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The Fed’s Open Conspiracy

Friday, March 3, 2017 16:57
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For such a clammed-up bunch the Fed’s been awfully gossipy

They’re practically hollering a March 15 rate hike. Coincidence?
It seems more like an open-air conspiracy…

But will a March rate hike start the Fed on a destructive cycle?
There’s evidence for it, as you’ll see shortly. But first that open

Janet Yellen addressed a group in Chicago today. From which:

Given how close we are to meeting
our statutory goals… we currently judge that it will be appropriate
to gradually increase the federal funds rate if the economic data
continue to come in about as we expect… in which case a further
adjustment of the federal funds rate would likely be

She might as well have announced a hike today. More:

San Francisco Fed head John Williams bleats a rate hike is “very
much on the table for serious consideration.”

New York Fed chief William Dudley — Yellen proxy and maybe the
most influential of her goons — belches that “The case for monetary
policy tightening has become a lot more compelling.”

James Bullard, CO of the Fed’s St. Louis wing, gloats the Fed
“has essentially achieved its dual mandate” of maximum employment
and price stability.

Even Fed Gov. Lael Brainard — the Fed’s most dovish dove — is
chirping it’s time to start tightening the belt.

Unless the market goes to seed or the economy blows up within a
fortnight, the Fed’s backed itself into a corner. No hike and it
risks its remaining atom of credibility. And a March hike will
likely increase expectations for more. Michael Feroli, chief U.S.
economist at J.P. Morgan:

Of course, the Fed hiking in
March will increase expectations that the Fed will deliver
quarterly rate hikes.

But we wonder if the Fed’s reading its own press…

The Atlanta Fed’s estimate for first-quarter GDP rings in at a
sluggish 1.8%. They had to adjust it down from a previous 2.5% —
not quite a rounding error. That’s after they already walked it
back from 2.7% to 2.2% last month.

How long before they get to zero?

If you’ve been following Jim Rickards, you know a busted
cuckoo’s got it all over the Fed:

Their forecasts have been
consistently wrong by orders of magnitude for years. Actual data
show unemployment higher, growth lower and inflation lower than the
Fed expects.

Maybe the economy’s not as bouncy as they think.

And consider… According to research by Bank of America, history
shows that once the Fed starts tightening, it keeps tightening
until there’s a “financial event.”

It adds: “This acceleration of U.S. financial tightening is a
huge deal, and could in time become hugely negative.”

Their chart reveals that for eight of the 12 financial “events”
circled, eight struck after tightening:

width="500" />

The study adds that the next “event” — which it predicts for the
second half of the year — will occur at a much lower level of
interest rate than the past. That’s because the base line is lower
than at any other point in history, as the chart shows.

Bank of America draws this sketch of the year ahead:

If the Fed raises this month and the market continues under full
steam, the remaining bears will hoist the white flag. They’ll pile
into riskier equities. That’ll lead to a “melt up” in stocks. And
they could “melt up” until summer.

Bank of America’s “Bull & Bear Indicator” is flashing seven
out of 10 today. Bullish… but not reckless. But after the great
melt up, they think it’ll cross the red line — eight:

At some stage in coming months,
our Bull & Bear Indicator will likely exceed the “greed”
threshold of eight.

Exhibit B:

alt="" width="500" />

And once investors make it over the “wall of worry” and past the
greed threshold, down comes Humpty Dumpty:

Like Humpty Dumpty, risk assets
will invariably have a great fall once the ‘wall of worry’ is
climbed and investors stop worrying.

It’s the classic Warren Buffett saw about being greedy while
others are fearful and fearful when they’re greedy.

If the Fed hikes this month and markets don’t blink, investors
could climb that wall of worry. That’ll give the Fed ammo for more
hikes. Then that “financial event” Bank of America projects enters
the stage?

BofA’s bottom-line advice: “We recommend buying S&P 500 puts
for the second half of 2017.”

If their analysis is right… now might be the time to take


target="_blank">Brian Maher

Managing editor, "" target="_blank">The
Daily Reckoning

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