From Yellen Put To Yellen Massacre
from The Automatic Earth
I think I’ll just give you a slew of quotes, and then you can figure out if you can figure out why I chose to call this the Yellen Massacre. Which consists, by the way, of two separate but linked parts, not quite the Siamese twin perhaps, but close. What links them is the upcoming Fed decision to raise interest rates, and the timing of the announcement of that decision. It will blow up both bond markets and a large swath of emerging markets. People keep saying ‘the Fed won’t do it’, or ask ‘why would they do it’, but arguably they’re already quite late. It must be half a year ago now that I wrote it would hike rates, and also told you why: Wall Street banks. First, here’s a fine little ditty published at Econmatters:
Early on Thursday morning, realizing this was going to be a robust selloff in equities, the ‘smart money’, i.e., the big banks, investments banks, hedge funds and the like, ran to the old staple of buying bonds hand over fist with little regard for the yield they are getting paid for stepping in front of the freight train of rate rises coming down the tracks.
Just six days away from the most important FOMC meeting in the last seven years, and another 300k employment report in the rear view mirror, this looks like an excellent place to hide for nervous investors who have far more money than they have grains of common sense. Newsflash for these investors, yes markets are over-valued, and you need to get out of Apple, and about 100 other high flying overpriced momentum stocks, but you can`t hide out in bonds this time.
That party is over, and next Wednesday`s FOMC meeting is going to make this point abundantly clear. There is no place to hide except cash. You should have thought about that before you gorged yourself on ZIRP to the point where you have pushed stocks and bonds to unsupportable price levels, and you keep begging for the Fed to stall just another six months, so you can continue to buy more stocks and bonds.
Well you have done an excellent job hoodwinking the Fed to wait until June, you should thank your lucky stars you have done such a good job manipulating the Federal Reserve; but just like the boy crying wolf, this strategy loses its effectiveness over time. Throwing another temper tantrum right before another important FOMC meeting hoping that Janet Yellen will be alarmed by these Pre-FOMC Selloffs to put off another six months the inevitable rate hike, this blackmail strategy has run its course.
The Fed is forced to finally start the Rate Hiking Cycle after 7 plus years of Recession era Fed policies by an overheating labor market. You knew this day was going to come, but most of you are still in denial. What the heck were you buying 10-year bonds with a 1.6% yield five months before a rate hike?? You only have yourself to blame for the 65 basis point backup in yields on that disaster of an “Investment”.
But really what were you thinking here?? That is the problem when the Fed has incentivized such poor investment decisions and poor allocation of capital to useful, growth oriented projects over the past 7 plus years of ZIRP that these ‘investors’ don`t think at all, they have become behaviorally trained ZIRP Crack Addicts!
They can cry over the strong dollar, have a couple of 300 point Dow Selloffs, scare monger over Europe or Emerging Market currencies, but the fact is that the due date has come on your stupidity. You bought all this crap, and now you have to sell it! Well too freaking bad, boo hoo, you shouldn’t have bought so many worthless stocks and bonds at unsustainable levels in the first place. [..]
The positioning for this inevitability is as poor as I have seen in any market. The carnage in the bond market is just going to be gruesome, the denial is so strong, the lack of historical perspective of what normal bond yields look like, and what a normalized economy represents where savers actually get paid to save money in a CD or checking account. The fact that the Fed has so de-sensitized investors to what a normalized rate economy and healthy functioning financial system looks like is probably one of the biggest drawbacks of ZIRP Methodology.
The Federal Reserve, and now the European Union have set the stage for the biggest collapse in bond markets that will make the sub-prime financial crisis look like a cakewalk.
One may question whether 6 days is carved in stone; maybe THE announcement will come the next meeting, not this one. But does it really matter? Yellen has created a narrative about the US economy, especially the (un)employment rate. About which yet another narrative has been created by the BLS, which refuses to count many millions of Americans as unemployed, for various reasons. And that leads to the article’s claim of ‘an overheating labor market’. The only way the US jobs market is overheating is that it seems to have created a huge oversupply of underpaid waiters, greeters and burger flippers.
But the narrative is now firmly in place, so Yellen and her stooges can claim they have no choice but to hike. Not just once, but three times this year, suggests Ambrose Evans-Pritchard in the following very bleak read and weep portrait of the world today. In which he also describes how all of this plays out in sync with the soaring dollar, which will have devastating consequences around the world, starting in the poorer parts of the world (what else is new?).