The Market Signal Everyone Should Heed: When Doves Cry

Regardless of what mainstream business/financial outlet one turns to of late, one meme has returned with a vengeance. Has it been, Buy The F’n dip? (BTFD) How about Hold On for Dear Life? (HODL)

Actually its a bit of a trick question, for as these sayings have really never truly gone away over the last few months, only their zeal for overuse and execution has.

No, what has suddenly reappeared on the scene is the oldest and most underrated signaling one can pay attention to, and it too sports its own acronym.

That saying? CYA aka Cover Your A**. And it is showing up everywhere – if – one wants to truly listen.

The only thing more important than being acutely aware for its emergence, is taking note from precisely where. And it is here, this time, that “where” is a very important signal to not only hear, but make note from where. For the implications to not only the “markets,” but the global economy at large are tremendous.

Yes, “tremendous,” maybe extraordinarily so.

The CYA siren call has been showing up everywhere as of late. So, to pick out which to pay attention to has been clouded by the fact for its reemergence via the next-in-rotation fun-manager cabal, when (suddenly nervously) explaining why the “markets” are currently rising based on “good earnings, and reasonable P/E metrics.”

If one listens carefully, very carefully for that matter, suddenly there is a caveat at the end of nearly every explanation.

Remember back in days-of-yore (like January) when earnings season was told/sold to be “just fantastic!”? Do you remember any caveat? There was, but it was only to the laudatory side,

Tax cuts were going to propel everything to the moon. GDP was now poised to rocket along taking the entire market with it, and on, and on. “Dow 30K here we come!” Then, everything changed.

Was it tax cuts? Nope, they were passed. Was it GDP? Well, the original estimates and readings were a bit, how shall we say, “over zealous,” maybe? (over 5%) But everything was supposedly firing on all cylinders.

Earning so far? So far, everything seems to be just as was called for. i.e., a bit more positive than negative, with about the same in respect to those beating expectations vs missing.

In other words, all according to plan, right? And yet, the “market” not only feels stuck, but what’s worse, (I’ll contend, far worse) feels to be teetering.

This has now (right on cue) caused many earlier talking head bull-market-prognosticators to, out-of-the-blue, add caveats to their musings.

In other words, “everything is rosy, that is, unless the world melts down tomorrow.”

As catch-all as the aforementioned is, it pretty much sums up every call as of late. i.e., Just a few months back there was no need for any caveat, unless it was an add-on portending even more upside nirvana than what being heralded at that moment.

Today? It’s all CYA. e.g., “As we’ve/I’ve said before, this will all end badly” has, once again, suddenly reappeared. (coughCNBCcough)

Although the above is noteworthy, there is another CYA making its way across the financial media. And, it is here, where one should pay the most acute attention to not just the wording, but rather, who that reasoning is coming from. i.e., The once market soothing coos of the Federal Reserve’s noted doves is sounding, more or less, like the call of a shrieking hawk laced with tears. i.e., They seem to be trying their best to align their views and wording with the now Chair Mr. Powell, but seem to be doing so with great personal agony or anguish. Opinion of course, but it’s how I interpret what I hear today, as to what I heard only about a year ago.

Case in point: Fed. Board Gov., Lael Brainard.

In a speech given at the Global Finance Forum in Washington D.C. Ms. Brainard made a few startling remarks to those who’ve regarded (and correctly interpreted, I’ll add) her as one of the most fervent “doves” at the Federal Reserve in regards to policy these past 9 years. Here are a few notables. To wit:

“Sizable fiscal stimulus is likely to reinforce cyclical pressures at a time of above-trend growth and tightening resource utilization. There are few historical episodes of similar pro-cyclical fiscal stimulus to draw upon as we assess the outlook. But in the few cases where resource utilization has been near the levels we may soon be approaching, there have been heightened risks either of inflation, in earlier decades, or of financial imbalances more recently.

Currently, inflation appears to be well-anchored to the upside around our 2 percent target, but there are some signs of financial imbalances. Our scan of financial vulnerabilities suggests elevated risks in two areas: asset valuations and business leverage.”

Here’s another…

“In terms of liquidity, not only do our largest firms now have the right kind and amount of liquidity calibrated to their funding needs and to their likely run risk in stressed conditions, but they also are required to know where it is at all times and to ensure it is positioned or readily accessible where it is most likely to be needed in resolution.”

However, it is here (all opinion, of course) where one can hear the true change in tone, as well as implications, again to wit:

“I support efforts to improve the efficacy of the Volcker rule while preserving its underlying goal of prohibiting banking firms from engaging in speculative activities for which federal deposit insurance and other safeguards were never intended. The interagency regulation implementing the Volcker rule is not the most effective way of achieving its very laudable and important goal. We are exploring ways to streamline and simplify the regulation to reduce costs without weakening the key objectives. We should be able to provide firms and supervisors with greater clarity about what constitutes permissible market-making. We should also identify ways to further tailor the Volcker compliance regime to focus on firms with large trading operations and reduce the compliance burden for small banking entities with limited trading operations.”

My conclusion? Hint: The Bernanke/Yellen Put has been revoked, at least for the time being. Consider this both a warning, as well as notice. i.e., The banks and “markets” will have to deal, on their own, with lower prices and liquidity issues. Only in an outright panic will they re-engage. And where that level resides is currently lower, much lower, than many may assume.

As always, one should read the entirety of the prepared text and conclude for themselves. However, with that said, I can only assume that it was painful for Ms. Brainard to set forth such “hawkish” tones. After-all, she has been one of the most consistent “doves” in regards to anything Fed. related and its willingness to intervene at even the most innocuous of market turmoil. i.e., Even if it was to just suggest (aka Jawboning across the media) that the Fed. was standing at-the-ready.

Ms. Brainard, in no uncertain terms, lays out point-after-point that the Banks have the ammunition within their own quivers to deal with any “market” uncertainty. And if that “uncertainty” also equals market losses? The Fed. is now viewing that as welcome “froth extraction.”

That alone must have sent shivers down many a bankers spine, which brings us back to today, and the question, what does it all mean for the “markets” going forward?

No one truly knows for sure, but there are clues to be added to all the above, and they are these…

Now that the N. Korea situation seems to have been resolved to the positive, shouldn’t all the “risk premium” that came off from the “all-time-highs” be not only retraced, but more akin to “Dow 30K here we come?” You know, since that was one of the main drivers said to be the reason for any sell off in the first place.

How about if you now add into that the “Syria” or “Russia” showdown which has all but been negated? Shouldn’t that now, at the least, add more fuel to propel higher with immediacy?

And what about all the above added with earnings coming in as projected? Surely, that would also conclude that the “markets” should rocket higher and faster than a Saturn V, right?

Remember, the Federal Reserve along with all the so-called “smart-crowd” now appear in-line with the same thoughts of the economy, as in, everything’s on solid footing, earnings are coming in as prophesied, employment is at all-time record highs, real-estate is up, “markets” are still hovering at near all-time highs, I mean, what’s not too like, right?

Well, there is one thing, and it is bringing many a “dove” along with “market bulls” to tears. That thing?

Quantitive Tightening (QT) along with rate hikes are going to go on, unabated, for the near future. That’s the signal, the only signal I’ll maintain, that matters.

That is – until the “hawks,” “markets,” and politicians begin crying “Uncle.” Which may not be that far off, over-the-horizon, should these “markets” not rebound from here, with immediacy.

Yet make no mistake, the Federal Reserve has now covered its own bases. i.e., CYA speeches and more is also akin to another acronym: YBW (you’ve been warned)

© 2018 Mark St.Cyr