Risks of 'destabilizing' markets -  has been one major perennial excuse foreseen by the opponents of 'normalizing' rates. Never have so many fretted over such a little shift, perhaps in monetary history; including members of the Federal Reserve itself. 

Everything has factored into the arguments; from forestalling until after Elections, to a suspicion this has been so delayed that it endangers hiking right into a recession. Of course with this past week's downward revision of final Q2 GDP, evidence of sloppy economic reporting (such as housing and autos, spun to suggest stronger activity in some areas), is evident within what at best remains a mixed business environment.

This weekend we have a stock market that clearly responded ideally to Jackson Hole comments by Chair Yellen and Vice Chair Fischer (by dipping initially; rebounding for a perfect amount of time to allow us to short a full new guideline as we indicated we'd do Thursday based on a suspicion that even if they took it down it would rebound just a good bit before working lower). (Simply put: we anticipated the market's behavior on Thursday evening's report; and thus a rebound in the morning allowed a good short.)

The only point that needs to be made (as I did in videos all day Friday for traders) is that Fisher did not express 'his' view differently. Listen to the words he actually said; not the interpretations by reporters or analysts. He said there was nothing the Chair said that wasn't inline with conditions supportive of hiking rates. That's also my view of her remarks; and that's why reporters jumped at the chance to focus on her hedge later in her comments; and not the initially 'sort of' hawkish tone. 

All of this went as we had ideally expected; ever since NY Fed President Dudley, at a gathering the prior Friday, also spoke to the prospects for snugging-up rates. What I'd said during the whole week was that it wasn't 'would she or wouldn't she', but rather noticing how Dudley voted against a rate hike at the July FOMC Meeting; and changed his perspective just last Friday. Hence a hint of the core elements of the Fed leaning towards firming. We also repeatedly noted that 8 of 12 voting members of the FOMC had voted to hike at the July Meeting. So at the time Yellen and Dudley basically just overruled the 2/3 majority vote in-favor of a hike. 

The other point was that markets weren't prepared for a September hike, and now of course will remain on edge until the September meeting, regardless whether that's a hike or not. Of course you'll hear more comments about how hiking is more favorable than not; a method of hand-holding ahead of a likely inevitable hike (if nominal which makes this wild freaking over not much until you look at the implications longer term).

Let's sort of summarize where we are, where we've been, or the implications:

The rub

We're in a 'Controlled Depression' at worst; a 'marginal recovery with almost no improvement in household income, not financial asset worth, at best'; or 'potential Recession' probably on the horizon. The Fed has no easy answer; they painted themselves in their corner and they need out. Interest rates are moving them out and have been for some weeks; as LIBOR and government paper has been ignored by too many economists. 

The irony 

Stocks are overdue to stop defying gravity (it was the narrowest August in the entire post-World War II era; and has been languishing for weeks; until just after a one-year anniversary of breaking shortly after my return from Europe last year). Yes,I heard the supposed plans of the Fed to 'outlaw' the business cycle and permanently control things. They've tried that before and it never lasts incidentally; not capitalism, that's for sure; but all we can say is they did it in the 1920's (we all know the outcome). While nobody talks about it, the Greenspan Fed set up the 'Epic Debacle' we'd warned of coming in 2007 (after looking for a year of money going into stocks while house prices collapsed) by trying to pump-prime in the years after the 2000 'crash' as well as the sagging after the 9-11 attacks (Bernanke's Fed bailed-out 'Epic Debacle', but beyond the 'emergency' bloating of banks, they kept it all on for far too long, and now Janet Yellen inherited the role of unwinding the policy extreme the Fed created).

Anti-gravity machines are actually are underestimated by many; especially when it's a correlated cabal among central bankers, who threaten to burden populaces with debt that can never be repaid, as they 'try' to forestall any day of reckoning ever. But as we just saw; this goes on for longer than is logical, when you have a Congress that won't embrace their fiscal responsibilities and a Fed that doesn't acknowledge they're part of the problem, and have thus made a solution more difficult and protracted. Whether or not they consciously aim to create not a utopian or even European socialist style placid economy, with everybody contented enough not to rebel, that's not realistic for the United States. It contributes to part of trends toward populism and genuine free markets. It also creates a nearly-universal global-debt environment putting at-risk lots of countries; making recovery 'in event' of a truly major break, more difficult than older times when one part of the globe could be underwater, but not necessarily others. 

In sum

Things got out of control in other eras, and there was a price to be paid. This Fed knows it, and along with the BoE, BoJ and ECB, have ventured into uncharted territories (or threaten to with Yellen even mentioning 'other' tools or purchases that a responsible Fed knows should not be used lest they dig us deeper into a fiscal hole). This is perhaps more akin to the 1870's or the 1920's, than it is to recent behavior. At the same time, it's been depression-style monetary stimulus while calling it recovery, and absent the kind of normally-concurrent fiscal and infrastructure improvements. 

Many of the major hedgers who aren't obliged to 'solely' be essentially fully invested, know we're on the cusp (from an overall perspective) of a sensitive or even tough go for the 'one-way-oriented' fully-invested bullish money managers. It's even worse for the 'leveraged' trading crowd. Remember a lot of short-selling got unwound as some of the die-hard bears did capitulate or change their approach. But one constant stuck around: record margin debt. That can (and likely will) add fuel to a downside fire. 

The multiple of this market is no bargain; GDP estimates and guidance are mediocre at best. Debt levels are at dangerous historic highs. Debt is being issued by some to pay dividends (a few oils doing that); which is almost as bad as the quasi-Ponzi tactic of the underfunded pension funds. This is not a conundrum; it has serious risks that's not yelling fire in a theater; but pointing out that major professionals have been pulling funds out of excess credit and equity exposure all year; while foreign funds, and yes, the application of leverage, has given the illusion of strength. 

Thus the market making recent nominal new highs is irrelevant; shorts get run from time-to-time, but rallies are unsustainable. Fiscal difficulties make this country weaker and they won't automatically be resolved regardless of domestic political changes that might occur in the short-run. However, new revelations (perhaps involving influencing, that at least previously pushed the U.S. or other nations toward more globalism) risks sort of demoralizing a lot of people, and that can have an impact too. 

What's needed is a Fed that bites the bullet and indeed internally examines itself (all the way toward reinvention if need be); a Congress that clearly makes commitments to direct funds to domestic improvement and small business empowerment (one may be amazed how just a few changes in the tax code, combined with trade reform, may revitalize the nation more rapidly than extreme pessimists allow); and all of these for sure would be enablers of a renewed spirit on the part of entrepreneurs of all types.