The following commentary comes from my friend and colleague Stephan Weiss:

 

Last week at least started well as the upper echelon of fund managers heard from their “well-placed sources” that Helicopter Ben had miscommunicated the FOMC position when he spoke about tapering and would set the record straight at his press conference, imbuing them with the fortitude to get long in front of Wednesday afternoon.

Well, they got half the story right as he did set the record straight.

Taken alone, the FOMC minutes were positive for the market as nothing indicated that policy was going to change course. The indices acted accordingly, swaying between green and red. Then we found out that those sources were no more well-placed than a convertible parked beneath a tree with hanging bird feeders. First, the FOMC projections were released showing that the targeted 6.5% unemployment rate was now forecast to occur in 2014, not 2015, and that GDP growth was accelerating. Then, just prior to the reporter from TMZ asking Bernanke about his personal plans, his prepared remarks were released. Therein, Helicopter Ben dropped not more cash, but the bomb:

“We also see inflation moving back toward our 2 percent objective over time. If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year; and if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear. In this scenario, when asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7 percent, with solid economic growth supporting further job gains—a substantial improvement from the 8.1 percent unemployment rate that prevailed when the Committee announced this program.”

So here we are: the transparency thing as Bernanke explained the Fed’s thought process. The FOMC will apparently begin to cut back this year and, depending upon the next jobs number, may do so before the third quarter ends. The point that we reach 6.5% has been moved up but that is no longer the trigger; now it is 7% accompanied by an upward bias in the economy and inflation at 2%.

If only the Fed kept that information to themselves we could have read the minutes and gone on our merry way as the market stabilized and perhaps moved higher. Instead, traders relied traditionally unreliable FOMC forecasts – a flawed strategy in itself – and panicked. In the old days, pre-openness, the market took the real hit when the rate increase actually occurred and usually upon the move deep into neutral policy territory. That was decidedly less disruptive to the markets in terms of duration because by the time the liquidity geyser slowed to a drip, the economy was already on better footing, earnings growth was apparent and valuation could withstand less accommodative policy.

But this is the worst of all worlds since we likely won’t see much growth in earnings this quarter, Europe is still uncertain and China is on the verge of a credit crisis that will make 2008 look like boom times. Interbank lending rates in China have ballooned from just over 3% a month ago to over 11. Put in perspective, US rates are near zero.

I can’t imagine too many visitors to Jimmy Dean’s factory leave the tour and buy a few links in the souvenir shop, anxious to cook them up when they get back to the trailers. Seems like traders feel the same way about the Fed post press conference, puking out their stocks and bonds, violating important levels of support. However, once the vision fades and their stomachs settle, a curing period that will likely take us through the next jobs number on July 5th (a light attendance day in the midst of a “4 day” weekend making for Über volatility), earnings and up to the next FOMC meeting, they will recognize a great buying opportunity– at least for stocks. Bonds, unfortunately, will stay in the grinder.

For now, though, the carnage, bred through emotion, is likely done as atrophying now takes over. Within that time frame there will be peaks and valleys as volatility, courtesy of Fed transparency, becomes the norm. I’m up for nibbling for the intermediate and long term but the market hasn’t corrected enough to find many real values.

~~~

Stephen L. Weiss has been on Wall Street for 25 years in senior positions at the industry’s most prestigious asset management and investment banking firms. A former tax attorney, Weiss worked at Oppenheimer & Co. then Salomon Brothers during the time it was controlled by Warren Buffett, developing and communicating investment ideas to the industry’s most respected investment funds including SAC Capital (Steve Cohen), Tiger Management (Julian Robertson), Soros Funds, Kingdon Capital and Omega Advisors (Lee Cooperman). Prior to joining Lehman Brothers to run equity sales he worked for Steve Cohen at SAC Capital. The managing partner at Short Hills Capital Partners, LLC., Steve has written three books and appears regularly on CNBC’s Fast Money Halftime Report.  More information is available at www.shorthillscap.com.

 

Category: Federal Reserve, Investing, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

27 Responses to “Helicopter Ben Miscommunicates”

  1. Petey Wheatstraw says:

    Markets to Bernanke: Do what we want, or we’ll kill this MF.

  2. gloeschi says:

    I tend to disagree.
    1. Ben knew that tapering wouldn’t be easy. Hence the leaks via Hilsenrath to try to guide market expectations as gently as possible towards the idea QE might me reduced at some point in the future, always conditional on economic conditions. As bond market yields rose, Ben tried to calm bond markets by explaining that the market probably had read interest rate tightening into his plans when he only intended to take the foot a tiny bit off the gas. as he explained. Ben wants us to believe that less QE is not the same as tightening. The market disagreed.
    2. The big disappointment was not the potential tapering of QE in itself, but the apparent abolishing of an inflation target, or N-GDP targeting (as encouraged by Woodford and a few months later adopted by the FOMC). Markets had expected the Fed to engineer (if at all possible, but that’s another question) inflation of 2%, and to “defend that target from the downside”, possibly pushing it to 2.5%. With real GDP growing only 1-2%, nominal GDP would have increased 3-4.5%, just enough to keep debt-to-GDP from rising further (assuming a further reduction in the fiscal deficit to say 4%). Markets accordingly went long inflation-correlated assets, and especially TIPS, pushing their real yields deep into negative territory. Now those trades, including precious metals, had to be unwound. The Fed doesn’t seem to be concerned about low and declining PCE deflator anymore, despite it being well below target. This can also be seen as a sign the Fed is desperate, not knowing what exactly to do, changing targets in rapid succession. Or political pressure to back off from an inflation target, which, when you look at it, is nothing but a verbal guarantee to devalue the currency by a set amount (when the central banks job should be to maintain the value of the currency).
    3. Of course the Fed’s economic projections are always too optimistic. But the Fed is not alone; look at the IMF. One part is that too gloomy forecasts could hurt ‘confidence’. The other part: when actual growth rates come below expectations, this gives the Fed justification for continuing with QE. Everything coming from the Fed is part of its communication strategy, intended to influence (or manipulate) market expectations. So why would you take their forecasts at face value?
    4. The inability of the BoJ to contain a rise in rates (despite more aggressive QE per GDP than the Fed) is a worrying signal; what if central banks are actually unable to deliver inflation / prevent deflation?
    Hence I don’t believe Ben ‘miscommunicated’. He simply painted himself into a corner, and there is no way out. Two questions remain: 1) how much do markets have to fall until Fed officially reverses course and promises not to end QE, and 2) will that be the moment when Ben is replaced with Yellen in order to spare Ben the humiliation of having to back paddle the end of QE for the umpteenth time?

  3. markwyand says:

    With so many pundits arguing the economic situation is far too fragile to consider tapering, I have to wonder, perhaps the beard simply can’t bare all these bubbles. Is it too far-fetched to imagine a Fed that has no intention of tapering in the foreseeable future, yet talks of it to rein in on our exuberance?

  4. flocktard says:

    I disagree as well. The way I heard it was Bernanke saying “I’ll do what I have to do when I’ll have to do it” and everyone else (to my admitted perplexity) heard a different message, of impending rate increases (or at least ACTED like it.) We all know we have to break trend on rates at one point or another, and the way housing has been acting, Bernanke’s little reminder may turn out to be quite timely and prescient.

    This IS the same market that responded with such unwarranted fear on the strength of comments from Meredith Whitney, so this is one of those times where you can let the market see what it wants to see. Let investors look for what’s really there.

  5. Willy2 says:

    Since Benny B. hasn’t been able to stop the crash in 2008 I simply don’t see why one should continue to listen to him.

    When I look at the yield on the 5 year TIPS, I see the first sign of deflation. Like the TIPS showed deflation in the 2nd half of 2008. I would consider that to be an F. “Fail” !!! Benny B. has been “printing money” like there was tomorrow in an attempt to debase the USD. But the USD has gone up since mid 2011. No wonder, Obama wants Janet Yellen to become the new FED chair(wo-)man. She’s is supposed to be a “serial printer” even worse than Benny B.

    • After 2006, I dont see how anyone could have stopped the crash. By then it was all over but the cryin’

    • Joe Friday says:

      Not to mention, putting aside that the Fed has not been “printing money” in it’s conventional parlance, how would anything the Fed has been doing be construed as an “attempt to debase the USD“, when it could have little effect ???

      • Willy2 says:

        When one buys commodities, a US bond or a US stock/share then one is also shorting the USD. From 2001 up to 2011 commodity prices went higher and as a result the USD went lower. But now the bull market in commodities is over the USD should gg higher.

        Source: e.g. Hugh Hendry.

      • Willy2 says:

        Oh yes. The majority of loans/stocks & bonds & all commodities are priced in USD. So, when one buys these things then one also sells USDs. But when one sells a stock, bond or commodities then one buys USD at the same time. Then the demand for USD is larger than the demand for e.g. Yen, Euro, CAD, BRL, AUD etc. Hence the rising USD. So, the worst thing that can happen to markets, is a USD going up !!!

        So, when e.g. the entire world bond market (incl. the T-bond market) goes to “hell in a handbasket” then we’ll see the USD go up !!! Because the US bondmarket is the largest bondmarket in the world.
        A number of people say that a rising USD means that the US enjoys an inflow of money. This is garbage. In the 2nd half of 2008 the USD went higher but the US still had a Current Account Deficit (CAD, =outflow of money). In fact the US has been running CADs since the early 1950s, in every freaking year.
        Yes, the bull market in commodities is – for the time being – over. And that’s something the US government doesn’t like. Think “shrinking C.A.D.”. Never heard of China “slowing down” ? And China consumes A LOT OF commodities. What happens in say 5, 10 or 20 years time remains to be seen. But the bull market in commodities is over. And the USD going higher. In that regard the timeframe 2000-2015 will be strikingly similar to 1970-1984.

      • We shall have to agree to disagree

        Why? I make a BIG distinction between being short something and making a purchase with it. If you are short any asset, it can run against, you, affect your P&L, generate a margin call, cause losses. Compare that with using dollars to make a purchase.

      • Joe Friday says:

        Willy2,

        When one buys commodities, a US bond or a US stock/share then one is also shorting the USD.

        That not only does not make any sense, it is documentably false.

        From 2001 up to 2011 commodity prices went higher and as a result the USD went lower.

        A) You assume a correlation not in evidence.

        B) You might want to check the DXY INDEX.

        But now the bull market in commodities is over the USD should gg higher.

        See A and B above.

      • The US dollar fell 41% from 2001-07 — but has since stabilized and is now at 3 year highs

      • Willy2 says:

        See what happened in 2008: Everything crashed but the USD went higher.

      • Willy2 says:

        I wouldn’t be surprised to see the USD(x) to go to say 160 in the next 4 to 5 years.

  6. PeterR says:

    “All systems are performing within design parameters.”

    HAL
    2013 – A Space Odyssey

  7. constantnormal says:

    alternate title suggestion: “As he targets the exit from his post, Ben finds his spine”

    I wish him well in this endeavor, and hope that he can impose this culture of “having a spine” on the rest of the Feral Reserve that will malinger after him.

    QE must be removed at some point, one way or another, and if the economy is insufficiently strong to withstand it at this point, it is the fault of Congress and the White House, not the Feral Reserve.

    Bernanke can do a lotta things, but he cannot plaster over government malfeasance. It’s time to tie a bow on this Fed’s efforts, and call it a day. Remove the support apparatus, and see if the patient lives.
    I think it will — but if it does not, then it was really already dead.

  8. Concerned Neighbour says:

    With today’s huge miss to GDP, the markets may very well surge to new all-time highs.

    Pardon me while I fetch my barf bag.

  9. george lomost says:

    There is no mis-communication involved. After years of QE with no end in sight traders, investors and speculators did all kinds of screwy things to reach for returns when neither artificial prices nor artificially low interest rates could be used for reliable price discovery. Now that there is even the remotest possibility of “tapering” they are all noticing that there are way too many dancers on the floor and far to few chairs to grab when the music stops. So the “positioning” has begun.

    On the bright side, we are now part of a quasi-scientific experiment in applied economics: The ECB is doing austerity, Kuroda is trying ‘Banzai’ QE and the Fed is planning to do a kind of ‘in-out, in-out’.

    Enjoy the show fellow Droogs. Booyah!

  10. Katya G says:

    He didn’t miscommunicate, he got misread by the jumpy and the apocalypse now crowd. They heard what they wanted to hear: they heard “could change course” and ran for the hills, and didn’t get to hear “depending on prevailing economic data”.

  11. Lugnut says:

    Ben Bernanke – the human Rorschach Test

  12. Pantmaker says:

    Again..nothing was miscommunicated. It boggles the mind how people are now so singularly focused on the Fed as THE source of market direction. Valuations and economic fundamentals are so 2007.

  13. DeDude says:

    Everybody including the Fed knows that the rates have to go up and that it will be better if that increase is done in a controlled way. So they pushed it up and it moved a little to far to fast. What should they do then. Reversing their statements would be losing them credibility. If they instead push a story about “miscommunication” then they get to control the change without losing credibility. I think they were doing exactly what they wanted and at the same time getting some idea of how jittery the markets are so their next move can be a little more precise.

  14. OscarWildeDog says:

    Hmmm.. Pretty funny. Many “experts” and pundits thought they knew what the markets would do when Bernanke issued QE1, then QE2 and QE3, and then when he started “letting up” or “tapering” or “cutting back” or “signaling” this or that, ad infinitum, ad nauseum. And, after every turn, jump or utterance, these same people psychoanalyzed Bernanke as if he were a Jungian reject. Bottom line: nobody knows anything (let alone predict the future), and very few agree on anything of any substance.

  15. Willy2 says:

    “I make a BIG distinction between being short something and making a purchase with it. If you are short any asset, it can run against, you, affect your P&L, generate a margin call, cause losses. Compare that with using dollars to make a purchase.”

    I agree. But NOW YOU are implying something I never said or wrote. I merely said that when one buys e.g. commodities then one sells USD at the same time. That’s the same as being short USD.

    • Joe Friday says:

      The DXY dollar index is about where it was in the early 1980s. I can make any case you like depending upon which interceding time periods you want to cherry pick in between.