Tyler Durden Blog | Recent Market Dynamics Would Be Consistent With The Economy Already In A Recession | Talkmarkets
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Tyler Durden (pseudonym) is the lead writer at ZeroHedge.  Tyler represents the idea that a return to truly efficient markets is a possibility and a necessity.

After having experienced the inner workings of capitalism at various ... more

Recent Market Dynamics Would Be Consistent With The Economy Already In A Recession

Date: Monday, January 21, 2019 12:30 AM EST

One week ago, we discussed why the Fed now finds itself trapped by the slowing economy on the one hand, and the market's response to the Fed's reaction to the slowing economy on the other. Namely the market's subsequent sharp rebound, only the third time since 1938 that we've seen a V-shape recovery of this magnitude when the market dropped down more than ~10% and spiked +10% in the subsequent period. We said then that the "obvious problem" is that the Fed is cutting because the economy is indeed entering a recession. Even as markets have already rebounded by over 10% from the recent "bear market" low, factoring in the economic response to an easier Fed, effectively cutting the drop in half expecting the Fed to react precisely to this drop, while ignoring the potential underlying economic reality (the one confirmed by the bizarrely low neutral rate, suggesting that the US economy is far weaker than most expect).

Ultimately, what this all boils down to as Bank of America explained yesterday, is whether the economy is entering a recession, or - somewhat reflexively - whether the suddenly dovish Fed, trapped by the market, has started a chain of events that inevitably ends with a recession. The historical record is ambivalent: as Bloomberg notes, similar to 1998 and 1987, the S&P fell into a bear market last month (from which it immediately rebounded) following a Fed rate hike. The difference is that in the previous two periods, the Fed cut rates in response to market crises - the collapse of Long-Term Capital Management in 1998 and the Black Monday stock crash in 1987 - without the economy slipping into a recession. In comparison, the meltdown in December occurred without a similar market event.

And yet, a meltdown did occur, and it has a lot to do with confusing messaging by the Fed, which did a 180-degree U-Turn when in the span of just two weeks, the Fed chair went from unexpectedly hawkish during the December FOMC press conference (which unleashed fire and brimstone in the market), to blissfully dovish when he conceded at the start of January that the Fed will be "patient" and the balance sheet unwind is not on "autopilot."

But it wasn't just the Fed's messaging in a vacuum that prompted the sharp December drop: it is also the fact that the Fed and the market continue to co-exist in a world of perilous reflexivity, a point made - in his typical post-modernist, James Joyceian, Jacque Lacanian fashion - by Deutsche Bank's credit strategist Aleksandar Kocic, who writes that "the underlying ambiguities of the market’s interpretation of economic conditions are an example of financial parallax – the apparent disorientation due todisplacement caused by the change in point of view that provides a new line of sight" (or, said much more simply, the Market reacts to the Fed, and the Fed reacts to the market in circular, co-dependant fashion).
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