“We Are Living With Maximum Uncertainty”

The Dow Jones plunged over 1,000 harrowing points last week.

And so investors entered Monday’s drama with one eye on the stage… and the other on the exit.

But the Big Board put them to ease with a thumping 354-point rally.

The S&P worked a 41-point advance of its own. The battered Nasdaq surged 143.

Stocks were mixed today before scratching out a late day gain.

But what next?

Will the rout resume… or is the bottom already in?

“We are living with maximum uncertainty,” cries financial analyst Catherine Austin Fitts, adding:

The old system could go five years or five months…If you look at all the information we need to make an intelligent assessment, we don’t have access to that information.

That is precisely the dilemma at hand.

Five years, five months, five days, five minutes — nobody knows.

For the reason you need look no further than the Federal Reserve…

After the financial crisis the Fed began rewriting the traditional market script.

Through quantitative easing and related stagecraft, the new directors worked to eliminate the normal twists, the turns, the heart-thumping perils.

That is, they labored to produce theater without drama.

It would begin happy, stay happy… and end happy.

The great market villain — the business cycle — they attempted to expunge from the story entirely.

It was heroes across the board.

As explains John Rubino of the DollarCollapse.com blog:

One of the strangest things about this strangest-ever expansion has been the way pretty much everything went up. Stocks, bonds, real estate, art, oil — some of which have historically negative correlations with others — all rose more or less in lockstep. 

But can you have a Cinderella without a wicked stepmother… a Star Wars without Mr. Darth Vader… a Rocky without Apollo Creed?

As well imagine The Exorcist without its devil.

Nor can you have an economy or a stock market without devils of its own.

The monetary authority can no more banish the business cycle than the pope can banish sin or an umpire can banish rain.

But now the Federal Reserve is attempting to “normalize” interest rates and work down its balance sheet.

And as Rubino notes, the phony heroes that went up together… are coming down together:

But now the central bank spigot is being turned off, and everything is heading back down the same way it rose in lockstep.

Around the globe a ghastly scene emerges — in stocks, in bonds, in commodities, in cryptocurrencies.

As we reported last week, some 90% of all assets Deutsche Bank tracks are negative on the year.

In reminder, that is the highest percentage since 1901 — if you can believe it.

Bitcoin — the greatest star since Valentino — has come down hardest of all.

Rising above $20,000 last December, the fallen marvel fetches $3,681 at writing.

Meantime, the Federal Reserve will likely raise interest rates next month.

The market is presently giving 79.2% odds — in favor.

We have previously suggested this hike could lift the fed funds rate above the neutral rate of interest.

That is, rates would begin to pinch.

But forget about the rate hikes, say economists Benn Steil and Benjamin Della Rocca.

The Fed’s quantitative tightening (QT) provides the central drama.

Their calculations reveal that QT to date has lifted 10-year Treasury yields by some 17 basis points (a typical fed funds rate hike is 25 basis points).

Historically, they say, a 17-basis-point increase to the 10-year equals a 68-basis-point hike to the fed funds rate.

A 17-basis-point increase to the 10-year Treasury yield, in other words, equals nearly three Fed rate hikes.

In other words still:

The Fed has effectively worked (nearly) three additional rate hikes than officially listed.

And the QT pace is quickening… so the squeeze will tighten:

If asset runoffs continue at the Fed’s announced pace, then by the end of 2019 they will tighten monetary conditions as much as a policy rate increase of 220 basis points (2.2 percentage points).

A 2.2% increase from today’s 2.25% fed funds rate translates to 4.45%.

And the implications?

Today, the Fed expects that rates will remain below this neutral level until the end of 2019. But by our calculations, the combined effects of balance sheet reduction and conventional rate hikes will produce an equivalent tightening in monetary conditions much sooner: by the end of 2018. This fact suggests that monetary policy will start to contract economic growth early next year.

For emphasis: Monetary policy will start to contract economic growth early next year.

We offer no specific timetable — of course.

Nonetheless, we bear good news: The “maximum uncertainty” currently obtaining may soon end.

But with the good news comes the bad:

Investors might not like the resulting certainty…


Brian Maher
Managing editor, The Daily Reckoning

The Daily Reckoning