Fed Intervention Has Completely Destroyed The Markets

Federal Reserve intervention has killed natural market processes.  The Fed is also starting to lose control of its ability to manipulate the markets.  Today is a good example.  The S&P and Dow are negative as I write this (2:30 EST) after staging a big early day rally.  Most sub-indices, like retail and housing, are also red. BUT, the infamous “FANG” (Facebook, Amazon, Netflix, Google) stocks + Apple are up anywhere from .2% (AMZN) to over 3% (AAPL). These stocks are the largest stocks in the SPX by market-cap and are part of the “tool kit” the Fed has been using to keep the S&P 500 and Dow from spiraling lower.

Since late 2012, the Fed has been able to orchestrate the markets with heavy doses of direct and indirect interventionary tactics.   It’s used a combination of money printing, plunge protection and propaganda to keep the stock market propped up, interest rates near zero and the price of gold suppressed.

But, if the action over the last four trading days are any indication, the Fed is increasingly losing its ability to control the markets.  This is most evident in the apparent break-down in market sector correlations.

From roughly late 2012 through early 2016, the Fed has been the US$/yen as a “lever” with which to push the S&P 500 up and the price of gold down.  If you study these three graphs, you can see the correlations from 2012 to 2016 and the breakdown of the correlations in 2016:          Weekly $/Yen           Weekly SPX           Weekly Gold

I happened to notice on Friday and yesterday (Tues, Sept 13) that, despite a move higher in the $/yen (the yen falling hard vs. the dollar), which is the level the Fed had been using to manipulate stocks, the stock market experienced steep sell-offs.  Typically the $/yen and the U.S. stock market move in near-perfect correlation. Today they are inversely correlated.

Even more interesting, the bond market, even at the short end, also sold off (yields rose).   This is unusual  because typically when stocks get bombed, the money coming out of stocks floods into very short maturity T-bills and the dollar rises.  Yesterday EVERYTHING was down except a few agricultural commodities and the dollar index.  I have no idea where the money that came of stocks was parked.

Regardless, it was clear that hedge funds were selling everything that was not nailed down yesterday  and Friday.  At some point, as volatility increases, a significant portion of the money coming of stocks and bonds will be flowing into the precious metals sector.   If you review the trading patterns in 2008 before and after the October, you’ll see that initially the metals/miners were correlated with the S&P 500.  Subsequent to the end of October, the precious metals sectors dislocated from the stock market and moved higher while stocks continued to decline.

I believe all of this activity, especially the dislocation in correlations among the sectors as discussed above reflects the Fed’s increasing inability to manipulate the financial system. There are just too many factors for which they can not account.   One perfect example is the disintegration of energy exploration and production sector assets.  Debt recoveries in E&P bankruptcy  restructurings have been averaging 21% – LINK.  This means that lenders are getting back, in general 21 cents on every dollar lent to these companies. Some tranches received close to zero.   Part of this “recovery value” no doubt includes some partially random value attributed to stock distributed to bagholders.

This is a problem because the big Too Big To Fail Banks were stuck holding a lot of this debt.   In other words, the melt-down in the energy sector has the potential to blow big holes in bank balance sheets (this among many other deteriorating assets).  If the Fed hikes rates, it will likely force recovery rates even lower.  In fact, it will lower the value of collateral securitizing most bank debt deals, especially mortgages.

It’s a common notion that the Fed has “backed itself into a corner” with interest rates and its monetary policy.  But there are several ways in which Fed has backed itself into a corner. These factors are beginning to emerge and they are removing the ability of the Fed to treat the financial system like its puppet.

Expect a lot more volatility in all market sectors going forward.  The economy is clearly headed into a recession, if not already in one.  An interest rate hike next week has the potential to trigger a plethora of unforeseeable chaos in the markets and I believe the Fed will once again defer on its threat to hike rates.

8 thoughts on “Fed Intervention Has Completely Destroyed The Markets

    1. Well I think he is behind the curve or or-to-lunch on this topic. He says:

      ““If they don’t start raising it, the real problem will be the economy isn’t that great,” he said. “Somewhere, probably in the next couple of years, we’ll go into a recession.

      I think we are in a recession NOW; the best time to have raised rates was 2-4 years ago, the Fed is clueless, they are stuck, they raise rates now they crash the market.

    2. Wilbur Ross is a savvy vulture. I bet he is all cashed up and ready to pick off pre-determined and prime assets when the plunge comes. He wants the Fed to raise and is talking his book, in my opinion.

  1. I don’t think the Fed will raise rates next week.
    The problem the Fed has is “jawboning”.
    If the Fed raises rates next week, we all know what
    that will do to all asset classes. If the Fed does not
    raise rates I think that their credibility will be shot on
    a global level. Either way the Fed is up shit creek with
    no paddle.

  2. Correct me if I’m mistaken, Dave, but I believe you mentioned something about Bankers Trust versus Procter & Gamble in one of your recent podcasts. Here it is again in this youtube video (about the 17:40 mark). Interesting video overall, thanks to Turd for posting it on his site.

  3. I have never seen the markets so placid and docile. Dead calm in fact. The price discovery signal has been cut so they no longer function or respond to stimulus. Bad news has no effect … good news has no effect … nothing moves these markets up or down… they are unresponsive and totally comatose. The only reason the markets are still alive is because the machines are breathing for them and the doctors are pumping them full of drugs. Pull the plug and the markets die.

  4. data was rather poor this morning… gold unchanged as I type, man, they’ve really got the screws tightened on the pms right now, at least until the FOMC.

  5. Here is the thing … zero interest rate is killing the insurance industry… they can not take much longer…
    running out of space/time there is only so much you can logically/reasonably… do …
    there is a physical limit derivatives you can logically hold..for derivatives substitute for a premium…and olny othr way to earn was bonds … and bonds at ZIRP or worse NIRP … is killing revenues… at the very time baby boomers are retiring and need payouts… combination is killing all insurance corps.

    See Insurance is ( a bet something will not happen …like you bet your house will burn down ) the insurance company bets it will not…. usually a good bet because you want yo live in it… and do all you can to keep it from burning…

    (derivative … is a bet that the same thing will happen … the house will burn …if it does BURN some one will help the insurance company pay you for your house replacement) ie insurance on insurance … normally a good bet too …. but there is a logical limit you should want ….based on the insurce revenues…

    See in the old logical days… company normally took primium from customers invested in bonds …make money on interest on those bonds … Insurance was a revenue generating machine ….
    but now % @ ZIRP no profit in bonds … no reves from baby boomers (mostly pay outs now) going to get worse…till all we baby boomers die off…but until then we need our annuities and pensions …because we are old frail sick and can not earn like we did in or prime …oh yes we will kill the heath insurance industry too with our type 2 …and other chronic metabolic illness…that will only get worse of over time.
    //////////////////////////////// THE FED HAS KILLED ALL OF US WITH LOW RATES //////////////////////////

    ZIRP has destroyed the profit in bonds and neg % rate NIRP will destroy the revenues of the insurance companies…forcing Large insurance companies in to the risk on risk off stock market…soo you see the Central banks will kill the insurance industry even faster if they allow Neg % rates …or kill the the stock market/ and governments faster if they raise rates…that is where we are…you decide death by a gun … death by poison…death non the less.

    If you destroy the insurance industry you will destroy the stock market too …because you/corps can not do any business with out insurance … because of fear of litigation for innocent accidents …so with out insurance no corps no corps no stock markets … so now what ….if you don not rase rate you kill insurance companies … which will eventually kill the stock market… If you raise interest rates you will kill the stock market instantly…so there you are…

    Because if you raise interest rates you will kill sovereign/ governments faster because of the debt…
    soo is there a way out … no! a reset is coming… ” WINTER IS COMING “

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