Did The Fed Just Experience A ‘Margin Call’ Moment?

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For those not familiar, the reference is attributed to a scene from the movie “Margin Call” (2011, Lionsgate™) where John Tuld (Jeremy Irons) makes the sanguinary argument for dumping its portfolio of toxic holdings immediately against contradictory arguments that it’ll be seen as panicking by others with the line, “It’s not panicking if you’re first.”

That one line in fiction contains volumes as to the reality about how Wall Street, bankers, and more view the world. Which is precisely why when I read the news that Federal Reserve member, and “Regulatory Point Man” Daniel Tarullo resigned unexpectedly I just sat back in my chair thinking, “Of course he did” as that afore-mentioned scene came to mind.

The reason why this sudden departure (remembering his term expires in 2022, some 5 years away) inspired thoughts as the above that will surely be met with retorts such as “tinfoil wearing, conspiracy type” nonsense was not just the timing. But his resignation letter. To wit:

After more than eight years as a member of the Board of Governors of the Federal Reserve System, I intend to resign my position on or around April 5, 2017. It has been a great privilege to work with former Chairman Bernanke and Chair Yellen during such a challenging period for the nation’s economy and financial system.

Yep, that’s it. No alluding “health reasons.” No “need more time with family” qualifiers. Nor, anything else. Just a corporate styled, “Thanks, see Ya!” as to vacate 5 years early one of the most prestigious jobs in banking (Board of Governors) with quite possibly one, if not “the” most powerful agencies in the world, bar none. e.g., The Federal Reserve. Right, “Nothing to see here people, just move along, thanks for stopping by.”

If this doesn’t ring alarm-bells, than I guess Barron’s™ is right and “Next Stop Dow 30,000” here we come! Or, was that cover-story what signaled Mr. Tarullo to heed what it may portend (i.e., marking market tops) and thought, “Getting outta Dodge” before this thing falls apart first was the next prudent banking and career move? All one can do is speculate.

That said: It’s a fun thought experiment on one hand. But on the other? All I’ll say is this:

If you’re into market signals? These aren’t what you want to see emanating from the Fed. If you’re one of those still buying every dip horns-over-hooves. Because the next “dip” just may be a cliff. That is, unless you’re a vaunted investment “guru” on CNBC™ and your mail arrives 2 days late crushing your prior invesment advice to then flip, then flip again only 6 days later back to what you argued was wrong to begin with. But I digress.

So again: Why would a member of the Fed suddenly resign?

Unless?

And that one word, much like the one line from the movie speaks volumes. The difference this time? It’s not in a fictional setting – it’s reality. And what it portends doesn’t have anything close to the intention of any movie. e.g., entertainment.

No, these signals are troubling at their root cause. i.e., the realization that the entire monetary system may in fact be teetering on the verge of chaos. And the finger-pointing has already begun directed squarely at central bankers, and in particular the Fed.

The abdication, its timing, along with its terse reasoning reinforces the argument that things are not as “great”, or “under-control” as the powers that be (e.g., central bankers) would have one believe. Especially from an institution that is supposedly hell-bent on making sure “signaling” or “policy” interpretations are delivered in a manner as to not be misconstrued.

From the outside looking in, it would appear either someone didn’t get that memo, or didn’t care. The only thing more concerning is, if they did – and still didn’t care.

Again, there seems to be far more to this resignation by the very manner in which it was brought forth. And that’s not an “interpretation problem” for others to overcome. No: That’s a problem of interpreting at face value anything now emanating from the Fed. Period.

Why? I’ll propose it’s occurring at precisely the exact wrong time where “believe” and or “trust” that the Fed knows or understands the implications of its decisions are needed. And what are the current Fed “smoke signals?” Utter shambles for anything resembling coherent, concise messaging.

Think I’m exaggerating or being hyperbolic? Fair point. Here’s just a few of the prevailing “arguments” one needs to try to decipher when attempting to understand current monetary policy and what it may, or may not, portend for the future.

One down, (e.g., Mr. Turullo) how many will follow? e.g., Is Fed Governor Lael Brainard next? After all, Ms. Brainard was not only an ardent supporter of Mrs. Clinton, but she also appears misaligned with current policy messaging. i.e., not too keen about hiking rates.

Or how about other arguments, along with statements such as this from Vice Chair Stanley Fischer when responding to a question about future fiscal policy which may, or may not, be forth coming in the U.S.:

There is quite significant uncertainty about what’s actually going to happen, I don’t think anyone quite knows.

To me, the real trouble was what followed when he said:

At the moment we are going strictly according to what we see as our responsibility according to law.

So, maybe it’s just me. But I’m quite sure that his boss, Chair Yellen, quite confidently alluded to at the last FOMC presser exactly what was needed and forthcoming, regardless of what came out of the current administration. i.e., three rate hikes (via the Dot Plot) and possibly even more should they (the Fed) see fit to react to anything “fiscal.” Has that changed? Again? And if it hasn’t? Is that still not an even bigger problem for the “markets?”

If the above referenced conference and articles are any clue the messaging and signaling are bordering on incoherent. Again! Think there’s no reason to “panic” if you’re on the inside, let alone trying to gain insights from the outside looking in?

Remember when the scariest notion viewed by Wall Street was the possibility that the Fed would even consider, let alone float the idea of winding down its balance sheet first, before exhausting all other “tools” or options? How many “think tank” aficionados along with the gaggle of Ivy Leagued Ph.D economists touted such a thing as “crazy talk” when the notion was ever brought up?

This even caused the former Chair to take to the keyboard on Jan. 26th 2017 and ask (or plead) that it wasn’t so. Can you say “Oh, Oh?”

From St. Louis Fed. President Bullard’s discussion on 2/9/2017 for 2017 Monetary Policy. To wit:

Now that the policy rate has been increased, the FOMC may be in a better position to allow reinvestment to end or to otherwise reduce the size of the balance sheet.

So, are we to infer that if we are to get only one or two rate hikes, what we might actually see concurrent with that is the only other thing deemed even scarier in the eyes of Wall Street, e.g., selling by the Fed rather than buying?

Again, can you say, “Oh, Oh?” Or is this all “conspiracy”, “tin-foiled” cap wearing crazy talk? Could be. Or, it could be fiction transforming into reality straight out of a scene in “Margin Call.” After all, as of November 15, 2016 Mr. Tarullo’s position was to carefully watch market reaction to the Trump administration. And his conclusion?

Hint: Re-read the first paragraph while remembering: When it comes to “bag holders” that’s not in their job description, that’s yours.

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