Panic In Needle Park – Janet Yellen “The Dealer” to the Rescue

By David Nelson, CFA

It’s been seven years since I referenced Al Pacino’s first movie “Panic in Needle Park.” In August of that year I wrote an article for Minyanville discussing the Fed’s injection of funds into the financial system.

This was of course the early days of the mortgage crisis which later morphed into a full blown financial meltdown. Panic in Needle Park chronicled the lives of New York City heroin addicts and their dependency on an unending supply of junk. Every waking minute was spent worrying about your next fix. An addict’s life revolves around the dealer hoping they’ll show up with fresh supply.

Fast forward nearly 7 years later and it seems not a lot has changed. Today, investors still look to the dealer who lives on Constitution Avenue NW behind the hallowed walls of the Federal Reserve and ask this question; “Janet, are you holding?” If you didn’t understand that last phrase you’ve obviously have led a sheltered life. I come from the music industry so I still remember the lingo. Addicts will tell you, knowing the fix is available if needed is just as important as getting it. Janet & Co. made it clear that if necessary she will be ready needle in hand.

The most important indicator for the Fed continues to be the stock market. Whenever it falters you can count on them to at least jaw bone it higher. The reaction to the FOMC minutes shows just how concerned investors had become in the last few weeks. Relieved, traders continued buying throughout yesterday’s session especially in beaten down tech and biotech stocks.

Walking it Back

The Fed went out of its way to walk back the hawkish comments from the last meeting. In the space of a few hours, the market shifted from believing rates are going higher in the first half of 2015 to later that year; possibly even 2016. The Fed’s Charles Evans has been quoted saying; “it should be at least 6 month’s between the end of QE and a rate rise.” He is also on record stating the Fed hasn’t been aggressive enough.

After reading all 13 pages of the release the page that made the most sense was the disclosure, which basically says the previous 12 pages could be wrong.

During the last couple of weeks I’ve discussed some of the other concerns weighing on markets. Hedge funds rocked by a rotation out of some of their favorite names decided to take down their leverage and other investors became uncomfortable with just how far the valuation envelope has been pushed in some stocks. It seems obvious now that markets were also concerned about the timing of the first hike in the Fed Funds rate.

Moving the Goal Posts

Ever since the depths of the financial crisis, inflation has been a key component in shaping Fed policy. Even the IMF has lowered inflation expectations around the world. Until we see it running close to target it seems clear the Fed will remain accommodative. I hope the current forecast proves wrong and just a cautionary statement to calm the markets. Postponing until 2016 will be a clear signal the economy is too weak to reach escape velocity.