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Bloodbath Day 3: Watch for a Fed Statement to Calm Market Spasms

— James West

Tuesday looks poised for another spectacular bloodbath after Monday, and looking at the eastern hemisphere this morning, it looks like it could be worse, with the FTSE down 2 percent, China’s Hang Seng off 5.12 percent, and the Nikkei in Tokyo off 4.73 percent. The Dow at one point was down over 1600 points in mid-afternoon trading. Wow. All this because of a little data indicating wage growth? I don’t see it.

More likely this is the broad market experiencing a collective, data-driven profit taking binge which has morphed into a downward plunge thanks to the automated nature of stop-less programming across trading platforms.

At the last Federal Open Market Committee meeting on January 31st, 2018, the group said, “In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1-1/4 to 1‑1/2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.”

So not only does the FOMC make clear that they expect wage growth, but that they intent to maintain interest fates between 1.25 and 1.5%. So this hardly seems like language in anticipation of any accelerated schedule to lift rates.

Is it conceivable that the intense negativity is in response to what mainstream financial media predicts will become an accelerated pace of interest rate increases based on the data? Is this a The Market sending a pre-emptive “don’t even think about raising rates now” message?

If you recall, the pattern seems to have emerged whereby if fed communiqués trend exceedingly toward hawkish in terms of future interest rate movements, then the market response with the equivalent of a childish tantrum ripping apart value until the Fed relents, and tone down the rhetoric towards raising rates.

This pattern begin when Ben Bernanke he first announced his intention to begin tapering stimulus package is back in 2014. Moments after suggesting that the economy was insufficiently good repair to begin diminishing the quantities of tapering which at the time stood at roughly $80 billion per month, the market swooned to the tune of 600 points and continue to do so for a few days until Bernanke announced that his tapering would be tempered.

In fact, that was exactly the event that caused the phrase “taper tantrum” to be coined.

Given the success of search infantile petulance in the past, it only stands to reason that, should such a coordinated emotional response be conceivable with any degree of credibility, The recent fed murdering’s would seem to justify this week’s timing.

Though it doesn’t necessarily follow that coordinated response superficially is the result of a coordinated action, or coordinated thought. Schools of thought relative to bond and stock markets have become variable within only a narrow range, such that a standard set of data points can be expected to elicit a predictable reaction by a large percentage of market participants.

New Fed Chairman Jerome Powell, sworn in yesterday, has the dubious honour of entering during the steepest two day market loss in the Dow’s history. We get the benefit, on his first day in office, of seeing how he responds in a crisis.

If he were to take a page from the book of his predecessors, he would likely move to soothe markets with a statement along the lines of “no intention to hurriedly raise rates” and “jobs data too preliminary to equate with a rate hike yet”.

The alternative is more blood in the streets. Which, looking at markets in London, Beijing and Tokyo this morning, appears inevitable.

 

James West

James West

Editor and Publisher

I employ a Capital Efficiency Model that dictates money should never be exposed for longer than is absolutely necessary to the possibility of being lost. Thus, I routinely sell half my position when a stock doubles from my entry price, and I sell stocks that lose 20%, unless there are...
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