MorningWord 10/2/15: The Fed forgot to return those tools they borrowed

by Dan October 2, 2015 9:30 am • Commentary

As the S&P 500 futures 2% reversal in a straight line shows, this morning’s September payrolls number was the worst possible outcome for U.S. equities. No matter how you slice it, the U.S. economy is not (and will not be) immune to the deflationary pressures that are depressing global growth. Regular readers know that I have no special insight or experience in the macro, but this fact seems fairly obvious.

So a rate increase by the Fed in 2015 seems unlikely. And at this stage of the game dovish monetary policy is not bullish for U.S. stocks. Why? If the data dependent Fed is about to get a string of disappointing economic data what tools do they have left to further stimulate employment and inflation??

My thoughts on this remain unchanged from a month ago (MorningWord 9/1/15: Wake Me Up When September Ends). Now they are only reinforced:

No matter what reason is most important, the confluence of events (that’s been clear for months) had me writing a fairly specific note of caution on August 18th; Warning Bells Scream in Silence, reinforcing my view that the volatility in almost every other risk asset the world over was headed for U.S. stocks. The most important takeaway:

It’s easy to dismiss all of these external factors when looking at our stock market, and it’s easy to join the NBD (no big deal) club when considering our multi-nationals’ exposure to emerging markets, but make no mistake, there are no shortage of external factors that are screaming warning-signs for our late stage bull market in stocks. Oh, and your favorite Fed Whisperer from the WSJ John Hilsenrath stated it loud and clear in this morning’s edition that the Fed may have exhausted its bag of tricks: U.S. Lacks Ammo for Next Economic Crisis

When a Fed-watcher with the access of Hilsenrath write about the Fed being almost out of bullets we should all pay attention. Because that means there are some within the Fed (that Hilsenrath speaks with) that feel that way. They worry about being able to combat the next crisis if they haven’t rolled back at least some of the last crisis’s saving mechanisms. Hilsenrath wrote that because someone he spoke to wanted him to write that.


I suspect global stock markets continue to correct this month as the Fed could be damned if they do, damned if they don’t at their Sept 17th meeting. And investors will have to wait for a sign of economic stabilization in China, not just stock market stabilization

Some worst possible near term scenarios seem to be playing out for the FOMC at a time when investors are about as nervous as they have been about the near term future of U.S. stocks in a very long time.   If the August 24th flash crash, and the rolling liquidation of late in sectors like Banks, Media & Biotech tell us anything, it’s that no stock or sector is safe if investors all head for the door at the same time.  We remain cautious on U.S. stocks as a whole, and very patient on buying this dip.

Are recent thoughts on the matter here: