Janet’s Bullshit


Well that just shows you how hard this game is. My forecast that Janet would err on being more hawkish than the market expected was spot on correct. But my prediction it would translate into stock market weakness was about as wrong as Miley Cyrus singing Smells Like Teen Spirit. Yeah sure we got a small dip in the stock market, but that was not the correct trade. Instead of assuming a hawkish Fed would cause a stock market decline, I should have leaned hard against the US bond market and bought greenbacks. I must admit, I thought those trades were close to being fully priced in and the stock market would take the hawkish Fed news harder, but I am obviously early with that view.

Right now almost all news is taken as negative for bonds, positive for the US dollar, but most importantly, bullish for equities. Have a look at this hilarious chart produced by Deutsche Bank outlining the market’s expected reaction to the various FOMC meeting scenarios.


Classic. Equities up no matter what Janet said.

Although I have long written about the possibility of a stock market melt up, when I see shit like this, even though I know we are in a delusional rally of epic proportions, I have trouble not writing some big pink tickets.

Too many market participants are letting price action dictate their investment opinion. It’s like all the knobs who were convinced interest rates would stay low forever have migrated to stocks and are now equally bullish on equities regardless of what common sense dictates.

And yeah, I know, I have written about the monster short position in the market, but there reaches a point where risks go through the roof, and most importantly, when Central Banks are no longer on your side, but instead actively engaging in tightening policies. And that’s where we are today.

Although most market participants acknowledge the Federal Reserve shifted more hawkish yesterday, the risks associated with Janet’s moves are being underestimated.

At yesterday’s Q&A session Janet claimed yesterday’s shifts were “tiny”:

Some of the participants, but not all of the participants, did incorporate some assumption of a change in fiscal policy into their projections. And that may have been a factor that was one of several that occasioned these shifts. But I want to emphasize that the shifts that you see here are really very tiny.

I laughed out loud when I heard that. What a load of bullshit. Yesterday’s move was about as hawkish as the Federal Reserve could have reasonably been.

Through the stupid dots, the FOMC signaled the market should expect three hikes next year instead of the previously communicated two. Not only that, but Yellen let it slip that not all FOMC board members had incorporated Trump’s fiscal stimulus into their projections, so there is a strong possibility this guidance will become even more hawkish in the coming months.

The market could have probably handled a tightening through the dot forecast, but it was Janet’s answers to some of the questions in the Q&A that really rocked the markets.

It started with her answers to the question regarding fiscal stimulus.

Well, I believe my predecessor and I called for fiscal stimulus when the unemployment rate was substantially higher than it is now. So with a 4.6 percent unemployment, and a solid labor market, there may be some additional slack in labor markets, but I would judge that the degree of slack has diminished. So I would say at this point that fiscal policy is not obviously needed to provide stimulus to help us get back to full employment.

Yellen is of course correct. The most compelling time for fiscal stimulus was a few years ago, not today. In fact, if the Donald gets his way, this would be the first time large scale fiscal stimulus has ever being applied outside a recession (although I might argue by the time it gets enacted, the recession might in fact be here):


What Yellen signaled was that fiscal stimulus would force the Federal Reserve to tighten more aggressively.

And if that exchange was not clear enough, Yellen went on to make it crystal clear.


When asked about her speech from last month about allowing the economy to run hot, Yellen quickly backtracked and claimed the discussion was merely theoretical. Well, f’ me.

Yellen cannot claim the Fed Chair giving a speech where she outlined the benefits of allowing the economy to run hot was merely a “thought exercise.” It’s like a guy whose girlfriend is eager to get married leaving hints about an upcoming proposal, but then when he fails to pop the question, responds with a “I didn’t say I was going to ask you to marry me.


We all know some dick who is just stringing along his/her partner. And it is only made worse when they tease commitment. Well, Janet’s bullshit is just as bad.

Yesterday’s complete waffling on any notion of allowing the economy to run hot throws cold water on the idea the Federal Reserve will be slow to raise rates.

The Federal Reserve has clearly signaled they will be tight, and only getting tighter. All that lip service about the huge number of underemployed was just talk.

The Fed has done a dramatic shift towards tighter policy. I was expecting a hawkish tone, but even I am surprised at the extent Janet has shifted. This is a much bigger deal than most investors realize.

Well, I shouldn’t really say that. The bond guys figured it out right away. They monkey hammered the 5 year Treasury note.


The US dollar exploded higher with the USDJPY rate trading 3 handles higher this morning.

I was going to put more charts in here about yesterday’s trading, but I would rather take a step back and talk about the bigger picture.

The Federal Reserve is in the process of making a colossal policy error. The global economy cannot handle a tight Fed which seems intent on getting ahead of the market. If Yellen was merely slowly following rates higher then I would be much less worried. But she seems determined to not allow the Fed to get behind the curve in any way.

This has already caused massive problems with overseas US dollar liquidity, and yesterday’s actions will only worsen it. Not only that, but even the US economy cannot handle this pace of change in both rates and foreign exchange values. This will choke off US growth sooner rather than later.

Market participants seem to think the stock market will be able to shrug off these massive anchors Yellen has hoisted on the global financial system. I completely disagree.

We are on the cusp of something big breaking. Here is how I am dealing with it.

I am switching many of my positions into options. Actual volatility for many of these assets is exploding. Every time I turn around something else is breaking out of a range and running for a percent or two in a low volume vacuum. I need to be able to sit through some of this stupidity, and owning options is how I can manage it.

I have been on the lookout for the point when Japanese Yen weakness does not translate into stock market gains. This happened yesterday in a big way:


This shows the stresses are finally resulting in the previous correlations breaking down.

I am buying some Yen calls and some stock market puts. They are both risk off trades, but I think the time is ripe to start putting on the full bear outfit.

I expect the yield curve to flatten hard. If I am correct that the Fed is in the process of making a policy error, then the bond market will figure it out first. Watch for signs that the bond guys are betting the Fed has pushed too hard.

Finally, I know everyone is all bulled up on the US dollar. And it certainly seems like a one way ticket. Precious metals have been clubbed like a baby seal (I know, I know, terrible image, and one of Canada’s greatest shames), but I want to remind you that gold bottomed on the day after the last Fed hike.

And in case you are a huge Euro bear, this morning Dennis Gartman proclaimed “parity in Euro absolutely in sight.” I wasn’t sure he was still around after his “oil will never go higher than $44 in his lifetime,” but he still seems to get some airtime on CNBC to help us all with our trading. And if that wasn’t enough, earlier in the week, my favourite contrarian signal was run up the flag pole with this great graphic:


If you want to get all bulled up on the US dollar on the cusp on the Federal Reserve making a big policy error, then be my guest. But I would rather be on the other side of that trade.

Every now and then the markets overshoot a rational outcome. We are in the midst of one of those times. Yesterday’s Yellen about-face is a much bigger deal than markets realize. They are not thinking it through to the next logical steps. I expect that to change in the coming days…

Thanks for reading,
Kevin Muir
the MacroTourist

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