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‘The Bull Move Has Lasted So Long Nobody Can See Its End’

“Here’s when US equity and bond markets will change direction,” Cali Money Man grumbled a few days ago. He is a wealth manager and has been on the job at brokerage firms and large banks through three phenomenal crashes. Unlike others, he hasn’t forgotten the craziness that led up to them.

“When investors come to fear the next Fed-talk, that’s when markets will change direction,” he said. “Now they bid up risk in advance on confidence – and afterwards on reassurance – that ZIRP will continue. But eventually they’ll focus on the start and pace of tightening. Fed-speak will assume an aura of bad news.”

And on Wednesday, there was some Fed-speak. The minutes were published from the Fed’s July 29-30 policy-setting meeting. Investors hit the sell button, just a smidgen, then changed their minds, but not much. The Dow and S&P 500 ended the day up, the Nasdaq slipped. The reaction seemed uncertain, jittery, frazzled, but finally unconcerned.

All eyes have been on the Fed for years. By now nothing else matters. And the minutes had a nasty message buried inside: the Fed was seriously debating if it should raise interest rates sooner.

Many participants noted that if convergence toward the objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated.

“Many participants.” No longer just one or two hawks! And QE is practically history. It confirmed Fed Chair Janet Yellen’s quickly brushed-off warning in July to Congress; and it confirmed what other Fed governors have said recently: rate hikes might come sooner and be quicker than anticipated.

Alas, it took the market only about 30 minutes to decide that the FOMC minutes are backward looking and hence irrelevant. What mattered now was what would be said at the big shindig in Jackson Hole. When Yellen speaks on Friday, the pundits will vivisect her oracular pronouncements and read in between the lines to ignore what they don’t like and put in bold italics any hint that ZIRP would last forever, that in fact, the Fedcouldn’t ever raise interest rates.

That’s what powers the market. Fundamentals have been obviated by the Fed.

“I was on a conference call with a group of portfolio managers,” Cali Money Man said today. “Their mood wasresigned capitulation to the trend, going fully invested in order to survive. Low-risk assets pay nothing. They’re negative to clients after fees. And even worse after inflation. Yet these ‘low risk’ assets, such as high-grade bonds, face almost certain losses.”

Almost certain losses: that’s how low-risk assets are being defined today. The Fed’s new world is dripping with ironies.


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