Q4 2018 scared them, their effort to normalize rates and the balance sheet ended in failure and a sustained drop in stocks would’ve brought a further slow down in economic activity and have risked a recession. So they flipped and they flopped and went full easy again and kicked the can further down the road exacerbating asset prices in the process.

And when the repo crisis happened out of the blue they panicked and flushed the system with liquidity and it’s brought about a massive further acceleration in asset prices.

Let’s even stipulate for argument’s sake that the liquidity does not make it into stocks directly (I think this is very debatable), but if money is chasing stocks because the perception is that the Fed is supporting markets, that’s then a learned behavior producing the same effect. In short: They have created a market monster that demands constant feeding driving the very behavior that they are unwilling to admit.

Some call it a communication problem. I call it a policy failure, a market and economy made permanently dependent on central bank intervention with central banks unable to extract themselves while the world is ever more drowning in debt.

But worse for the Fed now: Hardly anybody believes them. Not on liquidity, not on repo, not on inflation.

Guy Adami brought up a very good point yesterday:

The Fed may publicly pretend to not target asset prices, they may claim inflation not to exit when every consumer experiences it, they may pretend ignorance and imply that stock prices move in mysterious ways. They may even pretend that valuations are not at extremes:

They may pretend ignorance on all these things, but we know better. And the market knows better for every Wall Street firm with a bullish outlook cites the Fed’s policy actions as a primary reason to buy stocks.

There is of course a reason why the Fed can’t and won’t admit to any of it and that is: They have been largely responsible for the last 2 stock market busts and are setting everyone up here for the next one:

And that makes them the villain:

Instead of coming clean they are unwilling to admit it to themselves and/or to the public instead they keep peddling the Big Fed Lie: “It’s very hard to say what is affecting financial markets with any precision or confidence.”


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Categories: Opinion

12 replies »

  1. Very interesting times indeed. I love the challenge and the fun of investing.
    Silly notes from today:
    – I had to short Tesla with an order at $666 lmao
    – Really focusing on volatility and think it’s the place to be to have great exposure to the ups and downs… and ultimately a crash when it does come.
    Thanks for the awesome work. Unlike other experts, you have kept true to your perspective and speak truth. Respect!

  2. “They are still Fed apologists out there in apparent denial beating the drum that nothing the Fed does causes risk assets to rise directly. ”

    Typo- should be ‘There are still Fed…”

    No need to publish this comment.

  3. Want some more govt economic related bullshit? How about Wilbur Ross pumping the coronavirus as positive for American GDP via CNBC (Below). What next, buy ratings increase for CAT as the world will need more backhoes? Time to break out the MPSA hats (Make People Sick Again)? Wilbur Ross is mentally ill…

    CNBC 9:20 am: Wilbur Ross says coronavirus could bring jobs, manufacturing back to the US
    Commerce Secretary Wilbur Ross said the coronavirus could have a positive impact on the U.S. economy. “I don’t want to talk about a victory lap over a very unfortunate, very malignant disease,” Ross told Fox Business Network. “But the fact is, it does give businesses another thing to consider when they go through their review of their supply chain.”

  4. as long as there is no spike in interest rates (due to a loss of trust) ….I think the madness can continue…we live in such unprecedented times: endless accumulation of debt doesn’t seem to bother anyone….on the contrary: many really believe DEBT Levels don’t matter anymore. Truly unbelievable

  5. S&P500 today, from -30 earlier on to…. +10 before close.
    Down days will simply not be tolerated, says Fed. & co.
    Must keep the dying bull alive at any/all costs.
    How much repo was spent to achieve today’s result…

  6. Today was a hoot! Infected and dead from 2019-nCoV up 30% in a day, my heartfelt sympathies to those affected, WHO calling a global emergency. Shares popping up. AMZN avoiding more taxes / increasing efficiency (note: revenue was in line with expectations) and they pop more than 10%. One can only ROTFLMAO or weep.

    The disconnect between reality and markets truly has become unbelievable. Fed (and other central banks) infusions are the only thing markets recognise as reality. And it has to keep increasing else the illusion is dispelled. Perhaps the truth is: reality doesn’t matter.

    Any rational being knows this is not possible. I expect a messy end before long. How about next Monday when Shanghai opens down 10%?

  7. The “Markets” panic bid higher after the global WHO emergency announcement, mostly because the market loved that the WHO did not recommend we stop global flights. Bloomberg said 160,000 people flew from China to US in the year 2003 Sars outbreak. Last year 3,000,000 people flew from China to the US. Comparing today to 2003 is a mistake, and the world will look back in 3-6 months in amazement that nobody shut down all flights from China to the rest of the world, not wanting to harm the “Markets”. Kudlow also said today, via Bloomberg, the following below…which shows that companies now make our American health policy decisions, not the government as they do not want to be blamed for hurting the “Markets”. Last I checked, the markets will not be voting this fall.

    Per Bloomberg today – “Kudlow also told reporters at the White House that the Trump administration is leaving decisions about whether to cancel flights to or from China to the airlines for now.”

  8. The great fallacy which is endlessly touted is that confidence brings growth. The fact is that monetary expansion ( credit that is) brings growth and confidence.
    It’s a “show me the money Jerry” economy. Confidence follows money, not the other way around.
    I’d say there is at least another $100TN or $200TN of ‘confidence’ to be printed before the con ends.

  9. I can’t believe there are still Fed apologists out there in ABSOLUTE denial that the Fed is NOT ‘federal’, is NOT private, and is NOT illegal and unconstitutional.

    ~ Occams


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