Yellen - Why Is It Not Working?

FED Speak, FED Hike, FED Squawk – Some Disccusion

Yesterday we posted these comments regarding the FED:

Another anecdotal issue is that the FED is due to report their unbelievably tortured analysis and process geared to raise interest rates by only 25 basis points. However, at this point the FED credibility is pretty tattered and IF they raise interest rates they will be viewed as non-data dependent to the contrary of their propaganda. If they do not raise interest rates they will be show that the verity of their analysis and policies is likely sorely lacking. In either case, the best the FED can do is damage their credibility or damage it more. Not particularly wonderful outcomes and for the markets this could imply that no matter what the FED does will be received negatively.

Yellen - Why Is It Not Working?


It is worth noting that if things get too challenging in the markets, the Fed may decide not only "no hike" but QE and effectively "rate cut". This woul be data driven of course and all in the span of less than 2 weeks of data. The question is would any new QE solve the problem? While there is no reason to doubt that a rally on some QE announcement would occur, the problem is that we are facing liquidations of malinvestments. As in 2010, after the initial rally in equities, QE funds and liquidity sought an avenue for allocation - the chosen allocation was not previous dubious products - and did not immediately go into equities or bonds - it went into commodities.  This caused dislocation in the commodities markets with many commodities rising hundreds of percent in a very short time - which in turn caused the "Arab Spring" (which was no "spring" but rather a revolt by starving citizens) as many poor and middle-class Middle Eastern people were unable to afford necessities of rice and other foods. They were forced to choose between buying food or paying rent. Similarly, were sitting in the situation in which junk bonds need to be liquidated and QE liquidity would not be allocated easily to junk at this time. Therefore, the only option for the Fed, which this analyst feels would further damage their credibility, would be for the Fed to directly purchase declining assets and junk bonds. Certainly, the FED can purchase junk bonds and represent them on a portfolio at par as they have done with many of the bankrupt entity debt that that they purchased in 2008 and 2009 (Maiden Lane III Portfolio) - but this does not inspire confidence.

So, in summary, it appears that if damage becomes pronounced to the equity and debt markets now or int he future theFed may need to attempt to directly arrest it. However, their tools are not precise and not effective. Moreover, they would be seeing as hypocritical because how could they not see this coming, and, in fact, want to do a rate hike just before major damage to bond and equity markets would occur. Either way, the situation as it seems to this analyst, is a no-win outcome for the Fed, no matter what they do. The best probable scenario that likely exists is that the Fed just buys every asset that is going down and attempts to arrest decline by increasing the balance sheet further and also deteriorating its quality.

Is it really possible, that if these options are even on the table? And would they work or make a difference for more than a short time?

Significant Downside Probability Dead Ahead

If you monitored the work published on this site and that our community has received the last weeks, the daily directional projections have been correct 10 out of the last 11 days. Additionally to that, they have been directionally correct for almost 90% of the previous 30 days which can be documented on the site. In addition, the intraday projections have been playing out every day this week usually to within an hour accuracy with 90% directional precision - certainly well beyond our objectives and also a continuation of the uncanny accuracy of the methods and data.

July 7th, 2015 Daily & Weekly Market Structure Projections Update

July 7th, 2015 Daily & Weekly Market Structure Projections Update

After reviewing the data into the close this week, probabilities for the next 4  weeks or so, are likely to be characterized by weakness generally, with probability for Wednesday or Thursday strength (not both days but only one per week). The likelihood is for only about 1.3 up days per week. Specifically, it looks now most likely that this coming Monday (max Tuesday) is likely to represent a turning point and that the odds for a measured rally are not likely until mid-August.

Highest likelihood near-term is for persistent weakness. From a logical standpoint, it is fairly unreasonable expect volatility to subside which indicates that the option for a subdued consolidation decline is not high odds and more that the odds for a significant rally that is virtually totally unsupported by any probabilistic data is very low. Therefore, this reiterates the prospect for weakness over the next weeks with lower highs on rallies that start around the 2nd week of August into September .

The operational assumption is that September into October is most likely to form a large right shoulder of some form - that will be seen. After this week's activity closed today - confidence in these probability scenarios, as presented, is significantly increased. Of course reality will tell.

One of the additional reasons for more negative potential is a result of intraday MSP overwhelmingly turning toward negatively probability. In addition, to daily and weekly market structure projection (MSP), general tendency MSP, which projects broadly conformed and context relevant wave structure into the future - favors towards the negative.

With macro issues like margin debt almost doubling in the last 2 weeks in China, the Greek saga and significant credit stresses in Portugal, Spain, Italy and many eastern block countries over the last week, it seems that the near term context is not supportive of a calm retracement or sustained rally appearing on the horizon. The best outcome for the markets seems to be to lay with the possibility for a significant rally into early next week - probably on gaps which is another issue with the idea of something constructive emerging.

Moreover, its is somewhat alarming looking at the mcm Indexes which will be updated and published once more this weekend. It seems simply unlikely that any rally of significance can be built on the back of the horrid losses being absorbed by investors in the current markets that are represented in the indexes:

 July 2nd, 2015  mcm Indexes

July 2nd, 2015 mcm Indexes

While the data interpretation could be wrong, or this data may just plain be wrong, shorter term probability analysis will certainly adjust in that case. But seldom have we seen so much downside probability than presently. The exception is that October this year appears setup for much more extreme downside. The end of the week the picture has firmed and upside into Sept appears most likely to be a lower high and very volatile with volatility excursions generally favoring negative surprise.

Longer-Term Market Structure Projection into September

EURO Broken, Breaking and Broke – Greece Plays Its Hand

EURO Broken, Breaking and  Broke

EURO Broken, Breaking, and Broke

The ECB thought they could back the Greek Government and leadership into a corner with no other choice than an insipid self-destruction that would have left them, culpable, maligned and threatened by their own nation. Soon to be replaced by a trinket government installed at the whim of a few EURO bureaucrats (or Neo-Nazis - take your pick).

Greece played it about as well as possible. Knowing that the objective of ECB and Germany was to make sure that no other political administration in the crumbling European Union would ever be willing to commit such an act of defiance and humiliation against central planners. They waited till after markets had closed to announce a referendum and to "stick the finger" to the central planners (see ECB & EU Strategy – Political, Not Practical). During the afternoon on Friday, Greece made overtures but just after the close of the markets they gave no wriggle room to a central bank that thought it owned the outcome of the situation.

This era, characterized by the senseless debt pumping by central planning bureaucrats all over the world, has destroyed many lives and is presently in the process of destroying millions more - which will inevitably be the driving force of more complex conflicts between nations. The fact is that, via side deals and convoluted transactions with the US FED, virtually all sovereign central banks operate US FED policy by proxy. Almost all of them are precariously close to losing control of the leverage they have been so desperate to pretend is a catalyst to growth when in fact it is clearly the opposite (see these charts). IMF and BIS have been projecting wild fantasies regarding Greek growth for years. As it appears, these delusions are influenced by blind deference to the concept that something can be created out of nothing by a few bankers with a "control-P" key. Sadly this is not the situation as so clearly shown in IMAGINARY NUMBERS. With so little real capital available and so much leverage, even a little disruption can have grave implications. The next months and weeks will likely reveal more regarding leverage (more accurately deleveraging) implications.

Leverage - Where are we now?

Leverage - Where are we now?

These crises arising all over the world may be a catharsis for people in the end, but it will be one of the most painful paths possible for rejuvenation. From this perspective, Greece knows they are in pain, it can not get much more intense for them. What you can not pay for does not get paid - so, there is somewhat of a limit. BUT IT CAN GET VERY PAINFUL for debt-pushing central-planners. The implications of huge and contagious CDS & derivatives losses, financial instability and challenges that are all pointed at the feet and minds of central planners (as opposed to indebted governments) is likely to be a trend.

If there is one lesson from Greece, it is while the drug is offered - take it. When the drug causes ill health and death, for the history books, make sure its manufacturers and pushers get the blame.