This is a pickle wrapped in a conundrum surrounded by a puzzle, or something like that. The Fed declined to hike rates, which everyone thought was bullish, and then stocks got on the vomit comet. They’ve been going down on an elevator ever since.

I think what’s interesting here is how shamefully far behind the Fed is on this. Dudley is out there still talking rate hikes. Like, just the other day. He has gone right out of his tree. It’s almost as if he lost his B-Unit and can’t log into Bloomberg.

It was like this in the financial crisis, too. The Fed was very slow to act. It is a known fact that the Fed has never forecasted a recession (in spite of employing hundreds of nerd economists whose job it is to do precisely that). They don’t even react to them very well. I’m not certain we’ll get a recession, but the Magic 8 Ball says, “It is decidedly so.”

Like junk bonds, for example.

Credit spreads tend to be the best capital markets indicator of bad juju. The underlying bonds are even worse than the ETF. There are

bonds that are gapping 10 points lower at a time.  There is no dealer participation.  We are going to get hung bridge loans.  Some of the larger deals are troubled.  It is a mess.

My guess is that over the course of the next few weeks, the Fed is going to change their minds on rate hikes. Maybe they have already. It’s been my view that they won’t hike until 2017. I still believe that to be the case. I think you and I know what the Fed is going to do better than the Fed itself.

There are some people who think we’re FUBAR, that the Fed is out of ammo and we just have to get run over by the Mack truck because we can’t hike rates anymore, and what good is QE going to do, anyway?

Well, the one thing QE did was to raise asset prices, which happens to be the thing that currently ails us.

But remember, the Fed has all kinds of tools that haven’t even been explored yet.

• They can lower reserve requirements
   
• They can lower IOER (interest rate on excess reserves)
   
• They can do some magic stuff with the repo market that I don’t understand
   
• Helicopter money

The latter refers to when the central bank prints money and doesn’t buy bonds with it… it just mails out checks to everybody.

If I were a gold bear, I’d be nervous.

Let the Dollar Drop

The only way the Fed can get out of this is if they somehow manage to get the dollar to go the other way. To sell off.

That’s going to be hard. The strong dollar trade is the most relentless trend around.

This is the dollar over two years:

This is the dollar over a much longer timeframe:

Any technician would tell you that the dollar is consolidating, and the next move is higher.

But a move higher in the dollar would be brutal for global markets. EM is falling apart as it is.

If the Fed wants the dollar lower, it has to do one or more of those things in the itemized list.

An Austrian economist would say, screw it, let it go. There will be an adjustment period. And everything will be fine.

Even I am old enough to remember a time when the Fed didn’t feel compelled to intervene every time stocks went down 10%.

What People Are Saying

Pretty much every hedge fund guy I talk to is 100% bearish, this is the end of the world, etc. These are the guys responsible for the five-figure orders in HYG puts.

I would say the real money crowd is a little more sanguine. They are looking for value here.

The hedge fund guys are supposedly the smart money, but they tend to move as a pack. And they all tend to be wrong at the same time.

It’s getting ugly, but this isn’t the financial crisis and it’s not the dot-com bust. Stocks were overvalued, but not egregiously. Carl Icahn said there was a bubble in high yield, but there’s historical precedent for spreads to be this tight—they were tight throughout the duration of the Great Depression.

Biotech has sold off almost 30%, and big-cap biotech is trading with single-digit P/Es. Things can get worse—that’s what markets do—but this isn’t the end of the world.

I think the bigger danger is not how far the market goes down but how long it stays down. It will take a long time to reclaim the highs.

This is no-man’s land. If you’re thinking of selling here, you’re probably too late. If you’re thinking of buying, it’s probably too early.

I realize this is probably no help. Trust me, if I had conviction here, I would let you know.

Jared Dillian
Editor, The 10th Man

Jared’s premium investment service, Bull’s Eye Investor, is available now. Click here for our introductory offer. For Jared, no asset class or type of investment is off limits. From an iconic sports outfitter to a particularly liquid frontier-market ETF—Jared picks the best vehicles for his subscribers to profit from tomorrow’s trends today. Put Jared’s ingenious mix of market analysis and trader’s intuition to work in your portfolio today. Follow Jared on Twitter at @dailydirtnap.

IS “HELICOPTER MONEY” COMING?

Since the start of June, global equity markets have lost over $13 trillion. This might be thought of as lost “collateral” for the mountains of pyramided global debt. This is frightening the Central Bankers! 

(The last time global market dropped this much – Bernanke unleashed QE2)

As Zero Hedge spells out: 

“world market capitalization has fallen back below $60 trillion for the first time since February 2014 as it appears the world’s central planners’ “print-or-die” policy to create wealth (and in some magical thinking – economic growth) has failed – and failed dramatically”.

Despite a steady diet of global rate cuts and balance sheet expansion around the world, the last 4 months have seen an 18% collapse – the largest since Lehman.

THE FED HAS BEEN BACKED INTO THE CORNER OF ONCE AGAIN INCREASING ITS BALANCE SHEET 

HISTORICAL BEHAVIOR SUGGESTS THIS SHOULD SOON TO BE EXPECTED 

WHAT ARE THE CENTRAL BANKERS’ OPTIONS?

Of course you never know for sure, but the general thinking is there are three likely central bank initiatives in our future. They may be rolled out or unleashed in a coordinated fashion to stem a potential economic crisis.

IT WIIL ONLY TAKE THE PERCEPTION OF A CRISIS TO UNLEASH A TORRENT LARGER THAN WE CAN CURRENTLY IMAGINE! 

Let me be perfectly clear, non of this will work in the longer term! But when you are trying to keep your job, the longer term is the least of your concerns. 

IT WILL LIKELY RESULT IN AN 9 MONTH RALLY AND MARGINALLY NEW HIGHS (OUR PREDICTED”M” TOP)

GOLDMAN SUPPORTS OUR ‘M” TOP – WITH BOGUS NUMBERS 

POTENTIAL FED TRIGGER LEVELS 

So how long will the Fed wait before acting? What might the FEd’s trigger points be? 

A- BULL MARKET TREND CHANNEL SUPPORT

CHANNEL SUPPORT = 1860 

B- TRADITIONAL FIBONACCI SUPPORT LEVELS

FIBONACCI 38.2% = 1837

FIBONACCI 50.0% = 1743 

C- REGRESSIONS & TRADE WEIGHTED DOLLARS

Our longer term analysis on both the basis of linear regression and trade weighted dollars for the S&P 500 suggest ~1800needs to be held or matters could get quickly out of control for central bank policy initiatives. 

D- SOME SEE THE FED “PUT” TO BE MUCH LOWER

I find the views of Nomura’s Bob Janjuah to very insightful and predictive. He sees the Fed “PUT” to be much lower than we do. 

He writes:

“Where is the Fed “put”, and what would such a “put” look like? It is very early in the process and lots will depend on global policy responses and data outcomes, but I am happy to declare my view: the next Fed “put” is not likely until the S&P 500 is trading in the 1500s at least (so more likely to be a Q1 2016 item rather than Q4 2015); and in terms of what the Fed could do, clearly QE4 has to be in the Fed’s toolkit. However, considering the failure of global QE to generate sustainable global growth and inflation, and considering the Fed’s starting point, 2016 could be the year when we see negative Fed Funds as a way of getting money velocity moving up rather than down.

… while I think a US recession is merely possible rather than probable, the evidence is growing in my view that a global recession is more probable than possible. Certainly the global trade data are pointing to meaningful global growth weakness, backed by weak data from EM and large parts of DM too. And a quick look at credit markets, in particular the HY markets in the US and Europe as well as the EM credit space support my view of a global growth recession being probable and not just possible. So if a global growth recession is more probable than possible, then it seems clear to me that neither risk assets nor core rates markets are accurately reflecting this at this time – instead, they reflect the “more possible” scenario rather than “more probable”. In other words, financial markets are NOT yet pricing for a recession, rather they are merely flirting with the idea. I suspect this largely reflects faith/hope in policymakers within market participants. The events of the past few weeks, both going into and after the most recent BOJ and FOMC meetings, should give those heavily invested in policymaker faith/hope a lot of food for thought.”

THE REVENUE RECESSION IS MOVING TOWARDS A ECONOMIC RECESSION SCARE 

The Fed catalyst may not be a market level but rather the potential worry of an Economic Recession. A scare that may galvinize the Fed into action?

My research shows for the first time since 2009, all six major Fed regional activity surveys are in contraction territory. 

Charts: Bloomberg

WHAT THE MAINSTREAM MEDIA IS NOT SHOWING – But the fed is acutely aware of! 

EXPECT THE FED TO HIDE BEHIND THE COMING MARKET REALIZATION SCARE!

QE4, Helicopter Money (OMF), NIRP and Collateral Guarantees are coming soon! 

Gordon T Long     
Publisher & Editor
general@GordonTLong.com     

Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that you are encouraged to confirm the facts on your own before making important investment commitments. 

© Copyright 2015 Gordon T Long. The information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that Mr. Long may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or suggestions you receive from him.