Ooops, the F_E_D Did it Again

We picked up on the changing F_E_D tone at 2:26 p.m. on September 13th of 2012, when Bernanke gave the first hint during a press conference on the day the F_E_D announced QE 3 of all days, that the F_E_D was changing metrics that would allow them to create an exit (although he didn't say it, it was clear) from accommodative policy which sent the market down for the rest of the year -8% from the F_O_M_C meeting's high at 2:26 p.m. September 13th, when Bernanke was asked a question about inflation and the market DID NOT like his new "tone".

If you didn't get the message when the F_E_D changed guidance from quantitative to the arbitrary and easy to manipulate, "Qualitative, you can be forgiven, although we did point this out at the time that the only reason to do such a thing was to allow the F_E_D to find an exit from their $4 trillion plus expansion of their balance sheet.

However, if you didn't get the message when St. Louis F_E_D president James Bullard said , "The Markets are Wrong, the market doesn't appreciate how close we are to our goals" which should be read as tightening rates, then you didn't want to get it.

However if you missed Yellen's 180 degree turn yesterday, chronicled last night in the Daily Wrap.. Don't Want to Miss post, you just weren't paying attention. The F_E_D is SCREAMING exactly what I thought the day before the last F_O_M_C meeting, 

"THEIR HANDS ARE TIED BECAUSE OF INFLATION AND REAL FALLING WAGES, THEY HAVE TO HIKE RATES WHETHER THEY WANT TO OR NOT. "

NOW, in addition to Bullard, Yellen, Kocherlakota and several others, Dallas F_E_D president, Richard Fisher said today,

• DALLAS FED PRESIDENT FISHER SAYS 'MARKETS ARE OVERSHOOTING'
• FISHER CONCERNED FED MAY 'BE STAYING TOO LOOSE TOO LONG'
• FISHER: I DON'T THINK YOU SHOULD 'POP' A BUBBLE, BUT SHOULD LET SOME SPECULATIVE STEAM OUT OF MARKETS

Lets just take out the "Greenspeak".... Markets are "Frothy and overvalued, the F_E_D's "Reach for Yield" has created a monster and if you think for one second that valuations as the talking heads are rampaging on about are not high enough to warrant a crash, just know that almost every previous crash did not have exceedingly high valuations except in 2000, but they certainly are high considering the economic situation in the US and world economy.

He's telling us that markets (like every other F_E_D president) are not accurately pricing in the F_E_D's "NEW" rate guidance which says, they'll hike sooner and faster than the market has ever considered, this is EXACTLY what the Bank for International Settlements (BIS) which is the central banks' bank,  said in their annual report urging "Leading" central banks not to hike rates too late or too slowly and also telling them that they opted for the short term sugar rush policy which has left them with nothing in the end, a clear reference to 6 years of accommodative policy that bought the F_E_D the worst quarterly GDP print of -2.9% in 5 years!

Finally, we have heard over and over from Yellen that the market is NOT a bubble, until yesterday when she singled out Social Media stocks and biotechs, the stocks that move the market.

If there's no bubble, why is Fisher saying what Yellen said about a week and a half ago, that it's not the F_E_D's job to "pop" bubbles? Fisher clearly alluded to a bubble.

Think about the SKEW, the 3C charts and most recently last night's breadth charts that I've only seen look like they did twice in probably 15+ years of using them. Smart money gets it, that's why SKEW is elevated, that's why market breadth has dropped in many cases by more than half in less than a month as more stocks are selling off despite the averages printing "record highs", remember the top of the 2007 market was a record high for the SPX.

THE F_E_D HAS GONE IN TO MASSIVE DAMAGE CONTROL, TRYING TO GET THE WORD OUT QUICKLY IN RECENT WEEKS THAT THEY WILL BE RAISING RATES MUCH SOONER THAN ANYONE ANTICIPATES AS THE MARKET AND ECONOMY ARE IN REAL TROUBLE, FACING STAG-FLATION.

IF YOU ARE NOT GETTING THE MESSAGE BY NOW, YOU SIMPLY DON'T WANT TO HEAR IT.

Here's typically what happens when THE F_E_D HIKES RATES WHICH WILL SLOW OUR ECONOMY MORE THAN IT ALREADY IS....Higher interest rates is the main effect.

 Some of these declines don't look very large so to give some perspective, at 1 to the far left when the F_E_D started hiking rates, the market fell -45%, at 2 when the first rate hikes hit, the market fell -45% at the more recognizable tech bubble in 2000, there was at least a -38% SPX decline, the NASDAQ was worse. And at B in 2007 after a series of hikes failed to cool the housing market , they finally took hold and there was at least a -56% decline. *Note the effect of ZERO Interest Rate Policy (ZIRP) on the market to the far right.

The effects of QE which will end for good in October...

Here are past QE episodes and their effect of the SPX.

Any questions where this rally really came from and what happens when QE stops and the F_E_D hikes?

Just from a 3C point of view...

 Dow Jones 30 at the market top of 1929, 1-day chart. 

Did you know the F_E_D had engaged in QE in the 1920's, but this time it worked for a while leading to the roaring 20's, a time of economic expansion, but it seems the market ultimately paid the price for QE even back then. Note the year long 3C negative divegrence. 


Now the same 1-day 3C chart on the Dow 30 now...

 A significant difference hugh? Any questions as to why I say that "Whoever figures out the new market dynamics first, will see an opportunity that no one alive has seen"?

Now, as usual, the longer 3C charts show heavier underlying flow, it seems in 1929 it wasn't as heavy and had not made it to the 4-day chart very much (3C migration)

 However there was a quick, but sharp 3C decline and negative divegrence as it made a lower low as price made a higher high in to the 1929 top just before the crash.

For reference, here's the same 4 day chart, notice it was similar in 2007 to 1929, but not quite as sharp, but did make a lower low in to a higher high. Now contrast that with the QE/ZIRP fueled Sugar rush rally even the BIS said was a band aide that has made no appreciable results.

 

I think we are well positioned to be among the first to understand and work out the new market dynamics.