Federal reserve is signaling a rise in rates...

Today Mish mocked New York Fed President William Dudley's comments that "dreary days for U.S. economy may be over".  Mish is not buying it and neither am I.

What's Dudley suddenly on about?  Oh, nothing much.  Only that things are so rosy that the Fed is thinking about raising the interest rates in 2015.  Of course, this is something they have already indicated would be the case before.  So why say it again?  Why now?  Did things just get even "much more rosier" than last week or the week before?  Ummm, not really.  In fact, according to a very recent interview of Alan Greenspan, things really are not so hot in the global economy and the problems are structural ("structural stagnation").  Watch that video and read between the lines.  The reason Greenspan gives is lack of enough new construction and of course that means lack of enough new loans.  In other words, peak credit.  The global debt Ponzi is peaking and Greenspan freaking knows it.  He just doesn't want to use such direct language lest he be personally blamed for the coming collapse.

So again, why is the Fed repeating old news that it might raise interest rates in 2015?

Well, I think the key to understanding this is that the federal reserve breeds market confidence by giving out information to those with ears to hear.  Sometimes it is just plain old corrupt insider information that should be considered illegal to trade on.  But most of the time the information is disseminated via the good old boy communication system which goes right over the heads of Mark and Patsy.  That way the con men can have plausible deniability of any wrongdoing even though they know they are rotten to the core.

In years past with con men now long dead, that communications system would include a nod and a wink or a little nudge in the rib cage during a meeting to indicate to the recipient that seemingly unimportant information which was presented casually was actually of great importance requiring a much closer look by the recipient of the "hint".

Today that has morphed into "Fed Speak" and one of the tenets of this coded messaging system is that repetition implies increasing importance or urgency. 

In this case, the fed knows that many people labor under the view that the fed controls interest rates.  Of course, this is not true and I discussed it in more detail in this post.  The reason is simple: markets are bigger than the federal reserve.  In gambling parlance this simply means that the federal reserve is no longer the fat stack on the casino table.  In fact, Greenspan is quoted back in 2007 as saying,"the market value of global long-term securities is approaching $100 trillion" and thus these and other asset markets are large enough that they "now swamp the resources of central banks."

OK, so again, why is Dudley flapping his useless gums?  If the fed doesn't really control the rates that normal people care about (interest on car and home loans and on student loans, etc.), then why be so vocal about it in the media?  He must be trying to communicate something to those with ears to hear.

And so so he is as you can see from the 10 year treasury rate chart below.  Black 1 and black 2 of the new bull market in interest rates (bear market in treasury valuations...) are in the books.  Then we got red one (1 of 3). Then at the start of December we suddenly saw the 10 year rate stop falling an instead put in an island reversal.  You can see the island within the red oblong.  You basically gap down to a bottom and then gap up and the little unconnected piece of chart is the island.  This is a trend reversal TA sign.  Yes, the fed employs people who know how to read a chart...

If the fed says and does nothing while real life interest rates begin to skyrocket, people will see interest rates rising despite the fed holding the fed funds rate at near zero and they will say, "hey, I thought that the fed controlled interest rates but it's clear that they really don't".  A LOT of people will lose confidence in the leadership of the fed if they cannot keep interest rates low because the debt Ponzi absolutely requires them to be low at this point lest the whole corrupt shooting match go down in a fiery ball.

Well, Dudley can't change what is going to happen and so at least he needs to send the message out to leveraged market participants that the con cannot be kept going much longer.  Said differently, he needs to get in front of the actual fact by doing some good old fashioned hand waving P.R.:  "Hey folks, don't look at the interest rates rising on their own, look at me!!  I'm starting to think that we might just want to raise interest rates.  We think its about time since everything is just too rosy and perfect these days".

The smart market participants (i.e. hedge funds) are already closing down and you can see from prior posts that volume has collapsed in the markets.  Pretty soon the body of whoever is left in this scam will begin heading for the door too because as rates go higher their holding costs go up.  It's not that they will want to sell, it's that the math will give them no choice.  If interest rates rise quickly (as will likely be the case during the 3rd of 3rd of 3rd), market participants will certainly get margin calls and it will result in panic selling.

What's so interesting about right now in the interest rate wave count is that we are now entering the 3rd of a 3rd.  This is when things begin to really move quickly and get the attention of people. Prechter calls the 3rd wave, "the moment of recognition".   If these rates scamper higher very quickly then the fed is going to have to pull in its interest rate hike announcements lest the markets be given graphic evidence that the fed is actually powerless to control the economy or interest rates or anything else.  In other words, this is when the market figures out that the federal reserve is just a bunch of tired old men who have gotten their way by convincing (intimidating) the markets in the past but now the market has grown far bigger, far more powerful than the old bastards (and Yellen) running the tired old federal reserve.

A con generally ends when confidence is lost in the con men.  It won't be different this time.  Watch the 10 year treasury bond interest rate - its rapid rise will signal the end of the leveraged market participation and the VIX will skyrocket as people go running for downside protection in the form of puts.