Big Fed Lie

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by northmantrader

In real life you can always tell when someone has something to hide when they get really evasive in their answers.

And boy was Jay Powell evasive in his press conference yesterday. Twice he was asked about the Fed’s policies causing risk assets to rise, twice he skirted with a non answer:

He may as well have said that asset prices work in mysterious ways. It was a complete copout and dodge and therefore the non answer was very revealing in itself.

Look, I can’t believe we still have debates on this issue. There are still Fed apologists out there in apparent denial beating the drum that nothing the Fed does causes risk assets to rise directly. The Fed just manages the economy via interest rates and liquidity does not go directly into stocks. It’s just the underlying economic conditions and earnings growth that causes stocks to rise.

Please, just stop.

Who are you going to believe, the Fed or your own lying eyes?

And of course we can point to 2019 when earnings dropped and stocks flew higher on nothing but a constant Fed jawboning and policy operation with Jay Powell personally marking the lows during each correction:

I don’t want to rehash the debate arguing why the earth is not flat with flat earthers.

And I don’t need to: Jay Powell’s non answer was the answer.

If the Fed’s policy wasn’t causing asset prices to rise he could’ve just flat out denied it. Instead he muddled in generalities.

Which tells me one thing: He didn’t want to go on the record because he knows it’s true. But he can’t admit it, hence my point yesterday:

The Fed is a dishonest organization. I can go further and call it the Big Fed Lie.
The lie that asset prices are not directly on the Fed’s mind when managing policy.

Go no further then watch Bill Dudley in its vehement denial that repo impacts asset prices directly ( we already discussed this here: Repo Lightning) admitting the very point: The Fed is indeed watching asset prices in determining policy:

He literally said: “They (the Fed) certainly have to consider the financial asset prices when making their monetary policy decisions”.

And there it is.

And they do:

Does the Fed think we’re stupid or are they in self denial?

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In yesterday’s press conference Powell listed every possible reason for a slowing of global growth in 2018 except of course the real reason: That central banks reduced liquidity and stocks tanked as a result which slumped confidence and spending.

The linkage between stock market direction and economic growth was even acknowledged by Bill Dudley in the interview above.

The effect is obvious: Stocks drop hard and confidence takes a hit, spending slows the economy slows, stocks rise confidence goes up spending increases the economy grows. Nothing magical about that and hence the real incentive for the Fed is to manage the economy via the stock market and put in the conditions for the market to rise.

And liquidity, easy financial conditions do the job. What? You think it’s a coincidence that the Fed is running the loosest financial conditions in 27 years right now?

Of course not.

Here’s the truth the Fed can’t and won’t admit. The near 20% drop in stocks in Q4 2018 scared them, their effort to normalize rates and the balance sheet ended in failure and a sustained drop in stocks would’ve brought a further slow down in economic activity and have risked a recession. So they flipped and they flopped and went full easy again and kicked the can further down the road exacerbating asset prices in the process.

And when the repo crisis happened out of the blue they panicked and flushed the system with liquidity and it’s brought about a massive further acceleration in asset prices.

Let’s even stipulate for argument’s sake that the liquidity does not make it into stocks directly (I think this is very debatable), but if money is chasing stocks because the perception is that the Fed is supporting markets, that’s then a learned behavior producing the same effect. In short: They have created a market monster that demands constant feeding driving the very behavior that they are unwilling to admit.

Some call it a communication problem. I call it a policy failure, a market and economy made permanently dependent on central bank intervention with central banks unable to extract themselves while the world is ever more drowning in debt.

But worse for the Fed now: Hardly anybody believes them. Not on liquidity, not on repo, not on inflation.

Guy Adami brought up a very good point yesterday:

The Fed may publicly pretend to not target asset prices, they may claim inflation not to exit when every consumer experiences it, they may pretend ignorance and imply that stock prices move in mysterious ways. They may even pretend that valuations are not at extremes:

They may pretend ignorance on all these things, but we know better. And the market knows better for every Wall Street firm with a bullish outlook cites the Fed’s policy actions as a primary reason to buy stocks.

There is of course a reason why the Fed can’t and won’t admit to any of it and that is: They have been largely responsible for the last 2 stock market busts and are setting everyone up here for the next one:

And that makes them the villain:

Instead of coming clean they are unwilling to admit it to themselves and/or to the public instead they keep peddling the Big Fed Lie: “It’s very hard to say what is affecting financial markets with any precision or confidence.”

Bullshit.

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