A Role for Ancient Sanskrit Scholars in Today’s Market – Ben Changes One Phrase and the Market Goes Nuts
1. An Indo-European, indic language, in use since c1200 b.c. as the religious and classical literary language of India.
To the casual observer, today’s market action is sure not to make any sense. The Fed left the federal funds rate at 5.25% but the market went nuts. Stocks are up almost 150 points (as of 3:12pm EST). Interest rates fell, gold is up, the dollar is weaker against the yen, etc…. Why?
This is where the Ancient Sanskrit scholars come into play. Ben changed the language in the press release that accompanies the Federal Reserve’s interest rate decision. Here are some of the changes:
(1) Economic Growth – Today’s statement said “Recent indicators have been mixed” compared with January’s statement which said “Recent indicators have suggested somewhat firmer economic growth”. Mixed = bad, Somewhat firmer = good; Bad = more likely interest rate cut; More likely interest rate cut = stocks go up.
(2) Housing – Today’s statement said “the adjustment in the housing sector is ongoing“. January’s statement said “some tentative signs of stabilization have appeared in the housing market”. Again: Ongoing = bad, Stabilization = good; Bad = more likely interest rate cut; More likely interest rate cut = stocks go up.
(3) Inflation – Today’s statment said “Recent readings on core inflation have been somewhat elevated“. January’s said “Readings on core inflation have improved modestly.” Elevated = bad, Improved = good; Bad = more likely interest rate hike; More likely interest rate hike = stocks go down.
So, at this point, it’s 1-1 – Economic growth and housing are worse but so is inflation. Now for the kicker:
(4) Policy – Today’s statement said “Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth”. January’s said “The extent and timing of any additional firming … will depend on the evolution of the outlook for both inflation and economic growth”. And here we have it, my friends. In January, the next move, if there was going to be one, was supposed to be a hike i.e. “additional firming”. Now, the next policy move could be a hike or it could be a cut i.e. “adjustments”.
Rate Cut: 2, Rate Hike: 1 – Rate cut wins!!!! Hoo-ray!!! Hur-rah!!! Time to buy stocks and bonds!!!!
David Gaffen over at MarketBeat cites Todd Harrison of Minyanville.com that the market’s move is a “false one”. But it just isn’t so. It’s 2-1!!!! Hoo-ray!!!! Hur-rah!!!
How things look now (3:25pm EST):
10 year Treasury: -.03%, to 4.52%
VIX: -1.5,m to 11.5 (20 minutes delayed)
Gold: up about $3, to $662.50 – increased likelihood of a rate cut is bad for inflation which is good for gold.
Dollar/Yen: -.32, to 117.54 – increased likelihood of a rate cut is bad for the dollar which is bad for the currency risk in the carry trade.
Special thanks to Jagdish Mahatma at the University of Bombay for sharing his expertise in ancient Sanskrit without which the foregoing analysis would have been impossible.
For more background on how the Fed works, specifically how it manages the trade-off between growth and inflation, see my post “The Significance of the Fed Pause: Interest Rates, the Economy and Inflation”.