We have long held that the Fed does not make decisions but rather, the Fed pretends to make decisions.The Fed ultimately follows market signals although to get in line and follow this signal (chart below) they are indicated to be very late in coming to their ‘decision’ (if indeed December is the much hyped “lift off”).

Here are some messages for the Fed from the S&P 500/3 Month T Bill & 2 Year Yield (monthly) chart…

• SPX Humps 1 & 2 were the acceleration phase of a secular bull market and a cyclical bull market, respectively.Hump 3 is an extended affair that has broken out to well above ‘blue sky’ territory.
• Humps 1 & 2 were attended by rising T bill and 2 year yields.All normal, all good as the Greenspan Fed did the normal thing and followed the bond market’s signals (as implied by the 2 year) and raised rates to ease back on the liquidity spigot.
• Hump 3 continues to this day but the 2 year yield has for about 3 years been consistently grinding upward in order to pull back on liquidity.Yet ZIRP has pinned the T bill to the mat for 7 years running.The Fed has been going by different rules for the last 3 years of this cycle.

The bottom panel on the chart is a picture of the dynamic tension between the 2 year and the T bill.Tension (noun): a strained state or condition resulting from forces acting in opposition to each other

One way to relieve the tension would be for the stock market to roll over as its monthly chart looks capable of doing.That would put people back into short-term Treasuries (relieving interest rate pressure) seeking liquidity.That would also relieve the Fed of its big ‘decision’ beyond maybe a face saving token or two.

A market roll over remains the favored scenario but the alternative, a ‘manic up’ in markets, would be a thrilling ride as we all just chuck what we think we know and launch into uncharted territory, bravely going where no market and associated collection of casino patrons has gone before.