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Interest Rates Are Never Rising

Real life beats out professional economists. Again…

Of course the Fed isn’t going to raise rates. Have you taken a look outside, of late?

I had been previously sold on the idea that the Fed might have made some symbolic gesture today; a fractional point or something to that effect. But there is no serious merit to any argument involving meaningful interest rate hikes, either imminently or accretive for the span of some years more yet. There never was.

The Fed needs you to believe they still have any control left. This is how confidence games work.

If I say “cross me and I’ll abduct your first born”, well maybe that will hold power over you for a while.

But the day you say “abduct my first born and what stops me from beating your head in?”…well that’s the day I stop being a meaningful threat.

The Fed is quickly approaching “un-meaningful threat” territory.

Now, will we rally again? That is not so clear.

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Will The Fed Save Us?

The markets are in full on collapse mode. 3% declines is what 2009 was made of. Even 2011 I don’t recall as being this intense – although time mutes the pain.

But will the Fed arrive to rescue us? While I deeply hope for this outcome, I’m hesitant to count on it. I see several impediments to a Fed rescue.

The first is that Yellen was very intricately involved in the first set of rescues. Yellen is a dove; but she is a dove who believes in econometrics and the ability of a central authority acting under imperfect knowledge to do good in the economy.

The trouble with that perspective is that it so frequently is revealed to be wrong. This is the central point of non-linearities in real dynamic systems, which is fundamental to the work of the Austrian economists.

Where I am afraid we are going to run into trouble is by sanctioning the first round of interventions, Yellen the dove had a buy-in on the outcomes. If she intervenes, it will cast doubt on the first round of Fed actions. Will Yellen be able to do such a thing just to protect the stock market? Or will she tell herself everything is fine, to shore up the belief that she and her peers knew what they were doing in the first round?

My second concern is that, although the market is in a state of anguish, the economy is not clearly following the path yet. A major shift in stock ownership occurred alongside the Great Recession, and so the regular citizen may be more insulated to negative stock performance than five years ago.

It might be just us out here.

Would the Fed intervene to save professionals? How much bearing does this even have on the average blue collar citizen? I am concerned that the severity of the Great Recession means the knockoff shock waves may not justify additional aid.

Of course, on the other side of things, the stock market is still heavily owned by politically connected and economically powerful persons. That has never hurt much in the past. I’d say that’s still a positive, the current and apparent political upheaval against such behavior notwithstanding.

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Welcome, friends! For the 2015 DAY OF PATIENCING UPON US (blessings and praise) is, well…upon us!

In all of its infinite glory, the markets have ordained that, on this day, we should all be held hostage to the English predilections of a 68 year old woman.

Now! Wait with fearful deference to the Fed statement yet to be transcribed at the hands of careless twenty year old interns! And pray they do not forget to add the word “patience”. Twice for good measure.

On this remarkable day it is well worth it to go over the rules, which are completely capricious and still being made up at the moment. But here is a short breakdown:

1) IF Yellen says she is “patient”, then the market shall rejoice for no particular reason.
2) IF Yellen implies that she is, in fact, not patient, then the market shall despair for no particular reason.

So how does one know if Yellen is patient or not? Admittedly, it would be great if she just came out and say “Hey all, I’m taking a break from knitting, tending to my bonsai trees, and listening to a close, dear friend talking about her grandchildren to let each and every one of you know – I am super patient.”

That would be a most wonderful day and could very well touch off panacea.

Now, where it could get dicey is if Yellen says she is patient without just saying she is patient. Since these particular letters p-a-t-i-e-n-t seem to mean such a great deal, in that particular order, well then it could be quite a fit if she doesn’t use them.

In such an outcome, I suspect the best and brightest thirty year old micro managers would force their twenty year old trading slaves to lay down and cover their ears while they crosschecked the nearest thesaurus for clues.

To save you the trouble, I am providing you here a convenient list of synonyms for patience so that you can get ahead of the game, because that is the type of unparalleled service we provide around here.

Calm, forgiving, gentle, quiet, tolerant, long-suffering, understanding, accommodating, composed, easy-going, enduring, even-tempered, forbearing, imperturbable, indulgent, lenient, meek, mild, mild-tempered, persevering, persistent, philosophic, philosophical, resigned, self-possessed, serene, stoical, submissive, tranquil, uncomplaining, unruffled, untiring

But naturally this whole exercise is somewhat without purpose, as America’s most brilliant economists and laymen have already determined that interest rates shall be raised. Here is a direct quote from a recent publication:

“Mortgage rates are unlikely to go lower than they are now, and if they go higher, we’re likely to see a reversal of the gains in the housing market,” said Christopher J. Mayer, a professor of finance and economics at Columbia Business School.

Oh, no excuse me for my confusion. That was not from this year, it was actually from 2010.

Here’s the real quote.

Last week, Narayana Kocherlakota, the governor of the Minneapolis Federal Reserve, predicted… the Federal Reserve could raise interest rates.

Wait, sorry…sorry…I lied. That was actually a murmur from 2011.

Alright here is the real quote. For real.

We could still see the euro weaken against the dollar from here, which would still result in lower commodity prices.

What has really changed is the prospect for another plunge. It is most unlikely, with the various central banks of the world looking to shore up Europe, that we go back to an across the board sell off. That does not mean we go higher. It just means we don’t go to $0.

It also means that safe haven plays are at extreme risk. If Europe is not going to disintegrate before our eyes, then why hold half your net worth in gold.

Or treasuries…

…okay, I lied again. This time that was me in 2011 betting on higher treasury rates. I cannot recall if I ever made a specific bet on when the Fed exactly would raise interest rates, precisely. I wouldn’t doubt it though. But let’s agree that betting against treasuries in 2011 was just as wrong, shall we?

Here’s a Reuters article in 2012 betting the rate hike would be before late 2014. A cadre of economists actually thought the Fed would just pull the trigger right then and there.

(Reuters) – There is a good chance the Federal Reserve will raise interest rates before the end of 2014, according to a Reuters poll which also showed a significant minority of economists still expect a further easing of monetary policy in coming months.

The poll saw a 50-50 chance the U.S. central bank will break the pledge it made last month to keep benchmark overnight borrowing costs at near-zero for the next two years.

Here’s Fed chair Bullard in 2012 suggesting it would come in 2013.

March 23 (Bloomberg) — Federal Reserve Bank of St. Louis President James Bullard said U.S. monetary policy may be at a turning point and the Fed’s first interest-rate increase since the global financial crisis could come as soon as late 2013.

With policy currently “on pause, it may be a good time to take stock of whether we may be at a turning point,” Bullard said in a speech in Hong Kong today. “As the U.S. economy continues to rebound and repair,” further action “may create an overcommitment to ultra-easy monetary policy.”

Here is LaVorgna, chief U.S. economist at Deutsche Bank, hanging out at with our good pals at CNBC in 2013, ignoring everything the Fed said completely and still suggesting the rate hike would be imminent.

History, in fact, suggests that when the claims number averages below 350,000, you can safely bet a Fed interest rate hike will come within the year, according to research from Joe LaVorgna, chief U.S. economist at Deutsche Bank.

In the current Fed forecasts, rate hikes wouldn’t come until mid-2015, when it expects a rate of 5.8 percent to 6.2 percent.

But rate hikes came when claims averaged 350,000 in 1958, 331,000 in 1961, 345,000 in 1984 and 344,000 in 1987.

“If past is prologue, whereby low and declining claims accurately foreshadow a noticeable pickup in hiring—and hence a sharp decline in the unemployment rate—then monetary policymakers will not be waiting until 2015 before raising the fed funds rate,” LaVorgna said.

Which brings us to 2014, just three months ago, when we started this comical jig, waiting on an old woman to assure us she is still, in fact, patient.

For reference, see Bloomberg.

So let’s have a moment of contrite honesty together. You…me…all of us have been absolutely terrible at guessing when the Fed will raise interest rates. Even the Fed themselves have been terrible about guessing when they will raise interest rates.

The dance above us that you see, prancing over five years, is a display of failure. It is time to admit that candidly amongst one another.

This economics game we play – the underpinning of everything in investing – is not a science. It is an art form, rather; one which is prone to fits and everyone gets to be wrong quite a lot.

So why, dear reader, should I believe that now – with such rampant destruction in forex markets and the US dollar almost audibly sucking air out of the room – is the time to raise interest rates?

Why would you be right this time?

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The Big Question Then: How To Play EU QE?

The Swiss bank just announced that the ceiling they have been maintaining against the euro is to be dropped. That would make sense, since the euro is now trading below 1.17, down from almost 1.40 just earlier. In terms of the exchange rate, that had to be getting very expensive.

But the timing here should be viewed as a sign that the ECB is really about to start QE. This should be the stance because if they don’t, the impact would be minimal, but if they do you can’t be on the wrong side of the trade.

In terms of what this QE will look like…well, that is the question. What is the ECB going to buy? Not public debt, surely. How much more financing can these governments stomach with yields already negative in many countries. Even the worst countries, like Greece, are borrowing at rates that an average citizen would envy.

My guess here is two fold: (1) they buy up private financial assets similar to the mortgage program the Fed had in place, but that it will center on short term bonds, while also working with banks to create a long term financing window (EU companies and banks in particular have notoriously short term financing arrangements) and (2) they take the opportunity to absorb whatever mechanisms exactly they have been using, before now, to hide the massive debt loads that should have been coming due over the past three years.

If you forgot, Europe ended up pulling some master BS, using a combination of trade accounts to gobble up the garbage so that the markets wouldn’t have to see it default. I’m hazy on the exact specifics, but I would gamble that those imbalanced accounts are still outstanding; and my guess is they’re about to get totally monetized.

So the big question now is, where do you park money? I think that it would be very stupid to try and be short right now with central banks making big noise and seemingly readying the cannons.

If this is like past central bank action, then any longs will do – equity, commodities, debt, whatever you like. Oil could get a huge boost since it’s been so ravaged. ECB action will give the Fed room to play, especially if deflation keeps up. Yellen is no Bernanke…yet, but she also hasn’t been tried either. If the Fed coordinates, all boats get lifted.

But the safest low key play is probably just to hug U.S. dollars until things are a little more clear.

I am ~78% cash, with positions in CCJ, BAS and VOC, down roughly 3% in the first two weeks of the year.

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You Always Take The Blue Pill

Let’s get something out of the way.

Yes, this is all an illusion. But why should that matter?

So what that the entire structure of the market right now is fake? That without rigging the system, we would be much lower? Why should I let that get in the way?

The things I’m going to buy with all these gains are going to feel real enough.

I hate to break this to you pal, but life is an illusion. What, you were attached to this nonsense? Birth. Death. It’s all a veil of deception.

And when, long in the distance, this raindrop of a Universe we’re trapped in smacks the pavement and contorts itself into a Gödel Space and wakes the dead, this is all going to look pretty stupid. But for the moment, rather than “Zerohedging” myself into hyper-analyzing micro-variations of white noise in Fed data, I’m going to embrace the illusion.

Because the reality sucks, champ.

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To Be Clear, The Fed Dropping Guidance Was A Big Deal

So here we are the week after the Fed announced on April 9 that they’re just going to throw out that guidance that they’ve been spending the last three years meticulously articulating to the public, and we remain in a down market.

End of the world?


This is exactly what happened following the announcements of QE’s I, II, and III. The market continued to be slaughtered following the announcement, market “professionals” and “experts” lamented the end of global civilization and then…it stopped.

No, it didn’t just stop. It lampooned the detractors, dragging anyone short equities into obscene losses, while making those with blind faith quite wealthy.

What the Fed is really communicating here is that the game will remained rigged for as long as it takes. And since what the Fed is doing doesn’t seem to be making a difference (free money tends to get doled out to those closest to the trough, not those that actually need it), well then that’s just a another way of communicating that the game is going to be rigged forever, isn’t it?

Forever or until the guns come out.

So we’re seeing the monthly POMO purchases dropping another $10 billion and people are ever so afraid – but think about this rationally. From $80 billion a month, we were buying up $960 billion annually in effectively newly issued currency. That’s idiotic, QE I levels of program. I mean, QE II was only a $600 billion program, not counting the reinvestment of proceeds (which was really going to happen anyway, they just publicized it).

So $55 billion in new asset purchases are still on the table, which is for the moment still $660 billion every year. After the next $10 billion drop, we’ll still be at an annualized $540 billion every year. I mean, look, the numbers being thrown around here still equate to another QE II every 12 months.

I do some quick back of the envelope math and pretty quickly work out that QE III, from its inception on September 13, 2012, was somewhere in the neighborhood of $1.5 trillion.

So I’m supposed to lose my grip now that that’s being slowed to a “paltry” $600 billion? Let’s be straight here, just winding down QE III is going to be another QE II.

You know, because we’re winding it down permanently, really.

Or not, really.


And – oh yeah – your expectations that interest rates were rising next year are also premature. In a $17.4 trillion economy, a 1% rise in interest rates NOT materializing by itself is good for probably $150-200 billion a year worth of market forces. Multiply that by every percent financial institutions were expecting.

My point is this; right now everything is super scary, market short sellers are behaving like gigantic dicks, and The Fly’s comment section is haunted hourly by scum. But I’m thinking this is just the same story we’ve seen play out on at least three separate occasions already.

The fear is drawing everyone in. But the victory blow has already been struck – point Yellen.

But you can’t have a fox hunt without a fox; so we’re pressing downward. Make no mistake though, death awaits all short sellers. Before this is over, even just having too much cash on the sidelines will be grounds for humiliation, and short sellers should just actively start picking out that special “last rights” shotgun now.

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