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Step Right Up and Choose Your Black Swan…

Friday, February 22, 2019 16:57

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“Step Right Up and Choose Your Black Swan…”

by David Stockman

“Shallow men believe in luck, believe in circumstances: It was somebody’s name, or he happened to be there at the time, or, it was so then, and another day it would have been otherwise. Strong men believe in cause and effect.”

– Ralph Waldo Emerson, “The Conduct of Life” (1860)*

“So, the Philly Fed manufacturing index for February was hideous – indeed, the worst print since May 2016. At -4.1, it was down from 17.0 in January and missed a consensus forecast of 14.0. Results of the Federal Reserve of Philadelphia’s monthly Manufacturing Business Outlook Survey also showed the biggest one-month decline in new orders – -23.7 – since October 2008. For this survey, a reading below 0.0 indicates “worsening conditions.” What hell must a one-month slide from 17.0 all the way down to -4.1 indicate then… and that -23.7…

Of course, the Dow Jones Industrial Average is up nearly 200 points as of midday Friday. That’s because, as we discussed yesterday, markets are no longer venues for honest price discovery. They’re broken. Monetary central planners did it. And now they’re compelled to do the only thing they can to keep it all together… reflate… and reflate… and reflate…

This is where we are after decades of Federal Reserve policy predicated on “wealth effects.” The Fed is here to please Wall Street. And it’ll test the absolute limits of U.S. hegemony – including the durability of the dollar as the global reserve currency – in that pursuit. It’s “all in” on American Empire… That means the risk-reward equation is skewed away from Main Street in favor of elites inside the Acela Corridor.

Other than the violent flushes triggered by “Black Swans” every seven to 10 years, monetary central planners have defined a shallow bottom to chart-based trading cycles. So, there’s virtually zero risk in buying the dip. The Fed has put a floor under risk assets – with rewards flowing to Wall Street and Imperial Washington while real working Americans are enslaved by debt. All of that is hard-wired in the reaction function of the Fed and all other central banks around the world.

During these dip-style selloffs financial conditions do indeed “tighten.” That’s measured by multiple factors, among them widening spreads in the corporate and junk bond markets; elevated volatility; rising credit default swap prices; liquidation of market-leading “momentum” stocks; a sharp break in the broad market averages; and a flight to safety in the government bond market.

These are, of course, all indications of a fully functioning market – an honest, unmanipulated free market. They develop organically – there’s no predictable pattern. This is “price discovery” in action. Its development is based on buyers’ and sellers’ assessments of economy and prospects for profit at any given point in time. If the aggregated assessment is that conditions are “fine,” the dip might well be shallow, short, and relatively painless. If the collective outlook for growth is darker, the correction might well be deep, long-lasting, and fraught with uncertainty… That’s not how it works anymore, though.

Such “tightening financial conditions” are invariably met with dovish coos about “standing pat” and “staying lower for longer” and “pausing for markets to digest policy moves.” These are “all clear” signals for Wall Street’s robo-machines, algorithms, and day-traders. Key elements of the monetary central planning vocabulary have infected the so-called economists, strategists, and thought-leaders who should otherwise function as checks on the Fed.

On cue, however, these Wall Street minders proclaim the inherent tightening of financial conditions amounts to the equivalent of 25 or 50 basis points of policy rate increase…It’s a “selfie” rate hike… and it gets things like 19% post-Christmas rebounds done these days. It’s a dangerous way to run a financial system. And it’s getting more and more dangerous every day. So, do you care to play the “Black Swan?” game?”

- https://www.contracorner.co/

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*Freely download “The Conduct of Life”, by Ralph Waldo Emerson, here:

- https://cdn.loc.gov/service/

Source: http://coyoteprime-runningcauseicantfly.blogspot.com/2019/02/step-right-up-and-choose-your-black-swan.html

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