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Jerome’s Moment Of Truth
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Jerome’s Moment Of Truth

by The MoleDecember 19, 2018

Between 2009 and 2016 not a single day passed without someone (rightly) bitching about the inherent moral hazard and long term implications of the Federal Reserve’s various QE initiatives. Which after seven long years and several rounds finally came to an end in late 2015, when the Fed cautiously signaled that it was ready to start raising rates again, albeit ever so gently. And since that announcement not a day passes without someone bitching about the Fed’s ‘irresponsible’ rate hikes. Go figure…

You can’t have your cake and eat it too, folks. Either you want a functional economy built on savings and capital growth or one built on frivolous debt and eternal easy money. If you want the former then be aware that it does come with occasional periods of pain. Armchair economist, meet market cycle.

And if you want the latter then don’t come to me and complain about income distribution and wildly inflated home prices. Just recently a new Fed study , the ‘Financial Stability Report’, warned that lenders had relaxed credit standards on more than $4 trillion of corporate debt. It also found that prices of stocks, commercial real estate, and farmlands were high by historic measures (understatement of the year). That alone would suggest that raising interest rates is the prudent course of action.

Of course many disagree, as higher rates are most likely going to trigger an economic slowdown, and perhaps even a full blown recession. The general reasoning here is that the Fed shouldn’t press its luck as inflation is already hovering near the Fed’s target of 2%. But a year filled with wild market swings has done little ease investor anxiety.

But quite frankly the Fed may not have much of a choice today but to hold interest rates above 2.25% for the foreseeable future, meaning throughout 2019. In order to understand what’s going on let’s do a quick refresher on what’s called the ‘yield curve’.

Yield Curve 101

The yield curve basically refers to the difference between short term and long term interest rates, for example the 3-month t-bill and the 10-year note, or the 2-year and the 10-year notes which is the pair I personally favor. Under normal conditions long term interest rates are higher than short term interest rates, which obviously makes sense as investors assume more risk for lending over longer time periods.

But for a variety of reasons that difference sometimes narrows toward zero and occasionally even drops below, which then represents an ‘inverted yield curve’. Okay so what – why do we care? Well, the Fed cares, because why would anyone invest in 10-year notes or 20-year bonds if they can get the same or better yields from a 2-year note? Plus banks and other financial institutions make money by borrowing short at low interest rates and lending long at higher rates. An inverted yield curve frustrates this strategy.

And that basically describes the conundrum Jerome Powell and his fellow FOMC members are facing today. In order to avoid the possibility of a yield curve inversion the Fed must not project a dovish outlook for 2019. But if the Fed holds at 2.25% or perhaps even signals further hikes for the next year, then odds are that equities will be taking a tumble, if not today then most likely sometime in 2019.

Rock, meet hard place.


About The Author
The Mole
Mole created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious schemes at the usual social media waterholes.
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  • http://iberianviews.blogspot.com/ catracho

    Good post and conclusion (rock hard place)..

  • Jason13

    Should be fun today at least except possibly really slow til the fireworks at 1pm CST.

  • TimeToPanic

    No reason for the Fed to change its course. Short term t-bill rates still looking healthy and rising, the Fed must follow.

    I’m bearish into January, but see a Santa rally into late December. My cycle top is 28th.

    Key Bradley date on 17th January, couple of days after my cycle low, that might be the bottom of the crashy wave, target 2279 SPX.

  • http://gerb-reloaded.blogspot.com Gold_Gerb
  • mSquare

    It really is! Broad indexes down over 15% from highs only twice the past 2 decades – in 2000 and 2007/2008.

    Ask yourself if this time is it same as those two?

    So IMHO, downside is smaller (say 2-3%) than upside (5-10%?) – at least into January 2019…

  • http://gerb-reloaded.blogspot.com Gold_Gerb

    Risk:Reward baby.

    “Have a plan, trade the plan.”

  • Ted

    I bought the close on Friday. Under water but sticking to my guns.

  • Jason13

    Looking to buy but not yet

  • Mark Shinnick

    Your position risk around here provides a closer stop.

  • maxcherry

    on the clock for a ZBT

    “The breadth thrust indicator was developed by investor and analyst
    Martin Zweig. Since it provides a timing signal with a gap of many years
    or even decades, its utility lies more in signaling long-term trends
    than as a short-term trading indicator.”
    https://uploads.disquscdn.com/images/cf8a0c5c8877cc9b54ca7899647d251f8594dee2260d5f55a0076569226c5b1b.png

  • http://gerb-reloaded.blogspot.com Gold_Gerb

    that’s what I need. An indicator named after me.
    Ultimate Ego trip.
    ;-D

  • maxcherry

    is there a “cramer” indicator

  • http://gerb-reloaded.blogspot.com Gold_Gerb

    Yes. it’s all about ‘Levels’.
    😉
    Julie’s working on that one.

  • TimeToPanic

    Yep, stuck with my NQ longs from 6524. Has anyone else spotted the head and shoulders pattern is live, neckline broken, and about to be tested from below. https://uploads.disquscdn.com/images/09d0692442e5b736305c462c1ac6d9995952165bdd530bacadd28b71f88b8114.jpg

  • https://evilspeculator.com Sir Mole III

    I would never do that.

  • https://evilspeculator.com Sir Mole III
  • Mark Shinnick

    Seeming…go big or go home…

  • Julie 35 – 25 – 36

    GLD Yes … SPX Yes Moving stop up GLD 118.28
    JULIE

  • HD

    If you were buying them yesterday this is a good spot to close. Jmho

    Have a Merry Christmas all

  • Julie 35 – 25 – 36

    SPX Guys must get above 5 ema @ 2582 … I have a level 2579 The 5 ema is first order of business for the bulls
    JULIE

  • Julie 35 – 25 – 36

    Chief Great job on explaining the yield curve good post Chief Thanks
    JULIE

  • Julie 35 – 25 – 36

    MAX Have you any stats on when the Santa Claus officially begins and ends ? I have read mid December until approx end of 1st week January ? Thanks MAX
    JULIE

  • Julie 35 – 25 – 36

    SPX moving stop to just under 2548
    JULIE

  • maxcherry
  • Julie 35 – 25 – 36

    Thanks Max
    JULIE

  • http://gerb-reloaded.blogspot.com Gold_Gerb

    it’s a start to getting out of a 4 month base.
    [GLD:UUP]
    https://stockcharts.com/h-sc/ui?s=GLD%3AUUP&p=D&yr=1&mn=6&dy=0&id=p15046224099
    😀

  • Mark Shinnick

    I rely on NORAD.
    https://www.noradsanta.org/

  • Julie 35 – 25 – 36

    GG I was watching GLD decoupling it’s inverse relationship with the greenback It does occur more often than people realize
    JULIE

  • Julie 35 – 25 – 36

    SPX at 2579 level … high so far 2578 could be a pullback
    JULIE

  • Julie 35 – 25 – 36

    I believe it was near Christmas — “Houston We Have A Problem ” Reply from NASA Houston “Abort Mission Return Home God Speed ”
    JULIE

  • Sp00nman

    HYG making new lows today. Not bullish. I’m sick as a dog today so I will not be around for the announcement. Darn kids bringing home their germs all the time..

  • Julie 35 – 25 – 36

    SP take care of yourself Get well soon
    JULIE

  • Sp00nman

    Thx. Good luck to you and everyone in your trading today.

  • Brishort

    The market is FedVWAPed ready!

  • Julie 35 – 25 – 36

    SPX Unreal 2530 level … 2579 level .. within a point Too much
    JULIE

  • Brishort

    The good news is that it is SO coiled between the two numbers, any break (that is not a fake-out shortly after the announcement) should be real.

    Furthermore, whatever they say, it’s the market reaction, Options expiry being so close and quadruple one, it has a potential to be EXTREMELY EXPLOSIVE.

    A lot of gambling going on in options, people do not know which side or which way to hedge, or have a hedge bias….

  • Julie 35 – 25 – 36

    Agrree Brishort .. Explosive move coming Fireworks .. Watching closely .. Does NYC have snow yet ?
    JULIE

  • Brishort

    I am actually closer to Vermont! We have very little snow, a few weeks ago, but not much since.

    I was busy last few days, but will be around this PM. Will try to bring insight!

  • Sp00nman

    Yes, the 2580 is a LVN as well as 2530. What’s interesting about the volume profile is that the HVN’s below us are at 2480 and a larger “magnet” at 2450.

  • Julie 35 – 25 – 36

    SP I have an important level @2452
    JULIE

  • Julie 35 – 25 – 36

    Another important level posted 2482
    JULIE

  • Jason13

    Fits with my 2472 area as well

  • zzezzezz

    max pain point for SPY options (expiring this Friday) is $266.50

  • Julie 35 – 25 – 36

    Jason We have the levels .. Let them try to whipsaw us ! We will nail em. 2560 is a level and also watch 2553 on a continued pullback
    JULIE

  • Jason13

    Does anyone have the max pain point on options? Max Cherry?

  • Julie 35 – 25 – 36

    Jason Look below ZZO posted max pain SPY
    JULIE

  • Jason13

    Weird. I don’t see it.

  • zzezzezz

    2725 for SPX

  • Jason13

    Thank you.

  • Julie 35 – 25 – 36

    Hmm ! I see it .. it is 266.50

  • maxcherry
  • Julie 35 – 25 – 36

    I have a level 2724 matching max pain SPX
    JULIE

  • Julie 35 – 25 – 36

    Here we go Guys The fireworks
    JULIE

  • https://evilspeculator.com Sir Mole III

    Here she goes…

  • maxcherry

    i think it goes lower

    dec 21st low full moon 13 trading days from the dec high

    https://uploads.disquscdn.com/images/d9d98d243df73e9db0f80fe9aedf96230f0bc2a783b50df6219ce07b7e8df33c.png

  • Julie 35 – 25 – 36

    I went out at 2568
    JULIE

  • https://evilspeculator.com Sir Mole III

    Fed hikes for a 4th time this year by 25bps as expected, adjusts IOER by 20bps. Lowers 2019 projections to 2 increases. Fed Longer-Run Median Fed Funds Rate at 2.8%; prior median longer-run Federal funds rate 3.0%.

  • https://evilspeculator.com Sir Mole III

    “Fed will continue to monitor global economic and financial developments and assess their implications for the economic outlook.”

  • http://iberianviews.blogspot.com/ catracho

    Trump will be tweeting soon

  • https://evilspeculator.com Sir Mole III

    WOW, that’s a lot more hawkish than I had anticipated. What do you guys think?

  • Julie 35 – 25 – 36

    Guys As mentioned previous post on previous thread The Utilities knew a rate hike was imminent per their price action the last few days. Gotta watch the UTES at pre FED announcements
    JULIE

  • http://gerb-reloaded.blogspot.com Gold_Gerb

    all together now!

    (back from lunch)

    https://www.youtube.com/watch?v=TcJ-wNmazHQ

  • http://iberianviews.blogspot.com/ catracho

    Yes..agree.. that’s why i said POTUS will be tweeting . SHows they will be looking at the data and that a 10% fallin the market doesn’t influence their decision

  • http://gerb-reloaded.blogspot.com Gold_Gerb

    don’t think! just trade the tape.
    😉

  • https://evilspeculator.com Sir Mole III

    FWIW the Fed may have an ulterior motif but I think they are doing the right thing long term. It’s going to cause pain in equities though.

  • Mark Shinnick

    We really do need a blow off of some sort.

  • https://evilspeculator.com Sir Mole III
  • zzezzezz

    nibbling a bit here… will take more bites at 2520, 2500, 2480….

  • nirav777
  • TimeToPanic

    Fed still irrelevant.
    Market makers having fun.
    Up til after Christmas I reckon.

  • http://gerb-reloaded.blogspot.com Gold_Gerb

    Kiss Me!
    (5 minutes does not make a trend)

  • Ted

    Thanks that puts me at ease.

  • RoastBeeph

    Any thoughts on oil?

  • Julie 35 – 25 – 36

    Fed announcement … quad witching .. supposed Santa Claus Rally … Seasonality ! Good God All at the same time ….Abbott and Costello Who’s on first .. Who’s on second ! Julie on sidelines
    JULIE

  • TimeToPanic

    Lower, as USD spikes in to New year. Over 100 dead ahead for DXY.

  • ridingwaves

    again, so far the yield curve is one series and not an issue….

    12/04/18 bond market

    1 Mo 2.37
    2 Mo 2.42
    3 Mo 2.42
    6 Mo 2.58
    1 Yr 2.71
    2 yr 2.80
    3 yr 2.81
    5 yr 2.79 (wowie .. an inversion)
    7 yr 2.84
    10 yr 2.91
    20 yr 3.05
    30 yr 3.16

    If you want to call this an inverted yield curve, OK.
    Here’s an inverted yield curve from 2-12-08:

    1 Mo 2.55
    3 Mo 2.31
    6 Mo 2.12
    1 yr 2.06
    2 yr 1.94
    3 yr 2.13
    5 yr 2.71
    7 yr 3.13
    10 yr 3.66
    20 yr 4.43
    30 yr 4.46

    Note that you have to go out to 5 years to get a yield better than a 1 month treasury bond. Now that’s INVERSION!

  • TimeToPanic

    I’m with GG, which is a comfort, interim bottom formed this week, BTFDs.

  • mSquare

    I did buy SPY via UPRO as it dipped and bounced above pivot at $37.1x for today. Already green and think more as Press Conf. call goes on

  • RoastBeeph

    Thanks, leaning that way too though expect a dead cat bounce right now.

  • Julie 35 – 25 – 36

    I posted same several days ago about an intermediate term bottom forming at 2530
    JULIE

  • Julie 35 – 25 – 36

    GLD stopped out remaining 1/4 position long. I let the stop take me out.Going to look at GDX
    JULIE

  • ridingwaves

    3.50 NG tested again and bounce, big day on storage release tomm, lets hope they are up and that gap fills….waiting patiently…maybe forever

  • evilasevildoes

    UB sky rocketed on fed

  • Julie 35 – 25 – 36

    GDX Going to watch for a pullback approx 20 matching https://uploads.disquscdn.com/images/a58107ddc70bebcacf037f48b16afd3bbee4e9ca9764679252500968db5c8321.png a support and daily 21 ema JULIE

  • mSquare

    Exited with a small loss – guess ‘read it’ wrong. Waiting on the side

  • Jason13

    Cashed one short for 30 pts and now in another….I really think we hit new lows first before moving up

  • Julie 35 – 25 – 36

    Jason So far a corrective 3 waves down from 2685 .. I am sitting out until a resolution. I got out at 2568 and nibbled yesterday long at close Added this am on 60 min chart and made some coin
    JULIE

  • Brishort

    Strategy still to look for a significant break of 2592 or 2530.

    In between feels like whiplash right now. Not touching it until a better technical view.
    Although the point magnitude of the movements and its speed iare impressive, the Zero provides a clearer picture of the current indecision.

  • Jason13

    There will be a few stops under 2530 to flush

  • Julie 35 – 25 – 36

    You got it Brishort That will be a resolution mentioned in a reply to Jason below
    JULIE

  • TimeToPanic

    I can’t remember the last time I did a proid. 😉

  • Brishort

    Provides!!! better change the batteries in this wireless keyboard, it is eating my letters!

  • Jason13

    Wow. Moving stops down

  • http://gerb-reloaded.blogspot.com Gold_Gerb

    It’s all priced in.
    Buy yee sheep, buy with hearts glee!….
    😉

  • Ted

    I say it for you Donald “Powell you’re fired”

  • http://gerb-reloaded.blogspot.com Gold_Gerb

    typical for that paper gold. nothing fast, lasts!

  • http://gerb-reloaded.blogspot.com Gold_Gerb

    Whipsaw Wednesday!

  • Julie 35 – 25 – 36

    2506 level and then your 2472 closely matching 2482
    JULIE

  • TimeToPanic

    Perhaps that should read ‘forming’.

  • http://gerb-reloaded.blogspot.com Gold_Gerb

    Wha!?

    18th be damned! 21/24.
    Muwahaha. I’m a strong hand.

  • Jason13

    Cashed a second for 50 pts….I’m done for day

  • zzezzezz

    taking BIG bites now

  • Jason13

    Yeah it’s a falling knife now

  • http://gerb-reloaded.blogspot.com Gold_Gerb

    They are playing hardball. Act accordingly.
    🙂

    SPX
    https://stockcharts.com/h-sc/ui?s=%24SPX&p=D&yr=3&mn=0&dy=0&id=p1320243096c

  • Mark Shinnick

    Yeah, labu had a lot of volume at 110, now around 31

  • http://gerb-reloaded.blogspot.com Gold_Gerb

    doing good.
    better than my DRV.

  • evilasevildoes

    pnf really calling it perfectly

  • http://gerb-reloaded.blogspot.com Gold_Gerb

    Never go full retard.
    wired keyboard is a MUST.

  • Mark Shinnick

    DRV the big one hedge I suppose.

  • Julie 35 – 25 – 36

    Guys A rate increase and $BKX dumps. Rate increases are supposed to be good for financials Wall Street lies and charts do not !
    JULIE

  • TimeToPanic

    NQ testing 2018 lows, still think it bounces to c.6800. But now, chicken tagine, home cooked by my Moroccan friend’s wife.

  • http://gerb-reloaded.blogspot.com Gold_Gerb

    Interesting.
    I’d thought TVIX would be to the moon!

    https://stockcharts.com/h-sc/ui?s=TVIX&p=D&yr=1&mn=0&dy=0&id=p72042888370

  • http://gerb-reloaded.blogspot.com Gold_Gerb

    bow-chicka-bow-wow.

  • zzezzezz

    SPX bounced off 2480-ish (as @Gerbil_Gold:disqus and others have predicted)
    technically… 2489, but hey, I’ll buy more at 2480! 🙂

  • Jason13

    Bloomberg just posted that Investment Grade North American Credit Default Swaps ( IG NA CDX) are blowing out. Funny how I watched HBOs Too Big to Fail last night. Freakin eerie.

  • evilasevildoes

    hearing orders stacked over 1.5 billion to sell on #MOC for the S&P500 #ES_F

  • Julie 35 – 25 – 36

    2482 is the level below 2482 is 2452
    JULIE

  • Julie 35 – 25 – 36

    GDX working on a bearish line strike candle pattern
    JULIE

  • http://gerb-reloaded.blogspot.com Gold_Gerb

    “there are, no accidents”

  • Julie 35 – 25 – 36
  • zzezzezz

    Thanks!

  • Ted

    Only if the long bond’s yield is climbing. Banks borrow short and lend long. The tighter the spread the less money they make.

  • Jason13

    Not sure we’ll get there in todays session but potentially overnight which might be a gap down then up situation…but I’ll join you in the hunt.

  • Jason13

    Zero is starting to quiet down..

  • Sp00nman

    Man, I picked a good day to get sick.. Looks like we smacked the LVN at 2490. Internals don’t looks super duper bearish either which is nice to mark bullish capitulation and get long.

  • evilasevildoes

    HYG ouchie

  • http://gerb-reloaded.blogspot.com Gold_Gerb
  • evilasevildoes

    2487.24……..

  • Julie 35 – 25 – 36

    Again mentioned yesterday .. People calling their broker and hearing .. “All lines are busy Please remain on the line for the next available representative or leave your name and number where you can be reached !” Good God ! Recognition phase is NOW ! Too Much Guys !
    JULIE

  • evilasevildoes

    2571.92 res

  • Ted

    RUT at or near a two year low. WOW!

  • http://gerb-reloaded.blogspot.com Gold_Gerb
  • TimeToPanic

    Below 2452 is 666. (Evil laugh).

  • zzezzezz

    will probably pin it to 2500

  • Sp00nman

    Here a volume profile chart, you can see the LVN’s and HVNs below us. https://uploads.disquscdn.com/images/33cfba931c71bfd498325bc368bebcf761d6e166828d686030eb6754b8ae0ef4.png

  • http://gerb-reloaded.blogspot.com Gold_Gerb

    sh!t man, you’ve been holding out on US.
    look at that chart.

  • Sp00nman

    Haha nah, it’s just a volume profile chart, nothing fancy.

  • Sp00nman

    And for some much lower levels, obviously we may never get there but worth noting.. You can see the VPOC for the last 5 yrs at the red line.. https://uploads.disquscdn.com/images/1701f14b3f612c879d152cf382f381ebb336b7b7bb47899abd05f2c3e0d518fb.png

  • http://gerb-reloaded.blogspot.com Gold_Gerb

    whoa, easy on the big charts fella. save those for Friday’s.
    😀

  • http://gerb-reloaded.blogspot.com Gold_Gerb

    Time Check.

    I’m going to take a Hiatus for the next two weeks. It’s going to be very difficult to stay away.

    If I don’t talk tomorrow or Friday (ha!). Have a Merry Xmas, and a Very splendid New Year’s.

    -GG

  • Julie 35 – 25 – 36

    Tom Bowley contributor stockcharts February low has been violated.with strong selling He is the last contributor holdout on a developing bear market. Will be interesting to read his take now
    JULIE

  • Ted

    You too!

  • Julie 35 – 25 – 36

    You too GG Merry Christmas to you and your family
    JULIE

  • https://evilspeculator.com Sir Mole III

    Merry Christmas and a happy new year, GG. See you on the other side.

  • Julie 35 – 25 – 36

    Merry Christmas Chief .. Thanks for providing a female friendly blog and all your charts and info Glad I came aboard earlier this year Again Chief Thanks For Everything !
    JULIE

  • https://evilspeculator.com Sir Mole III

    Thanks darling. I will be here until the end of this week and then I’m taking two weeks off until Jan 7th.

  • TimeToPanic

    See you next week GG.

  • evilasevildoes

    i remember when he never watched currencies

  • evilasevildoes

    Gold_Gerb remember Dec 21 is winter solstice…hint hint

  • Sp00nman

    Have a good rest of the year GG!

  • zzezzezz

    Praise Lilith!

  • BKXtoZERO

    I hit the sell button on the 401k long from 2 days ago… 2530 close? Today at 2500 close. Things at work are hard lately at year end….rush

  • Wave_surfer

    I thought the Santa Claus rally was from Thanksgiving until the end of last week.
    Santa Claus rally ends and people close out their losing trades for tax purposes, which is why this week is the 2nd most bearish week of the year.

  • simonn1080

    Anyone got a chart on oil and where we might be heading to short term?

    Thanks

  • http://www.linkedin.com/in/sharondsessions/ Sharon

    i watched a webinar from him today he has gone over to the bear

  • http://gerb-reloaded.blogspot.com Gold_Gerb
  • http://iberianviews.blogspot.com/ catracho
  • Jason13
  • Sp00nman

    Ya I had a really nice trade setup after the Fed announcement for me that would’ve been one of my better profiting trades but I was laying in bed.. *sigh*