EC Some Thoughts On What Is Happening

People do not just disagree on what should and will happen, but they disagree on what has happened. As William Faulkner instructed: "The past is not dead. Actually, it's not even past."  This is clear in the narratives about the sharp drop in equity markets.  

It seems that the most common explanation places the onus on the Federal Reserve. Fed Chair Powell's was seemingly hawkishness in early October (during a time when the Fed has just voted to hike rates, and the median Fed forecast confirmed its intention to lift rates three more times in 2019). He noted that monetary policy was still accommodative, despite the gradual hikes, and there was still some a long way to go to neutrality.  Although there have been some explanation and softening of the words, according to this line of reasoning, the Fed repeated its error a week before Christmas by raise rates and signaling two (rather than three) more rate hikes were likely in 2019.  

This narrative is too narrow.  There are other important drivers that suggest a dramatically different explanation of what is happening.  The US stock market rally through the September 21 peak was built on a narrow foundation, led by a handful of technology companies. Some disappointing earnings and guidance saw apparently saw some levered players start to de-lever. A few of the leading multi-strategy funds had dismal performances in November, leaving to further deleveraging.  

Rising oil prices, which were part of the big macro play, reversed dramatically in early October.  The Trump Administration's decision to grant six-month exemptions from the embargo against Iran to some of its largest customers. This radically changed supply calculations. Many of the US market-based inflation expectation measures seem to be driven to a large extent by the swings in the oil market. The precipitous decline in oil prices may have prompted sovereign wealth funds from the Middle East to sell equities, as they appeared to in Q1 2016 to fill budget shortfalls. Several large commodity funds were adversely impacted, which seemed to contribute to the downward spiral liquidity and participation.  

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Barry Hochhauser 1 month ago Member's comment

Good article and comments.

Carol Wydra 1 month ago Contributor's comment

First they should STOP the press conferences..JP screwed up when he went off script..his autopilot remark was a real special kind of stupid. Plus the press does nothing but misinterpret adding kerosene to the fire. Less info is more when it comes to the Fed. Transparency has been way oversold.

Marc Chandler 1 month ago Author's comment

I do not think #Powell broke fresh ground indicating that the balance sheet reduction was on autopilot. The #Fed has intimated it before. It indicated that the balance sheet is not long a policy signal and that its reduction was technical in nature and would continue unless, the Fed approached the zero- bound again.

I also disagree about transparency being oversold. Given the immense power of the Fed and its relative insulation, transparency it seems to me, is integral to its accountability What is it doing and why? I get strategic ambiguity and can accept temporal inconsistencies, but I for one am happy that the purposeful obfuscation of the #Greenspan era is over--that "Secrets of the Temple" is a period piece. The system evolves.

Carol Wydra 1 month ago Contributor's comment

Sir, you misinterpret me. #Powell can't be data dependent and on autopilot simultaneously. I'm all for the Fed blathering to the masses about what it's up to. Delivery your little speech and get the hell of the podium. The post press conferences are stupid.

I never referred to that Ayn Randster groupie's marble mouthed delivery but now that you brought him up, it was an insult to the public and he exposed himself as the fool he was. Worst Fed chief of all and that's saying a LOT.

Gary Anderson 1 month ago Contributor's comment

Greenspan created the New Normal with financialization, hoarding and derivatives, Carol. That is either a stroke of genius or absolutely diabolical. I don't like it, but in an advanced society, protecting collateral seems to be important, especially when that collateral is debt.

Carol Wydra 1 month ago Contributor's comment

regarding your Greenspan comment I posit the latter. cheers

Gary Anderson 1 month ago Contributor's comment

So, basically, Powell said economic growth slowed but is on track to increase. What does Wall Street know that Powell doesn't know?

Moon Kil Woong 1 month ago Contributor's comment

This decline is heavily driven on politics, more on political destabilization caused by Trump than anything else. Because of this, as he addresses the uncertainty the market is bouncing back up rapidly. If the China trade war end and the uncertainty over the Fed ends the market may be set to rally strongly. However, this remains a big if, just like the potential for a deal to reopen government offices.

The other big reason for the market decline is the fall in oil which adversely affects many companies in the US and many economies. Trumps insistence that he wanted lower oil prices as low as $1 and pushed for Saudi Arabia to make it so may be a bad wish because if it came true it would collapse large portions of the US economy. We are dependent on oil these days as much as we ever were. It's just that we are now a large producer as well rather than a giant consumer.