Send in the clowns. In a week in which I have been listening to nothing but the Cars (RIP Ric Ocasek) I had to interrupt that playlist with a song from another famous financial analyst with the surname Collins. Judy Collins (no relation.)
The Fed is so out of control right now that it is verging on the hilarity of famous clowns like Bozo or Eric. To wit:
Wednesday's 25-basis point rate cut was approved by a 7-3 margin. The dissenters included Kansas City Fed President Esther George and Boston Fed President Eric Rosengren -- who voted for "no change" -- and uber-dove James Bullard from the St. Louis Fed who voted for a 50-basis point cut.
The stock markets like to believe in a world in which the Federal Open Market Committee runs in lockstep, led by a strong leader, and delivers on a unanimously-approved course to guide the U.S. economy. Powell and co. are not even close to that.
Are George and Rosengren right that no change is needed because unemployment is at 50-year lows and inflation is running well below 2%, or is Bullard right that things are flying off the rails owing to the trade war and slowing in other major economies unaffected by the U.S.-China trade tension? I don't know. I couldn't answer that question at 1:59 p.m. Thursday nor was I any closer to the answer after Powell's rambling press conference. Someone has to be right.
Powell's statement is such a mass of self-contradiction and obfuscation that it is no wonder his colleagues are deserting him. It's also no wonder that his Commander-in Chief is criticizing him, although the language being used is unprecedented.
I have better things to do with my time than to obsess over the IOER rate (interest on excess reserves) and the recently introduced SOFR (secured overnight financing rate), which was meant to replace the much-despised LIBOR. I was quite aware of the mechanism of repo transactions, but nobody wants to know how the damn sausage is made. We just want to eat it and rest snugly in our beds with the knowledge that repo rates didn't go as high as 10% early Tuesday, the SOFR didn't hit an all-time high of 5.25% that same night, and that the Fed is not going to inject $75 billion into the monetary system early Thursday morning for the third consecutive day.
Well, that knowledge is nowhere to be found.
The New York Fed, which carries out the monetary actions at the behest of the boys in D.C., seems to be in a constant state of confusion. But it all starts at the top, and the Wall Street Journal summarized it well Wednesday:
Mr. Powell on Wednesday noted that the level of reserves in the banking system is uncertain, and that it's possible the Fed would resume the growth of its balance sheet sooner than expected.
How on Earth does Powell not know, in real-time, the exact amount of reserves held by U.S. financial companies? It is the single most important figure used to determine the stability of the U.S. financial system, and has been since the 1920s.
Powell's ignorance is frightening, and in times of fear, investors turn to U.S. Treasuries. So, I am still bullish on bonds despite their massive boom-and-bust in the past two weeks.
The NY Fed owns $1.94 trillion of U.S. Treasuries as of the latest data, and my guess is that that figure will increase. Noted bond expert Jeffrey Gundlach of DoubleLine has predicted the imminent introduction of "stealth QE," and I believe The Fed's actions will not even be stealthy.
Injections of liquidity into the U.S. financial system help prices of both stocks and bonds in the near-term, but those gains are often fleeting. Corporate blow-ups such as FedEx's (FDX) Tuesday evening earnings disaster are going to continue to happen as the calendar moves from September to October and third-quarter earnings season begins. Equity investors need to be aware of that.
On the fixed-income side, the Fed may not know how much money is floating around, or how much is necessary for the day-to-day operations of the U.S banking system, but gosh darn it, they know how to buy bonds. Thus, I am not selling mine.