Gyroscopic Investing

Schwab's Liz Ann Sonders Says The 'Fed Put' Looks Dead

https://www.fa-mag.com/news/schwab-s-li ... -222662257

For the last 35 years, the Federal Reserve Board’s tacit willingness to intervene in financial markets when stock prices start to swoon has provided an implicit floor for the equity market. It came to be called the "Fed put."

Starting with the 1987 stock market crash, continuing with the Thai baht and Long Term Capital Management crises in the 1990s and the housing crisis in 2008, market participants became comfortable with the assumption that Fed Chairman Alan Greenspan and his successors could always be counted on to come to the rescue when equity prices started to tumble.


Based on the central bank's behavior over the last 15 months, those days are over, Charles Schwab & Co. chief investment strategist Liz Ann Sonders told Jim Bianco yesterday at John Mauldin’s Strategic Investment Conference. She pointed to the stock market’s collapse last October and the Fed's indifference to it as evidence that Fed Chairman Jay Powell and his fellow governors had other priorities.

“The stock market was down 25% and there was no ‘Fed put,’ especially with inflation running hot,” Sonders said during an interview with macro strategist Bianco.

Both Bianco and Sonders agreed it was always possible that, in the event of a serious banking crisis or a nasty recession, that the Fed could revert to its old-time habits. But they also concurred that the central bank was unlikely to easily accede to the stock market’s wishes for relief in the same fashion it did in previous situations, like the 2013 taper tantrum or when falling stock prices short-circuited efforts by Powell, then recently confirmed as chairman, in 2018 to normalize interest rates.

Asked by Bianco whether the Fed would change its 2% inflation target if the rate falls below 4%, as he expects, by July, Sonders said it would not do so “explicitly.” She added that she thinks inflation will continue to fall. “But getting to 2%, which is somewhat arbitrary, could take time,” she said.

> in the event of a serious banking crisis or a nasty recession the Fed could revert to its old habits

Then thats what we'll get. Will the Little Guy have time to buy cheap assets like 2009? He didnt have much time to in the March 2020 crash

I guess "experts" have to have opinions but I'm not sure this one amounts to much. The Fed's dual mandate is to control inflation and strive for something close to full employment. In many cases, like 2008 & 2020, that involves cutting interest rates quickly. So that will usually benefit stocks, real estate, etc. But that's just a short-term favorable byproduct of the Fed trying to stimulate. I mean in the two examples above, that's exactly what they are trying to do (juice the economy to encourage investment which in turn drives jobs growth).

I would disagree that the stock market "collapsed" in October of 2022. Everything was overheated at the end of 2021 so there was bound to be repricing of assets when the Fed started to raise rates. If people can get 4% to 5% on bonds after 15 years of getting nothing, of course some money will flow out of stocks. But, again, it's just a repricing of assets. And the Fed had no choice but to tighten. Indeed the FOMC was widely criticized for waiting *too long* to start tightening.

The Fed has not really made a secret of the fact that they are trying to cool off the real estate and labor markets. They are actually aiming for some job destruction and certainly some kind of cooling of the real estate market. They've come out and said so.

In my mind, so far everything the Fed has done has followed their usual playbook. Maybe those quoted in that article just don't remember very well that sharp increases in interest rates are standard operating procedure when inflation is damaging the economy.

Given their limited tools, what else should the Fed be expected to do at this point?

boglerdude wrote: ↑Sun May 14, 2023 12:20 am
> in the event of a serious banking crisis or a nasty recession the Fed could revert to its old habits

Then thats what we'll get. Will the Little Guy have time to buy cheap assets like 2009? He didnt have much time to in the March 2020 crash

First was a time period of nearly six months? Second was only about three weeks?

barrett wrote: ↑Sun May 14, 2023 5:12 am The Fed's dual mandate is to control inflation and strive for something close to full employment.

That's the official story, yes.
Just like the official mandate of the Supreme Court is to ensure the American people the promise of equal justice under law.

glennds wrote: ↑Sun May 14, 2023 11:24 am

barrett wrote: ↑Sun May 14, 2023 5:12 am
The Fed's dual mandate is to control inflation and strive for something close to full employment.

That's the official story, yes.
Just like the official mandate of the Supreme Court is to ensure the American people the promise of equal justice under law.

Or, that all the words in The National Anthem may not be a true reflection of reality?

glennds wrote: ↑Sun May 14, 2023 11:24 am

barrett wrote: ↑Sun May 14, 2023 5:12 am The Fed's dual mandate is to control inflation and strive for something close to full employment.

That's the official story, yes.
Just like the official mandate of the Supreme Court is to ensure the American people the promise of equal justice under law.

Hey glennds,

Would you mind expanding on this a bit? I mean, do you think the Fed should be doing things a lot differently right now? My overly wordy post was just saying that I think they are getting things more or less right with the limited tools they have to work with.

barrett wrote: ↑Mon May 15, 2023 12:10 pm

glennds wrote: ↑Sun May 14, 2023 11:24 am

barrett wrote: ↑Sun May 14, 2023 5:12 am The Fed's dual mandate is to control inflation and strive for something close to full employment.

That's the official story, yes.
Just like the official mandate of the Supreme Court is to ensure the American people the promise of equal justice under law.

Hey glennds,

Would you mind expanding on this a bit? I mean, do you think the Fed should be doing things a lot differently right now? My overly wordy post was just saying that I think they are getting things more or less right with the limited tools they have to work with.

Hi Barrett,
I kinda agree with the initial part of the quote that talks about the Fed's willingness to intervene in financial markets over the past 30 years.
IOW, I question whether the Fed has prioritized Wall Street interests over Main Street for decades, and whether that prioritization has brought us to this point.
Similarly I question whether there has been a trend over the past 2-3 decades of the Supreme Court and Congress also prioritizing special interests over public interests. Think about how many Goldman Sachs alumni have populated the Fed and Treasury Department over recent years. Ask yourself whether Goldman and the community of mega hedge funds have any particular influence, and whether it is a coincidence that easy money policy has been super lucrative for them.

Of course the conscience easer is the theory of aligned interests. Which is to say pleasing the special interest who is giving campaign money or perks is helping the public also. It's like the claim that if Wall Street wins, Main Street will be better off than they otherwise would have been, so don't complain.
But in my opinion, the era of easy money and zero interest rates has fueled asset inflation, asset bubbles, volatility, and disparity that has been lucrative to Wall Street and damaging to the average person, especially the incoming generation.

At this moment in time, I agree with you that they are doing about the only things they can do now that the public is in pain. The question I'm raising is what ownership the Fed ought to take in bringing us to this point, and what motivations drove their policy. It's not an outright allegation, but I think it's a valid question.

glennds wrote: ↑Mon May 15, 2023 1:05 pmSimilarly I question whether there has been a trend over the past 2-3 decades of the Supreme Court ... also prioritizing special interests over public interests.

Examples?

Xan wrote: ↑Mon May 15, 2023 1:20 pm

glennds wrote: ↑Mon May 15, 2023 1:05 pmSimilarly I question whether there has been a trend over the past 2-3 decades of the Supreme Court ... also prioritizing special interests over public interests.

Examples?

Here are two:

Citizen's United - for the first time the Supreme Court extended the free speech clause of the First Amendment to corporations. This reversed centuries old campaign finance restrictions and (IMO) radically changed the landscape of influence in the electoral process. You and I are equal in our influence, but neither of us comes close to the influence of a corporation or special interest group.

Another example - the Congressional repeal of the Glass-Steagall act in 1999 which removed the wall that was set up in 1933 between commercial banking and investment banking. This wall was intended to prevent the exact type of conflict of interest that contributed to the imprudent lending activity that underpinned the 2008 crash. One of the biggest driving forces behind the repeal was Sanford Weill who wanted to merge Traveler's with Citibank and create a mega-bank to be called Citigroup. Glass-Steagall stood in the way. A few years later, Citigroup required a $472B bailout.

glennds wrote: ↑Mon May 15, 2023 1:05 pm Think about how many Goldman Sachs alumni have populated the Fed and Treasury Department over recent years. Ask yourself whether Goldman and the community of mega hedge funds have any particular influence, and whether it is a coincidence that easy money policy has been super lucrative for them.

Thanks for responding, glenn's. I always value your thoughts. A couple of things though...

1) One could easily argue that the Goldman folks know as much as anyone about how money works. So maybe (he said a bit naively) they are just the smartest people. I mean, you sure as hell wouldn't want ME on the FOMC!

2) I look at the easy money from 2008 to 2021 as the Fed desperately trying to avoid a deflationary spiral, which is something they don't have a lot of tools to fight. I won't post the yearly inflation numbers here, but in those 14 years inflation averaged less than 2% (probably just a number that is only an educated guess anyway when it comes to how "positive" inflation has to be to avoid the deflation spiral). Thoughts on that?

barrett wrote: ↑Tue May 16, 2023 5:56 am

glennds wrote: ↑Mon May 15, 2023 1:05 pm Think about how many Goldman Sachs alumni have populated the Fed and Treasury Department over recent years. Ask yourself whether Goldman and the community of mega hedge funds have any particular influence, and whether it is a coincidence that easy money policy has been super lucrative for them.

Thanks for responding, glenn's. I always value your thoughts. A couple of things though...

1) One could easily argue that the Goldman folks know as much as anyone about how money works. So maybe (he said a bit naively) they are just the smartest people. I mean, you sure as hell wouldn't want ME on the FOMC!

2) I look at the easy money from 2008 to 2021 as the Fed desperately trying to avoid a deflationary spiral, which is something they don't have a lot of tools to fight. I won't post the yearly inflation numbers here, but in those 14 years inflation averaged less than 2% (probably just a number that is only an educated guess anyway when it comes to how "positive" inflation has to be to avoid the deflation spiral). Thoughts on that?

barrett,
These are both valid thoughts, and specifically as to #2, I have found myself in more than a few meetings where the small talk turns to the Fed and I was the only one defending them.
Yes Goldman Sachs recruits and cultivates a lot of brilliant people so it may not be fair to suggest that just because many of their alum are in positions of power means they are a de facto influence. In fact, to make your point, several Fed chairs and Treasury Secretaries came out of academia, government or places other than Wall St.
Bernanke comes to mind, and so do Tim Geithner, Janet Yellen. It hasn't been a continuous stream of Goldman Sachs people.

I use visuals in my own head to help me understand things. Your second point reminds me of an inflatable character, the type you might see in front of the grand opening of some business. If there is not enough air in the character it will flop all over the place and eventually just collapse. If it is overinflated, it will obviously burst. So there is the Fed standing by to pump in air as needed, or bleed it off. So I can get behind the idea that their role, especially from 2008-2021 was to titrate the air (metaphor for money supply and/or interest rates) and keep the character in the healthy zone; at the very least neither collapsed or ruptured.
In a way, the whole scene is kind of impressive and for a while I thought maybe this was the discovery of economic alchemy.

It's hard to overstate how different this is than the way the Fed worked in the 80s when we never really thought too much about interest rates, and rather, there was a M2 money supply report that came out weekly that got more attention. Either way, the Fed's actions set a framework, but they were not the fundamental engine of economic activity nor did they seem to be particularly concerned with asset values or the stock market.

So let me raise two issues:

1. What if the modern policy trend has essentially become THE asset price setting mechanism insofar as interest rates drive cap rates, and cap rates drive prices for most assets? Do we get a situation where asset inflation is decoupled from consumer price inflation? And if asset inflation is now rampant, do we end up with societal instability due to wealth disparity?
What about the price of entry into the asset club relative to wages for Gen Z or Gen Alpha? If this is a consequence of the new form of alchemy, then how does this square with a public mandate? Maybe it squares because if the mandate is employment and (consumer price) inflation, then we're good. But for some segments of society, maybe not

2. What if in the inflatable character/pump scenario, we have a situation where the Fed's pump is not sufficient to replace the air that might be leaking out of the balloon? Or conversely, what if the air inside the balloon is expanding at a faster pace than the Fed can bleed it off? It's possible that either of these scenarios could happen, and we just haven't experienced them yet. Or what if the Fed bleeds off too much air or pumps in too much air and causes the opposite of the condition they're trying to prevent?

Neither of these points are outright criticisms. And I have no answer for what I would do differently or what I would have done differently. But I make a case for why we're in uncharted territory, and why I'm generally a Fed fan, but still cautious.

P.S. if we take consumer price inflation over those 14 years you mention, and average it, we've done exceedingly well. It's hard to let go of recency bias though, so most people feel like they're being strangled by inflation at this moment and have forgotten how good we've had it for how long.

P.P.S. the wild card (breaking point?) may be the government's finances and where it may face it's limits, both in terms of spending and in terms of demographics. The Fed is not in control of either of these factors.
Excuse the lengthy post!

Fed's Bostic Says He Doesn't See Rate Cuts Until Well Into 2024
MAY 15, 2023 • STEVE MATTHEWS

https://www.fa-mag.com/news/fed-s-bosti ... MAIL_ID%5D

Federal Reserve Bank of Atlanta President Raphael Bostic pushed back against bets in financial markets that the central bank will cut interest rates this year and cautioned against taking further hikes off the table if inflation doesn’t cool.

“My baseline case is we won’t really be thinking about cutting until well into 2024,” Bostic said Monday in an interview on CNBC. “If you look at most measures of inflation, they’re still two times where our target is. And so that’s a long distance still to go.”


The Federal Open Market Committee raised rates by a quarter percentage point at a meeting earlier this month, bringing its benchmark to a target range of 5% to 5.25% and signaling it may be ready to pause its tightening cycle at the next meeting in June.

Bostic made clear that he now favors putting policy on hold to see the impact of aggressive Fed tightening since last year, with the economy also facing headwinds from tighter credit amid banking strains. But he also suggested that the next move may be more likely to be up than down, given the persistence of price pressures.

“If I had a bias between going up and going down as our next action, I would say we might have to go up. What we’ve seen is that inflation has been persistently high. Consumers have been really resilient in terms of their spending and labor markets remain extremely tight,” he said. “All of those suggest that there’s still going be upward pressure on prices. That is not my base case either.”

Prices climbed 4.9% from a year earlier in April, consumer price index data released Wednesday showed, the first sub-5% reading in two years. Excluding food and energy, the so-called core inflation rate also moderated.

While the Fed targets a different yardstick of annual price movements - the personal consumption expenditures gauge — all measures are running at more than double its 2% target pace.

Hey glennds,

I appreciate the lengthy post but haven't had time to follow up. One thing you've accomplished is to get this idea into my head that inflatable characters can be seen as a sort of metaphor for inflation. Yesterday I saw one and all I could think of was inflation/deflation and how the whole thing was such a balancing act. This is just how my brain works, so it's forever altered!

To this point:

"Either way, the Fed's actions set a framework, but they were not the fundamental engine of economic activity nor did they seem to be particularly concerned with asset values or the stock market."

Again, coming from my point of feeling like the Fed is doing the best they can with their limited tools, it makes sense that the institution now pays closer attention to asset values (in particular stocks) simply because so much of Americans' wealth is tied up in their 401k plans, as opposed to 40 years ago when it was mostly pensions. In other words, an action that immediately reduces the wealth of millions of Americans in a very visible fashion is bound to be something that an organization run by human wants to avoid.

Another random thought...

Looking at the monthly CPI-U numbers, I see that inflation was almost nil for the 2nd half of 2022 but has been higher again in the January to April period. So higher rates are probably here for a while.

It's good to not be on Bogleheads for this discussion because I can blather on about a lot of crap that is "not actionable".

Some Things the Fed Doesn’t Control

https://awealthofcommonsense.com/2023/0 ... t-control/

The Federal Reserve has a dual mandate — price stability and maximum employment.

Prices haven’t exactly been very stable these past few years so it’s no surprise inflation has been the main focus for Jerome Powell and team.

I’m sure the Fed wishes they could wave a magic wand that would keep the inflation rate and unemployment rate at their target levels.

If only it were that easy.

The Fed kept interest rates on the floor for most of the 2010s in hopes they could push up the rate of inflation to boost economic growth.

It didn’t work.

For the past year and change the Fed has gone on one of the most aggressive interest rate hiking cycles in history in hopes they could push up the rate of unemployment to slow the pace of inflation and economic growth.

Also not working.

Jerome Powell has basically said he wants millions of people to lose their jobs.

They want a higher unemployment rate and slower wage growth so the economy will take a breather and inflation will fall to more reasonable levels.

Inflation has been slowing but not because of a slowing labor market.

The labor market doesn’t seem to care about the Fed just yet:

barrett wrote: ↑Thu May 18, 2023 5:57 am One thing you've accomplished is to get this idea into my head that inflatable characters can be seen as a sort of metaphor for inflation. Yesterday I saw one and all I could think of was inflation/deflation and how the whole thing was such a balancing act. This is just how my brain works, so it's forever altered!

Hi barrett,
I don't envy the Fed's position right now. Staying with the inflatable character metaphor, there is also a complicated element to do with the speed with which the Fed pumps in air or bleeds it off. It could do so slowly and risk not being responsive enough. It could do so rapidly and risk over-correcting and replacing one problem with another, potentially worse one. And since all the indicators are lagging by definition, this is a difficult task.

Powell took a lot of flak for characterizing the inflation as transitory for that period when he did so. I don't blame him. At that point it was very difficult to tell how much of the inflation was supply shock related to Covid disruption. Surely they must have been wary of tightening reflexively only to find out that the inflation was rooted in supply disruption, not demand.

I dunno if these numbers are true, that Stanfords endowment went from 30 billion in 2020 to 75B, but in any event it explains the glee with which universities forced the jabs into 18 year olds

https://www.visualcapitalist.com/worlds ... ent-funds/

boglerdude wrote: ↑Thu May 18, 2023 8:33 pm I dunno if these numbers are true, that Stanfords endowment went from 30 billion in 2020 to 75B, but in any event it explains the glee with which universities forced the jabs into 18 year olds

https://www.visualcapitalist.com/worlds ... ent-funds/

Not sure I follow. I assumed that since the jabs were a left wing agenda policy and since most universities are left wing, they went along with "the current thing". How does the money in their endowment play in?

DogBreath wrote: ↑Fri May 19, 2023 6:03 am

boglerdude wrote: ↑Thu May 18, 2023 8:33 pm I dunno if these numbers are true, that Stanfords endowment went from 30 billion in 2020 to 75B, but in any event it explains the glee with which universities forced the jabs into 18 year olds

https://www.visualcapitalist.com/worlds ... ent-funds/

Not sure I follow. I assumed that since the jabs were a left wing agenda policy and since most universities are left wing, they went along with "the current thing". How does the money in their endowment play in?

I'm not making the connection either on the jabs either.
But the subject of endowments is interesting and for anyone who cares, last week's 60 Minutes did a segment on the Mormon Church's endowment and the whistleblower case that is ongoing regarding their tax status. I had no idea their endowment was as massive as it is.
One of the claims is that they are not using the funds for charitable purposes, at least to the extent they should. The church's representative said something to the effect that they are holding on to it so the resources will be available for the Second Coming.

DogBreath wrote: ↑Fri May 19, 2023 6:03 am

boglerdude wrote: ↑Thu May 18, 2023 8:33 pm I dunno if these numbers are true, that Stanfords endowment went from 30 billion in 2020 to 75B, but in any event it explains the glee with which universities forced the jabs into 18 year olds

https://www.visualcapitalist.com/worlds ... ent-funds/

Not sure I follow. I assumed that since the jabs were a left wing agenda policy and since most universities are left wing, they went along with "the current thing". How does the money in their endowment play in?

Yeah, I don't think the jabs had anything to do with the growth in Stanford's endowment, because it was still only $37B last year -- meaning it didn't grow much from 2020 to 2022. But then it doubled to $75B in a single year.

Something else is going on there. I can't find any information online explaining how Stanford's endowment managed to double in just one year. Either the fund managers took a huge risk and won big, or one or more entities made massive, unprecedented donations to the endowment over the past year.

glennds wrote: ↑Fri May 19, 2023 2:39 pm The church's representative said something to the effect that they are holding on to it so the resources will be available for the Second Coming.

Also curious. If/when there is a second coming, I doubt you're gonna need cash.

Tortoise wrote: ↑Fri May 19, 2023 2:40 pm
Something else is going on there. I can't find any information online explaining how Stanford's endowment managed to double in just one year. Either the fund managers took a huge risk and won big, or one or more entities made massive, unprecedented donations to the endowment over the past year.

If I was one to donate to my alma maters (I am not), I sure as heck would have cut them all off years ago for suppressing free speech and turning students into whiny snowflakes.

Unis got 70 billion in direct covid handouts. The NIH etc research grants are from the gov, and the student loans are from the gov. And the assets in endowments roughly track the amount of money printing. Even in the 90s at Stanford, Libertarianism or Objectivism/Ayn Rand was not mentioned once, even in philosophy classes. tbf they didnt explicitly push socialism