“Wednesday’s Child” comes from the nursery rhyme of the 19th century that was supposedly used in the area of fortune telling by the day of one’s birth in rhyme. “Wednesday’s Child” is said to be “full of woe.”
Seems fitting that this Wednesday will conclude one of the most (yes, most!) important FOMC (Federal Open Market Committee) meetings in years. So, let’s just say, “full of woe” may be an understatement should anything close to the “autopilot” debacle appear.
All eyes, as well as portfolio positions, will be watching and listening for even the slightest indication that either the committee, or its Chair, insinuates a modicum of uncertainty.
Anything other than a resolute position in their professed intent, where not only have they “paused” everything, but, (and this is really a very big “but”) they are about to reverse course, as in: cut rates.
If they skip doing so at this meeting (which has a high probability) the only other signalling that will be allowed (via the “markets” reaction) will be that July is certain. No mealy mouth “maybe” or other such indication will be allowed. Only a well regarded signal of wording via Fed Speak that the “market” believes is bankable, literally, will do.
Ambiguity will warrant a heavy price paid, indeed.
Also (you thought the above was it?): the option for re-instituting QE (quantitative easing) in some meaningful form, regardless of what they call it, is not only on the table, but ready for implementation at a moments notice.
Anything less: and the entirety of the nascent rally since the “Call from Cabo” on December 23, 2018 is not only in jeopardy, but more, possibly much more, as in the entirety of the “Trump Bump” beginning in November of 2016.
The reason why this meeting portends to be so much more volatile than the others over the last few years, is this: This meeting is the meeting where the Fed has to publicly demonstrate to the “market,” that the Fed knows and understands that it’s painted itself into a corner and can not get out.
With that, it must now finalize such acknowledgement publicly via its communication and deeds so that said “market” can feel assured that its front-running of implied conciliation is protected via the now seemingly assured “Fed Put.”
Again, anything less? See above for clues.
This is not, repeat, not a position the Fed or its members thought possible. The problem here is not just what the “market” may or may not do, for that is secondary.
No, what’s worse (I’ll insert, much worse) is that with the Fed and its members so brazenly confident in their reasoning in regards to policy, where they publicly displayed their disdain for the President, have had to unceremoniously admit through their most recent signalling and actions that his argument was correct, not theirs. Hint: remember when Chair Powell stubbornly and smugly wouldn’t address whether or not he would voluntarily talk or meet with him? Can you say, “Ouch!”
But the pain doesn’t stop there, not by a long shot. As a matter of fact, it may be just beginning.
The real issue currently is what both the Fed, as well as its sycophantic chorus of pump-organs that will trample over their own mother in order to get in front of a camera, microphone or keyboard to express both of their genius, but I digress, will now have to concede…
Without a rate cut followed with QE – this is as good as it gets. (i,e., “market” highs) Where lower, and possibly much lower for longer, with even more causational and consequential shocks will be the norm.
For without new money via lower rates or QE – it all falls apart, again, literally.
This is nowhere close to where the Fed stated it would be, for may I remind you that it was former Chair Janet Yellen that proclaimed shortly before handing the
bag baton to her replacement stated no new financial crisis in “our lifetimes” Can you say, “Thanks Janet?”
Then, as if on cue, because it really was, Mr. Powell implemented Ms. Yellen’s schedule for balance sheet reduction and more – and we have been in crisis ever since. So much so, that Mr. Powell has had to publicly remove any and all prior assumptions, scheduled reductions and more. Otherwise – it’s back to Financial Crisis-R-Us.
I have a sneaking suspicion Mr. Powell no longer is thinking “Thank You.” But that’s just me.
As I implied prior, just a pausing of anything will not cut it. There has to be both cuts, as well as some new or reinstated QE program of one form or another or, it all falls apart. Again, quite literally, here’s why…
On my show I keep using the metaphor of a credit card to help explain the why and how of what the “market” is currently expressing.
Say you have a credit card with a $10,000 credit limit with an introductory offer of interest rate at 0%. And: all you did was buy stocks with it.
Then the rate rose about a 1/4 point or .25% every 3 or 6 months and is now sitting at about 2.25/2.50%. Yes, It took years to get to that rate, but then again, stocks rose in an outpacing fashion in regards to carry cost.
You have always been able to sell a few that became profitable, pay the carry, BTFD when it appeared, rinse, repeat. Then in January of 2018 that all changed.
At the beginning of the year a schedule for QT (quantitative tightening) along with an implied rate hike schedule was implemented. What this did to our example is what is currently expressing itself via the “markets.” But here’s the distinctive difference:
Instead of my $10,000 example, try thinking in terms of $1,000,000,000,000’s (that’s trillions, yes, that’s where we are, no hyperbole) And it is here where the real problem manifests.
When the Fed began raising rates it didn’t just lift carry costs form the zero-bound into the still historically low range of rates in isolation. That’s what they say, or imply, in the mainstream business/financial media via their next-in-rotation fund-mangers and/or think-tank Ph.D Ivory Tower’d set.
No, in the real world. What they did was to raise those maxed out credit card balances carrying costs exponentially. Because if one could afford only .5%, raise it to 1%, and you’ve effectively doubled their carrying cost. Now make it 2% or more. Think about it very carefully, because that’s only the start. Here’s more…
If those stocks don’t continually rise, or worse, just stagnate. You’ve effectively made it near impossible to buy and hold for any length of time in the professional world known as “Wall Street.” i.e., carry costs are everything. Period.
But as they say on late night TV, “But wait! There’s More!!” The problem is, it becomes a whole lot more of the worst kind.
Using the credit card example, what QT has done is worse, as in far worse, than just the raising of rates, as I’ll now show.
Let’s say for sake of argument you could handle all the rate hikes that have so far been implemented. The issue here is, just like many of us know all to well when any credit line gets maxed, that in order to continue using that card the credit limit has to either stay as it is, or needs to be raised.
Because, if it stays the same, at the least, anything above your monthly payment of interest is available to reuse. e.g., (oversimplified demonstrative purposes only) $10,000 limit, minimum payment due $1000, 0% interest, balance reduced to $9000. Therefore, you can now go out and charge another $1000 worth of stocks. Maybe you sold a bit of what you bought prior to make that payment for a nice profit, but, you just buy it again at the next BTFD party. Rinse, repeat.
Easy schmeasy, right?
That’s right, for it has been that way in what seems like forever. That is until now, because QT changed everything to the above.
What QT effectively did to the above was where the real startling reality became apparent to the so-called “smart crowd.” i.e., It wasn’t about rates per se – it was all about the balance sheet as people like myself have always insisted. And the “market” reaction to “autopilot” proved it.
The reason why this is important to truly understand retrospectively, as well as going forward, is because this is where the rubber-hits-the-road as the old saying goes as to where we go from here – or, at best – remain stranded with a flat and no spare.
Again, using the credit card example, the entire scenario runs into trouble the moment the credit limit gets reduced. This is effectively what QT did to the entirety of the “markets.”
Remember, if you can cover the carry cost is one thing. However, the moment I reduce your credit limit is the moment I basically not only cut off your working capital, but I simultaneously reduce any and all future working capital or buying power – to nil.
Yes, nil, and for some, less than.
Using the above as I laid out: if you paid $1000 in carry cost (i.e., minimum payment) you had the availability to reuse it back to your limit. e.g., $10K
But, and it is a very, very big but: if I reduce your credit line in conjunction with raising your carry costs? What I’ve effectively done is destroyed your money by demanding you turn it over via the carry cost, while reducing your credit limit simultaneously. i.e., Not only did you have to pay the $1000 but you now have a credit live of $9K not $10K. But remember I said, “more?”
Not only did the Fed continue to raise the carry cost via rate hikes – it cut the credit limit far greater and faster so that that minimum payment went from, lets say, $1K to 3K. Then, at the same time, reduced the credit line from a pace of $1K per meeting so at the end of just a few months your credit line was lower than any subsequent payment, rendering said card for all intents and purposes: dead-in-the-water and useless.
In other words: If your outstanding balance was $10K then you reduced it through a payment of $2K making it $8K, but your credit line had been cut to $5K? Making another (yes, another!) minimum payment of even $3K leaves you even more broke and with no use of the money or credit.
It’s a double whammy and that’s why its shock waves were so pronounced as I said they would be.
This is why this Wednesday’s meeting is of paramount importance for both the Fed as well as the “markets.” Because what we have been witnessing since the “call from Cabo” and subsequent jawboning from every Fed member since, is a front-running of “hopium on steroids” into this meeting.
Disappoint? And the only thing worse for the Fed will be to read a tweet saying “See! I was right!” from you know who.
Actually, that might happen either way when you come to think of it. Because that’s just how bad the Fed has misjudged both the economy, as well as their loft above it all. But I’ll still lean that the tweet will, by far, be more soul crushing within the Eccles Building.
For when it comes to the economy and their foolish interventionism and dictates?
That’s for us plebes.
© 2019 Mark St.Cyr