From Joshua To Jerome: The Facade Crumbles With The Final Horn Blow

For those not familiar the Joshua reference relates to the Battle of Jericho story contained in the old testament, where the city walls crumbled after Joshua’s army marched around the city seven times blowing their horns. It was the final blast which brought the walls crumbling down. Jerome Powell may find himself in a similar situation.

However, the interpretation of victory may depend on which side of the street from the Eccles Building one stands, for it is going to be hard to tell precisely who wins or loses should the facade of these so-called “markets” crumble in full view.

Let us not forget one very important overarching premise that has been canonized and prophesied via the mainstream business/financial media, Ivy League Ph.D’s, next-in-rotation fund manager cabal, et al.:

The central bankers of the world are today’s financial demigods with the Federal Reserve playing the position of pontiff and Holy See. Period, full stop.

I have said this and other similar statements before and I believe they bear repeating as to show just where we are today, for when it comes to days-of-yore type references – they’re more relevant than many would like to admit, let alone believe. Here’s another. To wit:

Not since the time of kings has so much power been entrusted to such a small cabal of non-elected individuals.

And wield that power as they see fit – regardless of the consequences – they have. i.e., just ask any saver about Fed. policy effects for clues.

However, 2018 has been shaping up to be a year where there have been some extraordinary changes in not just the imagined robustness of the facade we now reference as “markets.” But also in both the efficacy and strength of the one and only facade that has mattered to the faithful: The Federal Reserve itself.

To imply that this once impenetrable facade is looking rather shaky, I believe, would be an understatement. Hence my allusion earlier to where the final victory may lie, and with whom, is an open ended question.

Since the beginning of the year it has been none other than the retired Chair herself e.g., Janet Yellen that has contorted her reasoning from seeing no new financial crisis in “our lifetimes” to now seeing financial boogeymen everywhere (or maybe that should be singular?).

Just this past October Ms. Yellen expressed her concerns over rising deficits as unsustainable. Well ain’t that a bit quaint coming from someone who oversaw the complete adulteration and perversion of the capital markets by magically printing $4Trillion and amassing a balance sheet that was never intended to to be used or accumulated in any such fashion. 

I was left utterly slack-jawed when I heard Ms. Yellen use the line “If I had a magic wand, I would raise taxes and cut retirement spending.” One has to wonder is she’s that tone deaf, experiencing memory loss, or a combination of the two with a little bit of “I’m retired and can say whatever I want now” combination of all the above? 

The “magical” aspect of all of this is whether or not the “magical thinking” of central banking intervention in all its forms that brought us such mythical delights as Unicorns, IPO’s that make Bernie Madoff question why he’s in jail and more have been worth the price. For it’s also brought us  other such delights as, but not limited to, for there’s not enough digital ink to list them all:

Business models that not only don’t work, they can’t work – ever. Crony-capitalism so rampant that it makes many a communist country envious. Student loan debt that enables economics/business Ivy League professors to teach subjects that not only don’t work, but require their students to remain dumber than a box-of-hammers as to ensure they keep taking out ever-the-more and in ever-growing amounts to pay for these very same professors salary and retirement.

And if that isn’t bad enough, all while they lavishly acquire awards that are meaningless (e.g., Nobel®) and are jet-set’d and invited to speak at more junket styled conferences around the globe that would make a pop star envious. And I haven’t even touched on the regulatory capture either into this same industry, or the industry that is suppose to be in the business of “regulation police.” e.g. SEC.

Is it any wonder the term “magic” came so freely to Ms. Yellen? After-all, for years her and her predecessors wielded the most powerful of all “magic” wands known to man, its name was: QE (quantitive easing.) 

The issue here is Ms. Yellen broke that magic wand on her way out of the Hogwarts of central banking known as The Eccles Building. Where Mr. Powell has been left to both deal with the repercussions she laid out prior as the “horns blow” to ever the more increases and balance sheet tightening.

He was appointed as her successor to carry on and hold up the fort. He may find out buried deep within his job description a fine print clause was added where he was also appointed to be the subsequent bag-holder. But I don’t think it’ll be just his to hold as these remaining chapters are being written.

The Fed, so far, has done six of the most consequential monetary policy moves with the seventh now about to be trumpeted. For those keeping track, here’s how I count these six:

  • Three interest rate hikes.
  • Three times the balance sheet reduction question could not be denied

In regards to the balance sheet, first: it was actually verified (or the markets first concrete view) in February. Then for the second: the incremental rate and process was allowed to progress throughout the year. Then for the third: in Oct. hyper-speed into $50Billion monthly was implemented with no dissension rather, there was unanimity of support via even the most assumed “dovish” of members

And here we stand with the seventh “horn blast” about to be trumpeted with what everyone is expecting to be another .25 interest rate increase. The question this time is, not will they do it or not, but rather…

What exactly happens if this final vibration of the year is seen as that which brings the entire facade of these “markets” crumbling down?

Is it the markets’ walls that are crumbled never to be rebuilt? Or…

Is it the once unquestioned insurmountable fortress walls of the Federal Reserve and its policy edicts that are turned into rubble?

The problem for both is this: Once the faith of the faithful is lost – so too is the power of any magic that once enamored them.

© 2018 Mark St.Cyr