Three Fed Chiefs Walk Into a Bar...

…and, the market soars! Just because.

There’s another old economics joke:

Q: How many central bankers does it take to change a light bulb?
A: None. It’s getting brighter, see? It’s definitely getting brighter!

The brain trust which has overseen the Fed since 2006 assembles today at the American Economic Association’s annual meeting. We’ve all seen the data: expansion of the Fed’s balance sheet from $800 billion to $4.4 trillion; a stock market which rallied 340%; 10Y notes which fell from 5.3% to as low as 1.3%; fed funds rate which fell from 5.25% to as low as 0.04%.

Bernake and Yellen obviously oversaw some sizeable market declines – Bernanke’s 57% 2007-2009 freefall obviously dwarfed Yellen’s carefully managed 15% swoon in 2015-2016.

But, it’s Powell’s 20% (so far) 2018-2019 correction that is attracting all the attention, as it is viewed by many as the result of a policy mistake. During his short tenure, Powell has already presided over two breakouts in rates (the solid red trend line, followed by the dashed purple trend line) and, in the past couple of weeks, a breakdown in rates (the dashed red TL.)

The breakouts alarmed many as they had a significant and immediate impact on industries which rely on low rates for prosperity: housing, autos, etc. They also refocused attention on the US’ disastrous debt imbroglio. The increase in rates (the black line) will be enough to help turn a 5% increase in federal debt into a 13% increase in interest expense.The problem is that thanks to the algo-inspiring spike in oil and gas prices last year, inflation was becoming a problem and justified higher rates. Since October, oil and gas prices have tumbled. December CPI will likely come in near 2% or even less. Both extremes were manipulated, as even Trump has now admitted.So, what metric should the Fed pay attention to in deciding the course of future hikes? Slumping real estate sales and ISM surveys? Strengthening employment figures? It seems Powell is damned if he does and damned if he doesn’t.

I suspect we’ll see smiles of relief from Bernanke and Yellen who got out while the getting was good.

Last night we got a pretty typical pre-Fed ramp job. When you see the futures do this……there’s usually a reason, such as the corresponding ramp job in oil. The momentary hiccup when the 312K jobs number was announced was easily offset by hammering VIX from where it was when I began this post two hours ago… …to here.

And, suddenly, everything is getting brighter! If you’re wondering why the ramp job stopped after 37 points, it’s pretty simple. That’s all that was needed to get SPX up to and over its SMA5 200 at which point the algos will have free rein. If Powell’s comments aren’t dovish enough, stocks will have a nice cushion.