Market's rudderless on Fed's mixed message

Stocks have been going nowhere for the last week or so.

The volatility is gone as institutional investors cannot get a probable direction for equities or the economy looking out six months.

But why?

Blame Fed chief Janet Yellen. In her press conference earlier this month — after deciding to pause in its rate hikes and also cutting the projected hikes from four to two — Yellen spoke in circles about the strength the Fed saw coming to the US versus the weakness in the global economy.

The perceived strength she cited was not all that convincing to analysts on the Street to say all is clear. Large investors believing in the rebound would not have a reason to load up on stocks because if you think Yellen is correct there will be a rate rise, which will take the air out of the stock bubble.

If you think Yellen is off the mark and economic weakness is coming, then you are fighting the Fed, which is  hardly ever a fruitful investment philosophy.

Just to confuse and obfuscate, since the meeting Fed presidents have been jawboning about the economy adding to Street confusion and keeping the dollar strong in the Fx markets. The vote to stand pat was 8-1 in March, but the comments afterward seems to be a more divided Fed.

So what’s up?

The Fed is painted into a corner. This is why Janet Yellen left Fed watchers scratching their heads in search of direction.

Europe’s central bank  is doing things never spoken about in monetary circles prior to 2008. Buying corporate bonds, accepting negative rates and probably buying the many troubled EU bank stocks to prop up the economy.

The ECB with Mario Draghi at the wheel is going full-bore in its market intervention and perhaps market manipulation. I say manipulation because Draghi and Co. are probably also working in currency and futures markets to keep the illusion alive.

This is not the only central bank manipulation going on however. As I cited earlier this week, the Treasury Department’s secretive Exchange Stabilization Fund needed to be recapitalized through reverse repo hence the December quarter point rate rise from the Fed to buy some of the trillion-dollar US securities being off loaded by Asian central banks.

As for the major Asian central banks, the Chinese have been devaluing the yuan this week by as much as one percent to combat Yellen’s “strengthening” economy. And the Japanese central bank is toying with the idea of giving younger people free “helicopter money” on the premise that they must spend it, since they will be forbidden to put the yen in a savings account.

Yellen’s comments after the meetings are meant to keep the stock market bubble going, while couching her comments to keeping asset inflation under control. I would say the barometer she uses to judge her success is gold prices.

The Fed “transparency” of letting the other regional presidents speak is to tweak the message based on day-to-day market movements.

So that’s how we wind up with a VIX in the teens and a dollar moving higher on most major currencies.

It’s not so much a monetary solution or a message that all is clear. It is however a clear sign that the Fed will tweak it as they go along.


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