In effect, the markets are front-running every Fed move and baking future easing and accommodation into the cake. If the Fed tries to raise against those expectations they risk unwinding the entire post-Lehman “recovery” of inflated stock prices and ever-expanding Fed funny money.
Yellen and the Federal Open Market Committee surprised exactly no one earlier this week by announcing that they were standing pat at the target federal funds rate of 1/4 to 1/2% that they set back in December. As Yellen explained in justifying the decision:
“the Committee’s baseline expectations for economic activity, the labor market, and inflation have not changed much since December: With appropriate monetary policy, we continue to expect moderate economic growth, further labor market improvement, and a return of inflation to our 2 percent objective in two to three years.”
Blah blah blah. You know the usual story by now:
The labor market is strengthening! (Just don't mention that it's mostly part-time and contract workers being hired, many of whom are getting a second (or third) job to make ends meet during the “recovery.”)
Economic growth is picking up! (Just don't point out that profits and earnings estimates for most industries have been drastically slashed since the beginning of the year.)
The Fed's own GDP growth projections are holding strong! (Just don't talk about the fact that even these projections have been slashed since the rate hike last December.)
It should also come as no surprise, then, that Yellen and the gang are now signaling fewer rate hikes this year than they were anticipating...and that they are absolutely insisting that negative rates are “not on the table.” (Just don't mention Japanese BOJ Governor Kuroda's similar remarks the very week before he took Japanese rates negative.)
But this time it is different. This time the markets seem to be taking no heed of what the Fed – or any of the central bankers, really – are doing. Or, to be more precise, they're now beginning to play their own game. Namely, the “How Far In Advance Can We Second-Guess the Central Planners Intentions?” game. Look at what's happened in recent weeks and the response (so far) to the Fed's forward guidance at this week's meeting.
After starting out with the worst opening in modern history, down 10% on the year at one point last month, the Dow has now enjoyed the greatest comeback in modern history, recouping all 10% in just the last few weeks. This should have investors jumping for joy, right? Economic smooth sailing ahead, surely?
Not so. Strategists and planners who ended up with egg on their face after this year's disastrous start are making sure they won't get caught flat-footed a second time. They are revising their projections for the year, but they're revising them downwards. No one is happy about this “recovery” and what this volatility means about the overall state of the market. As Richard Weiss, a senior portfolio manager for American Century Investment, admitted to Bloomberg earlier this week: “The rebound is not economically driven. There is very little difference in economic indicators from the end of the year through today.”
Indeed, there is little difference in the economic indicators. And unfortunately for those who are betting on another bull run in the phoney baloney over-inflated bubble-pumped stock market, those indicators are not good. After a five year bull run from 2011 through to a peak in January of this year, the dollar has started slipping against all other major currencies. The FOMC meeting only compounded that trend, with Yellen's cautious words sending the odds of a rate hike to 1% by December down to 70% and bringing the dollar spot index plunging along with it, including a 2.2% slide against the yen and a 1% decline against the euro.
In effect, the markets are front-running every Fed move and baking future easing and accommodation into the cake. If the Fed tries to raise against those expectations they risk unwinding the entire post-Lehman “recovery” of inflated stock prices and ever-expanding Fed funny money.
Of course, as with any crisis there are ways to benefit from the current insanity. The big winner so far this year is (who would've guessed it?) gold. Gold is having one of its best years-to-date since the 1970s, up nearly $200 since January 1st with no signs of stopping yet. Gold stocks are leading the way with some stocks making 300% to 600% gains so far, and they have been so aggressively shorted coming into the year that there is even more upside to be expected as the gold bears try to cover their short positions.
But as good as gold is doing now, there may be a different winner overall this year: silver. The gold/silver ratio is now dancing around the 80:1 mark. This is not only a 10 year high, it's also one of the few times in modern history that the ratio has risen over 70:1. Some of the other times this has happened include WWII, the crash of '87, the dot-com bust and the Lehman collapse. This shows that the gold gain is responding, at least in part, to the “fear trade.” People are nervous about the markets and parking their money in gold. As a result, gold has gained quicker and more prominently than silver. But as an increasing number of investors are noting, if and when that ratio returns to something approaching a modern era average (say, 50:1), there is a lot of upside to be made in silver.
Whatever the timing on that trade, two things are already certain this year. Firstly, that the Fed will in no way be able to continue raising rates as planned unless they do some form of easing or accommodating between now and then. And secondly, that the markets have stopped responding to Yellen and started dictating to her.