When Front-Running Gets Dangerous

The “markets” on Tuesday (May 4th) went from their ever-entranced manic behavior to suddenly flip into what can only be described as some form of depression with a sudden sell-off. Why?

Well, there are a lot of theories, but the one that stands out as the catalyst was when former Fed. Chair, and now Secretary of the Treasury, Janet Powell delivered the following at an event hosted by The Atlantic Magazine™:

(Paraphrasing): She warned that all of the government spending coming down the pike could cause the economy to “overheat.” Adding: “It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy.”

The result? A near immediate, as well as steady, sell-off across all indexes.

How can we put odds that what she said was the direct cause? Well, again, it’s all conjecture. But, a funny thing happened, when later during the same day at another event held at the “Wall Street Journal CEO Council,” she said…

“If anybody appreciates the independence of the Fed, I think that person is me.”
“I don’t think there’s going to be an inflationary problem. But if there is the Fed will be counted on to address them.”

The result? A near immediate, as well as steady buy, buy, buy, and buy some more reversal took place.

Funny how that happens, yes? Pure coincidence I’m sure of it, aren’t you? Both the Fed, as well as the Sec., would want you to believe as such. So, there you go.

So, why do I point out the above as for one to take notice of, when this has been somewhat of a repeat of what has been going on now, in one form or another, for years?

Hint: The self-perpetuating, percolating interest in: Interest rates.

I have been saying for years that I believe there is no unintentional, good cop-bad cop, off-the-reservation, or any other analogy when it comes to the Fed and its participants, when they are expressing their viewpoints publicly.

Again – any of them, regardless of how antithetical they may be to current policy or stated viewpoints.

To make this point finer, let me hypothesize it this way…

Some of you may be thinking, “What, they can’t have their own thoughts? If they can’t, then why is there a committee to begin with?”

It’s a fair question and/or point, that I’ve received by many when this topic has come up. This is how I answer…

Yes, that may be true, however, since the financial crisis in 2008 forward the Fed has had its head-handed-to-it on more than one occasion, needing for immediate damage control from others to counter anything that was taken by the “markets” as anathema to the Fed’s largess.

Need I remind you of the how the “Bullard Bottom” came to be known?

Now, that doesn’t mean these members don’t or can’t express themselves, just not in public, without the Chair’s full consent. Let me express this further…

If, say, a member has a complete opposite viewpoint, the Chair (e.g., Mr. Powell) might “allow” that member to make that statement in public as a trial-balloon to see the reaction, and then evaluate it. But, (and it’s a very big but!) I do not believe any member “speaks their mind” in public anymore without the expressed approval of Mr. Powell. Repeat: Any. It’s far too dangerous to the “markets” and they know it.

So, now with the above said, why would Ms. Yellen even float such an idea? Surely she’s aware (bit of snark there) the Fed itself is on absolute “We’re not even thinking about, thinking about interest rates into the foreseeable future.”

But, she’s also not the only one…

Others have been suddenly (e.g., Mr. Kaplan and others) openly positing the idea of making changes, maybe, sooner rather than later. Now, Mr. Kaplan is not a voting member of the FOMC, so his ruminations carry much less weight than say if Mr. Powell did.

But again, why? For we just had a Fed meeting and presser from Mr. Powell that all but said: “There are no rate hikes coming. Period!”

Hint: Back to my prior insinuation, or hint, if you will.

Question: What does one do when the very thing they claim to be in control of seems to be doing something completely anathema to that control? e.g., Interest rates are rising.

Answer: Appear as if it is you doing or, at the least, allowing the thing – even though you aren’t. For anything else demonstrates – you are not in the control you declare to be. Hence: you front-run it with a totally made up narrative and hope no one is the wiser.

This is what I believe was transpiring with Mrs. Yellen and the others.

Interest rates are rising, the yield on the 10Year Treasury alone is giving many on Wall Street indigestion. And that “indigestion” is giving the “markets” a full-on case of 24hr agita. However, it’s also raising across others as well, such as interest rates on home loans and more.

If the Fed is omnipotent on interest rates – then how are they rising in the face of the Fed declaring they will not?

Hint: Bond holders don’t care what the Fed thinks if they (bond holders) begin to think, or worse, believe they won’t get paid. Therefore, they start selling.

That causes bond yields to rise, and just how much that “rise” can bear before it starts dragging everything down around it, say, like “markets” that are highly susceptible to such is an unknown.

That said, we do know already that 1.5% on the 10Year was already mentioned as a “giving pause” moment for one Fed. president (Mr. Kashkari). We’ve remained well above that point, and much higher ever since.

I believe the Fed is currently very, very, very, (did I say “very?”) concerned about this current action and is trying to front-run the narrative not to Wall Street, but rather, to the general public at large that “thinks” it knows a bit about what’s going on, but in reality, only knows (and does not fully understand) what the Fed tells them.

It’s currently a “full faith and credit” issue for the Fed. And things are (my conjecture of course) getting a bit too close to rocky shores than they would like. Again, how can interest rates go up if they say they’re not raising them? It’s a rhetorical question, but in the eyes of the general public? As in, “Why is my 401K tanking?” It’s anything but.

If interest rates rise via the market forces of say, “Bond Vigilantes” and that causes “markets” to have a mild case of indigestion, well, that can be tolerated from the Fed’s purview. Maybe even welcomed to take a bit of “froth” as Mr. Powell stated of said markets. For what would be seen in the eyes of the general public? Well, they’ll only see how the Fed is out and about saying how it’s a good thing, and is all going according to plan.

That’s the hope, I’m sure.

However, it (The Fed) is now fully cognizant that not only does the current rising of interest rates via the 10Year and others raise an acute issue for them – but – they now know they can’t even say the word “raise,” never mind try and front-run an effect they may be powerless to stop without a full-on counter measure, that may scare Wall Street even more! That’s a real problem aka, “Boxed in, double whammy” type stuff.

For proof of concept to my argument, all I ask is for you to re-read Mrs. Yellen’s prose from yesterday, the timing and reactions to it within the “markets,” then ponder the conclusions for yourself.

Interesting, to say the least, yes? Pun, not intended.

© 2021 Mark St.Cyr