Druckenmiller and Trump were right

[Cardboard]

My own view: Jerome Powell is a fucking imbecile!

 

I hope that no one here will ever talk again about income equality!

 

Cardboard

[rogermunibond]

He's fighting the last war.

[CorpRaider]

Feel the market.  Feel it! feel it! 

[SHDL]

I guess we’ll have to wait to see if/how this affects the real economy (as opposed to the stock market — which BTW I don’t think the Fed ultimately cares about), but I have to agree that the optics don’t look good at the moment. 

 

This all feels like a collision between the Fed and the Trump administration.  The Fed had its intentions announced years in advance and was probably expecting other branches of the government to behave reasonably.  Trump sounds like he wanted to bully China into submission with his tariffs and thought he could get the Fed to accommodate his strategy.  Neither side budged, and here we are.

[Lakesider]

If you keep rates at all time lows, what course of action do you have when during the next recession? Negative rates?

[scorpioncapital]

These things take time to play out. I mean there is nothing crazy that PE 25+ stocks are treading water or going down back to 15 or 20x PE as rates rise. If rates pause or decelerate in their increase, then yeah, even 20x will still look reasonable. But how do we know where it will stop? When the economy starts tanking I guess. Do you think they want to tank the economy to see where the limit is?

[mwtorock]

Just feels like a familiar scene that happened in Q4 2015. Market shakes a bit when central bank becomes less dovish.

 

Just keep in mind though, average bear market is around -30%, we are about -15% here in the US equities, so even if it is a bear, how much downside is there?

 

Next year is the famous third year of a presidential cycle, which has been almost always positive for US indices in recent history. I would not bet against that.

[Liberty]

Alternatively, it's probably not a good idea to get emotional on a 25bps interest rate change causing a 2% market move.

[scorpioncapital]

That's if you're a smart indexer ;) I see many 'quality stocks' in various sectors down double that and then quite a bit more last 2 weeks.

[Dalal.Holdings]

Shouldn’t this thread be in the politics section?

 

Omg a 25 bp move up from already record low interest rates!!! The sky is falling!! Stocks have stopped moving straight up for three whole months!! I can’t take it!!!!

 

What ever happened to “value investing”. I’d expect much more from a place called “corner of berkshire and fairfax”.

 

Love how conservatives cried about “easy money at the fed” for years and now with Trump in office they suddenly want the easy money days to continue...

[scorpioncapital]

"The FOMC trimmed their median GDP growth forecast for 2019 (to 2.3% from 2.5% previously) due in part to recent tightening in financial conditions. Core inflation is expected to be steady at 2%, even with unemployment remaining well below its longer run rate (which was revised down slightly). "

 

That means real growth is 0.3%, or effectively Zero.

Zero growth at the level of deficits and debt of G20?

Where is the lift-off velocity?

 

[Dalal.Holdings]

"The FOMC trimmed their median GDP growth forecast for 2019 (to 2.3% from 2.5% previously) due in part to recent tightening in financial conditions. Core inflation is expected to be steady at 2%, even with unemployment remaining well below its longer run rate (which was revised down slightly). "

 

That means real growth is 0.3%, or effectively Zero.

Zero growth at the level of deficits and debt of G20?

Where is the lift-off velocity?

 

The gdp growth is real gdp. Inflation already subtracted.

[Dalal.Holdings]

Happy to see Powell tell Trump to gtfo. Independent Fed all the way. Druck sure mooching off publicity these days (loves commenting on macro macro macro).

[Viking]

The key for me is what is going on in the US economy. Growth is solid. None of the leading economic indicators are suggesting we see a recession in 2019.

 

The Fed raising rates in Dec was pretty much baked in. They are becoming more dovish, reducing the expected increases next year from 3 to 2. If US economic data weakens i expect them to reduce this further.

 

The one small surprise for me was regarding QE. Powell pretty much said that program is on autopilot (not data dependent). But perhaps, if we start to see weakness in US economic data, the Fed will change this to being data dependent.

 

All in all, the more the Fed normalizes interest rates (and reduces QE) the more asset prices will reflect what is really going on in the ecomony. To Druckenmiller’s original point, free money is no way to run a capitalist economy. Yes, the market will continue to throw tantrums... as long as it does not morph into the larger economy then so be it.

 

I remember when the Fed started raising rates 2 years ago lots of smart people called them idiots; the Fed has nailed it the past 2 years by raising rates and reversing QE. Do they need to slow? Yes. But compared to the ECB or Japan the Fed has done a much, much better job.

[Gregmal]

I think Dalal and Viking are spot on. I'd add that it's amusing watch this whole shit show play out. The really, really, really, smart money sat on the sidelines bitching about the Fed forever. Then, they eventually capitulate, and now they whine that there is no more easy money left... Poor really, really, really smart guys.

 

The economy is fine. Not robust but not terrible. Stocks, if you know what you're looking for, are very cheap and have favorable conditions and a significantly lower tax rate. That's not to say the nerds with the computer programs and algos won't cause havoc from time to time, or the really smart guys throw taper tantrums like today, but the sensible investor should do well going forward.

[Guest]

I'd love to see some 17% rates again. ;)

[meiroy]

 

1. Druckenmiller is the real thing. One of the only guys in the word that has the systemic view to profit off macro. His record is solid.

 

He DID NOT say there's going to be a recession tomorrow if they raise.  He said, they should have raised earlier on, and they didn't, this caused distortions with outcomes that cannot be avoided completely.  He is now warning about the current FED policy.  He warned in 2005. Should he have waited till 2007? I would listen carefully again to everything he is saying in the interview, including all the little details such as unemployment and him might being wrong. 

 

2. This is not about raising this one time.

 

3. Trump got it right by accident, because of his own incentives.  Druckenmiller gets it right because he knows what he's talking about.

 

[LongHaul]

Ah the blamethrowers come out.

 

Until recently the lowest interest rates in 500+ years. 

~3.7% unemployment now in the US

 

The last time the Fed had a lot pressure on it to keep rates low (Lyndon B. Johnson) we ended up with a ton of inflation and a very low stock market for a long time 70's and early 80's. 

 

Perhaps the Casino is just running out of booze.

[meiroy]

 

I wonder how the market would react when Trump fires Powell.

 

The reasoning: Trump is a mafia boss caring only about himself, for him the market going down = he is losing. Also means, his circle of supporters/enablers might finally ditch the boat. Mattis just quit, it would be nothing to fire Powell as well.

 

Who's taking bets?

 

[Gregmal]

 

I wonder how the market would react when Trump fires Powell.

 

The reasoning: Trump is a mafia boss caring only about himself, for him the market going down = he is losing. Also means, his circle of supporters/enablers might finally ditch the boat. Mattis just quit, it would be nothing to fire Powell as well.

 

Who's taking bets?

 

I wouldn't be surprised. Powell is a complete hack though. I rarely agree with Jim Cramer but he nailed this whole thing. It's one thing to hike as expected. It's another to come in completely tone deaf, after talking about being data dependent, and then push some aggressive rate hike agenda that is totally data independent. What an idiot. Kevin O'Leary gave a good sound bite on this too.

[Spekulatius]

I remember 1987. the market went down 25% in one day and Reagan just said that the stock market is doing its thing. We didn’t get a recession either.

 

Anyways, the slump has a lot more to do with what Trump does than with Powell or the Fed.

[Cardboard]

Thank you Gregmal!

 

It is funny that Meiroy takes this into a political direction while it is all about economic data and Powell failed miserably.

 

Druckenmiller is no Trump's fan, nor is Cramer I think but, they get it. 0.25% is nothing but, added to hikes already done, $50 billion a month evaporating in liquidity and a robotic approach to future rate hikes add up to a lot of tightening in an environment where doubt is rising quickly.

 

Things change everyday and quickly as new data comes in. Credit spreads exploding isn't important? Copper and all inputs dropping sharply in price? Shouldn't the Fed who is overseeing "gravity" in the financial world be held to a very strong standard?

 

And again where is the inflation? Are they not supposed also to seek maximum employment instead of fearing such good outcome?

 

Why is it always necessary to create a really important buffer or much higher interest rates to then rush to lower them once a crisis comes which they truly help create every time by raising too far?

 

As Druckenmiller said, the stock market may have predicted the last 9 recessions out of 5 real ones but, the Fed got 0 out of 9 and they seem hell bent on continuing down the same stupid path.

 

Cardboard

 

 

[meiroy]

 

Uncertainty caused by Trump has a negative impact on the markets, for sure.

 

However, the Fed's actions can cause a real eventual recession if they continue with the same mindset, they caused recessions and bubbles before so it won't be the first time.

[Cigarbutt]

 

I wonder how the market would react when Trump fires Powell.

 

The reasoning: Trump is a mafia boss caring only about himself, for him the market going down = he is losing. Also means, his circle of supporters/enablers might finally ditch the boat. Mattis just quit, it would be nothing to fire Powell as well.

 

Who's taking bets?

 

I wouldn't be surprised. Powell is a complete hack though. I rarely agree with Jim Cramer but he nailed this whole thing. It's one thing to hike as expected. It's another to come in completely tone deaf, after talking about being data dependent, and then push some aggressive rate hike agenda that is totally data independent. What an idiot. Kevin O'Leary gave a good sound bite on this too.

There was an interesting interaction in 1965. LBJ had decided to have his gallbladder resection on a Friday to avoid a negative effect on the stock market and spent time after on his ranch during his recovery (showing his surgical scar among others to whomever came around, including journalists and photographs) when he summoned Fed Chairman William McChesney Martin Jr.

 

History does not repeat itself but there are interesting parallels in addition to divergent views. The government was running high deficits during an expansion, the period was reaching a more than monetary juncture and it was felt (by some) that the Fed was behind the curve. I would say there was a fundamental difference because then, there were signs of rising demand for credit and now, IMO there are underlying secular currents pushing for further declines in credit demand, which may prove to be a defining feature. I don't know if Mr. Powell will finish his term but wonder what he will say at his farewell party.

 

As far as putting Jim Cramer in the Chairman of the Fed position, I would say he would need to be groomed first as a White House official.

 

https://www.richmondfed.org/-/media/richmondfedorg/publications/research/econ_focus/2016/q3-4/federal_reserve.pdf

 

Ideally, I would like a world where the Fed does less and less and eventually very little but one can envisage scenarios where they will do more and more in terms of quantity and quality, if not unconventional.

[Spekulatius]

I bet other than the stock market falling a bit, Powell doesn’t have much to go by in terms of leading indicators to suggest a slowdown right now. I guess, if you are in the hedge fund business like Druckenmiller, than the market is important, but for the Fed, I don’t think it matters much what the stock market  does. I do think that Powell needs to look at this with an open mind - interest rate changes take about 6 month to filter through in the real economy and I would bet that they may pause the interest rate hikes if they see weakness in March 2019.