Random Thoughts: What If the Market Snubs Fed Policy?

By Todd Harrison  SEP 20, 2013 10:09 AM

Unintended consequences pave a path to the most bearish outcome.

 


Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

There's been a lot of talk lately about the bullish stars aligning into year-end; a perfect storm of open-ended data-dependent policy, doves on deck at the Federal Reserve, and underinvested fund managers with performance anxiety that would make Bob Dole blush.

In successive sessions, policy hawk Larry Summers removed his name from the chairmanship stakes; Janet Yellen, the most natural extension of current policy, was leaked as heir apparent; and, of course, the shot heard 'round the world: an about-face on tapering.

All of this occurred in the context of a technical breakout in the S&P (INDEXSP:.INX) as the cup-and-handle pattern triggered to the upside. One could posit this series of events was a moment of financial serendipity. Or perhaps it is an extension of The War on Capitalism, which has turned politicians and policymakers into traders much like the dot-com bubble once did for taxi drivers and stay-at-home moms.

Lost in the euphoria is the simple truth that, in their effort to manipulate prices higher, policymakers opened the door to the single most bearish scenario: a rise in rates in the face of "no taper," a tangible manifestation of the deterioration of faith in the Federal Reserve.

Credit of a different breed -- that of credibility -- has always been the issue at hand for the markets at large.

Having this discussion with markets at all-time highs is like screaming into the Grand Canyon; few want to hear it, and those that do will file it away for a later date (when rates rise). Be that as it may, it's interesting to note this "unintended consequence" would not be on the table if the Fed did what it hinted at for the better part of the year; it was a bit of a bait-and-switch to a global audience with thinned patience.

I watched Stan Druckenmiller's recent CNBC interview last night for the first time. There are few financial seers whose views I hold in higher regard than Druck, who foresees "a party" before the eventual comeuppance, which he expects to be brutal.  He knows markets can reset quickly on little or no volume and the ensuing negative wealth effect isn't on a lot of radars.  Yes, timing is everything.

As a trader, a stair-step process that manages risk rather than chases reward is the order of the day.  As an investor, the onus is on each of us to see all sides, particularly when one side seems overwhelmingly obvious. We've lived through almost 15 years of savers being punished at the bottom and investors being screwed at the top.

That might be a thing of the past, but that requires a leap of faith and a matter of trust.

Random Thoughts:


R.P.

Twitter: @todd_harrison

Position in SPY.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

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