Powell Ain’t Yellen – Did The Fed Want This Correction?

Authored by Sven Henrich via NorthmanTrader.com,

When police try to solve a crime one of the key tasks is to determine who benefits from the crime. The beneficiary of a crime is not necessarily the perpetrator, but motive goes a long way to narrow the circle of potential suspects.

Who benefited from this sudden aggressive sell-off aside from anyone who was positioned short?

Certainly not hedge funds that capitulated long in January with their highest long exposure in 3 years literally right before the sell-off.

And certainly not retail that went full balls long on the aura of optimism:

$DJIA pic.twitter.com/G9dm4RfadZ

— Sven Henrich (@NorthmanTrader) January 24, 2018

Do you want to be the sucker that owns this? Do you want to be the Fed chair associated with markets crashing under your watch? Let me suppose that no, you don’t.

So you have a very small window for the air to come out before you get blamed. How about precisely the day after you get started in your job?

Best timed exit ever. pic.twitter.com/eumsPOx1Xn

— Sven Henrich (@NorthmanTrader) February 8, 2018

It’s perfect timing from a narrative perspective. It didn’t happen under Yellen’s watch and it happened too soon under Powell’s watch to blame him.

I’m not saying the Fed is the perpetrator, but the timing couldn’t have been any better for Jerome Powell.

What symbolized the bubble? Record volatility compression and retail betting on ever lower volatility. So you tell me what the odds were that, after 6 years, $XIV suddenly imploded precisely right after Powell took over?

“More volatility in the markets, and maybe addressing some of the excesses and imbalances in the markets, by having a little more volatility, may be a healthy thing,” https://t.co/Ls6SeogYD0

— Sven Henrich (@NorthmanTrader) February 8, 2018

So they know there were excesses and imbalances in the markets. That’s motive folks.

Look, if you need ammunition to deal with a future recession and you are worried about a bubble blowing up (which would impact the economy negatively) you best take control of it and manage a soft landing otherwise you chase the fall-out.

I can’t suggest that the Fed engineered this crash because I have no evidence, and without evidence it would be silly to suggest so, but what I can say is that they certainly had the motive and the timing was perfect. Precisely when it needed to happen.

Now you can decide for yourself of course and perhaps it is all coincidental, but I’m putting it out there as a possibility.

But, based on their communications in the past 24 hours, the script has changed. Powell ain’t Yellen. No dovish signals on the first sign of trouble.

Now, if this theory, and that’s all it is, has any validity then this sell-off will end soon. After all the Fed doesn’t want any real damage and they don’t view the current correction as damaging to the economy. Kaplan already signaled this yesterday.

But if the goal was to let a bit of air out of the bubble without impacting the economy, then a low between today and the next few days would’ve accomplished this mission.

Of course if the Fed is just watching this and is hoping for the best then perhaps those scary $DJIA charts will come to fruition soon rather than later