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Random Thoughts: The Federal Reserve Tries to Retire the Business Cycle


Historic shifts under a seemingly calm financial surface.

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

As with most of the recent communications from the Federal Reserve, there was a little something for everyone in yesterday's release of the minutes from its late July meeting.

Bulls will point to Fed officials being "broadly comfortable" with Big Ben's plan to start reducing bond buying later this year if the economy improves (read: our financial future remains data-dependent). Bears will offer that some voting members believe tapering the synthetic stimuli should happen sooner rather than later, presumably eyeing the chasm between a stock market rally and a legitimate economic recovery.

And there was the requisite twist; chatter about "establishing a fixed-rate, full-allotment overnight reverse repurchase agreement as an additional tool for managing money market interest rates." If you're of the view that policymakers are making this up as they go, you're not alone. This is the latest in an extremely long line of alphabet-soup solutions aimed at shaping the system formerly known as capitalism.

I wonder how many bullets the Fed has in its gun-and where the last one will be pointed.

Yesterday's wild stock market swings-upward of 300 points in the Dow Jones Industrial Average (INDEXDJX:.DJI)-weren't triggered by interpretations of said vernacular; it was a function of robots reacting to the vacillation in interest rates, which popped on the announcement.

With high frequency trading (HFT) responsible for some 70% of average daily volume these days-pause, absorb, and continue-nanosecond knee-jerk moves have become the norm.

There is more here than meets the eye, however, and ample reason for the continued concoction of perceived "free-market" solutions. Given the outsized leverage in the system, the interconnectedness of global markets, and the (best-guess) quadrillion dollars of derivatives-many of which remain unregulated-tying together our finance-based economy, incremental movements by interest rate butterflies have the potential to cause a tsunami that engulfs matadors the world over.

I, too, remember when the business cycle was a healthy and natural continuum; when, much like a forest fire, it was a necessary precursor to a fertile economic re-birthing. The economy expanded, contracted, and expanded anew based on fluctuations in production, trade, and business activity. But hey, maybe I'm just showing my age.

The business cycle, much like deflation, is now considered anathema-and given how fragile social mood is despite stateside markets remaining a stone's throw from all-time highs, one could (or might) understand why policymakers are pulling out all the stops in an effort to stem the "other side" of this grand five-year experiment.

I suppose if you're already walking on thin ice, you might as well dance.

Random Thoughts:
  • As the opening bell rang today, the skies cried and thunder clapped. Coincidence?
  • There is unconfirmed chatter that the algo trading loss at Goldman (NYSE:GS) was much higher than $100 million-but that's not really the point. Robot errors should increase in frequency as HFT manifests (like derivatives, they're dangerous in the wrong hands).
  • High-net-worth individuals may want to diversify assets across a few financial institutions (in lots of two-fitty, per the FDIC) to safeguard against potential cyber situations. Better early than late on this one.
  • S&P (INDEXSP:.INX) 1650-and the 50-day at S&P 1658-are near-term resistance; the next tangible downside support resides down at S&P 1555 (the 200-day).
  • Good luck, and remember: Profitability begins within.

Twitter: @todd_harrison

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