Wolf Richter: Afraid of Losing Trillions, Wall Street Fights Fed Rate Hikes

Lambert here: Party on, dudes! (It’s also interesting, in zeitgeisty sort of way, that Lucien Freud’s pricey “Benefits Supervisor Resting” is a portrait of an obese female government worker, instead of, say, an equally obese male hedgie. But no doubt Freud knows his market.)

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street.

Since last week, $2.1 billion worth of artworks have changed hands at Christie’s and Sotheby’s in New York. “Les Femmes d’Alger (Version ‘O’)” by Pablo Picasso sold for $179.4 million, highest price ever paid for a painting at an auction. The bronze, “L’Homme au Doigt,” by Swiss artiest Alberto Giacometti went for $141.3 million, a record for a sculpture.

There was Mark Rothko’s abstract painting “No. 10,” for $81.9 million, another Picasso, a Van Gogh, Lucian Freud’s “Benefits Supervisor Resting,” for $56.2 million, an Andy Warhol, Claude Monet’s “Nympheas” for $54 million, a Francis Bacon for $47.8 million, Rothko’s “Untitled (Yellow and Blue),” which describes it perfectly, for $46.5 million. It was an international feast of money: At Christie’s, there were bidders from 35 countries, at Sotheby’s from over 40 countries.

These sales will goose second quarter GDP by over $2 billion, not counting the money spent on luxury hotels, restaurants, parties, transportation, gifts, and the like. This is how the “wealth effect” is supposed to work – cranking up the real economy. Central banks, and particularly the Fed, which instigated it, have been saying this for years. We grudgingly admit the “wealth effect” worked. This side of the economy is hopping.

It so happens that the St. Louis Fed, which apparently hasn’t gotten the memo, reported that “the middle class may be under more pressure than you think.” It determined that the “middle class,” as defined in the report, has seen its median income fall by 16% between 1989 and 2013.

Yet there’s a problem in this gorgeous scenario: the Fed has stopped QE last year and since then has been engaged in a veritable cacophony about raising rates. It could end the party. Bonds, stocks, and art could crash. Fed heads have vaguely threatened to do it for months but keep pushing that vague threat further into the future every time the market backs off its all-time high just a little.

“The decision to raise rates is actually three decisions: Not just when, but how quickly and how high,” explained San Francisco Fed President John Williams on Tuesday. He’d go into the June meeting in a “wait and see mode,” he said, playing down the crummy Q1 economic data as transitory. “I see a safer course in a gradual increase, and that calls for starting a bit earlier.”

New York Fed President and vice chairman of the FOMC, William Dudley, chimed in with an ominous undertone: when it comes time to raise rates, it will bring on a “regime shift” that will stir markets, he said.

Fed heads have been doing this for weeks, some more dovish, others with hints of market turmoil as an inescapable consequence. Get used to it, they’re saying.

So long-term bond yields have soared. The German 10-year yield made a spectacular move from 0.05% to 0.71% in a few weeks, and prices have plunged from insane highs. According to Bloomberg, “more than $400 billion” went up in smoke in May alone. Investors that bought at the peak of the ECB’s QE-momentum gravy train have gotten run over. And yet, almost nothing has happened so far; yields are still ludicrously low.

This sort of thing scares the Fed-pampered denizens of Wall Street. For years, bonds and stocks have done one thing: go up. No matter how vertigo-inducing the new high, there would always be another one shortly thereafter, even if yields would have to become negative.

All this is happening just when everyone is fretting about how liquidity will evaporate the instant the real selling starts. There simply won’t be many buyers crazy enough to bid at prices that are at survivable levels for sellers. That’s scary to them; they’d actually have to face some risks.

And so they’ve been fighting back with all their might against the very notion of ever raising rates. Temporarily shorting German bunds is one thing. But losing a few trillion dollars and never be able to make them back is another.

They’re pushing in a variety of ways. For example, Potomac Research Group, in a note to clients, trotted out former Fed Vice Chairman Donald Kohn, now on Potomac’s payroll. He figured, given his Fed experience, that a June rate hike was off the table. This was then promptly passed on to the media.

The purpose is to create market expectations that the Fed won’t dare to disappoint in order to avoid a major tantrum. And it’s working, of sorts. While long-term rates have risen, short-term rates, which reflect what the market expects the Fed to do, have not. Bloomberg:

On Thursday, futures contracts were implying that traders saw the fed funds rate at about 0.3% rate by December. That’s the lowest estimate of the year, and about half the forecast for the overnight lending benchmark that the Fed gave in March.

The market is essentially calling the Fed’s bluff. Traders are betting that policy makers won’t be able to raise rates this year without disrupting stocks and bonds, something that they’d really rather not do.

Not to speak of art, housing, VC portfolios of billion-dollar startups with no sales, Silicon Valley…. Everything is on the line.

Over the many months that this cacophony has lasted, expectations of rate hikes have been moved from early 2015 to June 2015, then September, and now further out. There simply cannot be any rate hikes, ever! The party must not end. And these players are threatening the Fed with a “market-wide tantrum” if it does raise rates in June, or whenever. What remains to be seen is if the Fed can develop a mind of its own, at least occasionally, or if it admits to being just a bunch of figure heads, put in place to serve Wall Street’s whims and desires.

But there are consequences. By now, how many years does it take to save up for a down payment in major US cities? Are you sitting down? Read… How Soaring Housing Costs Impoverish a Whole Generation and Maul the Real Economy.

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. John Candlish

    Are there consequences? Mr Richter completely misses Adjustable Rate Mortgages, and Variable Rate Hypotheks that we have here in Europe.

    Most in the middle class are poorly equipped to suffer an increase in their ‘fixed’ housing expense.

    I would think that any rate hike would hit these people (human shields) first.

    1. Christer Kamb

      Even worse in some european countries. In one of them rising houseprices is financed abroad(>50%) in euros&dollar and swapped from long-term to short-term variable rates. Most borrowers prefer variables only (connected to cb repo-/interbank-rates). In one of the smaller countries the cb has borrowed an extra 100 billion dollars in case of dollar shortness(again like 2008). People borrow down to 1,8% with very small amortizations-plans(if any in the years before). Right now houseprices rise in an almost exponential “last phase” eruption.

  2. MikeNY

    Rothko was a one-trick pony. Lucian Freud is overrated, IMHO.

    I will wonder if Picasso ever painted a lamp-post. Or a guillotine.

    1. JEHR

      MikeNY, when you make a blanket statement like that, I wonder on what basis you make it. People have sat in front of a Philip Rothko and cried because of its power. Lucian Freud masters brush strokes like few others can. Picasso painted in so many different styles and for so long that I am sure he painted at least one lamppost and one guillotine, for your benefit, no doubt.

      1. MikeNY

        De gustibus non disputandum est. I think I made it clear that it was my opinion. I have no right to that — or am I supposed to parrot the opinions of every Clement Greenberg in the world as revealed truth?

        It is my opinion that Rothko is a one-trick pony. Usually one or two blocks of color, some variation around the border. It’s supposed to be ‘mystical’, according to Rothko’s own claim, and that of his admirers. That was his entire career. Nowhere does he show the intellectual curiosity, versatility, restiveness or daring of — e.g., a Picasso. And yes, I have been to the Menil chapel.

        Wrt Freud, I see him as a painter of highly stylized and usually grotesque portraits but without the technical ability of a Chuck Close, and without much psychological penetration. In this sense, he reminds of Botero. It is a style, I will give him that.

        YMMV. To my knowledge, aesthetics is not yet a ‘hard science’.

        1. DJG

          MikeNY: I used to be somewhat similarly skeptical of Barnett Newman, but then I saw a major retrospective at the Philadelphia Museum of Art (a great unsung museum). The show was astounding. His “Achilles” is one of my favorites.

          Many ironies about Picasso, who was a committed communist for many years and made no secret of his disdain for Franco and Franco’s gang.

          At least Picasso was astute about money. Poor Giacometti. He was notoriously austere. Millions for one sculpture? Money he never saw. It’s bizarre.

          1. MikeNY

            Yes, agreed, Picasso new how to make a buck — and did. Dali was pretty skilled in that department, too. God knows Warhol, whom I love.

            I admit there may be something much more, and deeper to Rothko than I can see; I even made the trip to the Rothko Chapel in Houston to try. But I don’t see it: he seems to me do be doing the same thing over and over. It’s not that I detest him; I just don’t see much there there.

            I feel like I should quote Peggy Lee…

            1. bruno marr

              Interesting that Mike would conjure Gertrude Stein (no there there). She lived in Paris, France during Picasso’s artistic endeavor. Her literary work is an example of fine art influencing literature. (The “no there there” was referring to Oakland, CA (birthplace), not to art.)

      2. bruno marr

        Excellent comment. Pablo Picasso could draw angels’ better than Angel’s. His lesser known sculptures (apart from his painting) are absolutely brilliant. (Yes, some folks are unmoved by his work, but they’re few.)

      3. Jack

        I just looked this Rothko guy up. Seriously? This lazy nonsense is what people call amazing art? You’re being taken for a ride.

      4. Alex

        Many of Rothko’s paintings (especially the ones where the whole canvas is filled with one or two or three regions, each painted in a different color, and that is all) belong to the category of “Emperor has no clothes” approach by art lovers. There is nothing there that cannot be done by a 6-year old, but yet the sentiment is that something MUST be there because the Very Important (and serious) People have expressed their enthusiasm of the supposedly deeper meaning

        1. Lambert Strether Post author

          The trope that “my six year old could have painted this” is quite old and a staple of Philistines in every age. I’m not a Rothko fan, but I have seen his paintings, and no, your six-year-old could not have done them.

          1. Alex

            While art is always subjective, there is a very straightforward test to distinguish whether a piece of art (or bottle of wine, etc) is appreciated by individuals mainly because of “brand”, history, etc. or mainly because of its quality. As you already guessed, I am talking about “blind” test.

            Think along the following lines: “What would I think about this painting (or wine, etc.) if I would not have known anything about its history, author/producer, label, price, and so on?”

            There are definitely Rothko paintings that would pass this test for me, but many other Rothko paintings would not. Example of paintings that would not pass (at least for me)


    2. curlydan

      I think most might agree that Houston is not much of a tourist town, but if you’re visiting, I recommend going to the Rothko Chapel and sitting inside for 15-30 minutes–it might help explain some of his other work. It and the neighboring Menil Collection are two of Houston’s highlights.

  3. Jim Haygood

    ‘These [art] sales will goose second quarter GDP by over $2 billion.’


    A product will only be counted in GDP one time in its life. So, current transactions involving assets and property produced in previous periods are not counted in the current GDP. For instance, if a laptop produced in the year 2000 is resold in 2006, the GDP of 2006 will not include the resale value of the laptop because this is a mere transfer of ownership entailing no creation of new value.


    1. Whine Country

      The earnings of those in the service industry who cater to the rich and famous by putting on these auctions do essentially receive a trickle up effect so to speak from the year the painting was produced to the year it changes hands…again and again! And the profits that are received by those who part with their precious paintings can then be spent on things that do go in to the calculation of GDP. It is definitely not a non-event as you have portrayed it.

    2. Tinky

      Wait – what? Are you suggesting that such rules are actually being followed when the Government calculates the GDP?


    3. Ben Johannson

      That’s simply not true, nor is the following paragraph at the link. Transfer payments are counted as consumption spending rather than government spending which the author appears to have missed.

      1. Ben Johannson

        Correction: Hayward is correct that Wolf gets the “goosing GDP by $2 billion” incorrect. I thought Wolf had specified profits as adding to GDP but he did not which serves me right for going from memory and not checking.

  4. susan the other

    It was pressure on and from Wall Street, coming from the WTO, and wage inflation hysteria here, that achieved the looting of our means production and the offshoring of our jobs. Now we have a very sick economy, with some 95 million of us unemployed. We are in an undeclared depression. Caused by “investors” wanting to insure the dollar will be a strong currency. Almost as if the dollar were the be all and end all of economix. If there is a quintessential one-trick pony it is not Rothko, it is Wall Street investors who are now trying to double-down with the TPP and the TTIP. And Hillary blablablabing about how we need to get competitive. But in order to get competitive we need to lower the value of the dollar. And, oh yes, we need to have industries and jobs. What a joke. So now that any semblance of a stable economy is hopeless, the only choice the Fed has is to feed the beast. If Wall Street goes down, it’s all over. Actually housing might also be a one-trick pony.

    1. susan the other

      Did anybody notice the blurb on ZH about the big UN conference on sustainability. The Pope is scheduled to speak. Francis is a cool guy as popes go. I don’t have a beef with him. But I almost see the UN being set up to be the scapegoat for more environmental destruction because they are so easy to pick on. New sustainable infrastructures and industries would be a good goal. Since we are never again going to see the ravenous growth of the last century… and all the inflation that pushed it.

  5. ewmayer

    What remains to be seen is if the Fed can develop a mind of its own…

    I ain’t holding my breath. Repeat after me: THERE IS NO EXIT STRATEGY, there is just hot wind from the paid jaw-flappers.

  6. RBHoughton

    The question is “whose going to be first?”

    It can’t be the Fed, ECB, BoE or BoJ, its just too dangerous.

    It will have to be some smaller currency-issuer, one reasonably confident investors will not instantly flee.

    Who on Earth can that be?

      1. Nathanael

        The UK is primarily run as a tax haven for big corporations. The Tories especially are super-afraid of investors fleeing to (New York, Hong Kong, Shanghai, Tokyo, Amsterdam, Paris, Frankfurt) and will definitely not be the first. Also the UK prints its own money so it doesn’t need cash flow.

        It’s actually going to be the ECB. The “golden handcuffs” of the Euro treaty mean that they can’t print money the way sovereign nations can, and at some point they’re going to have weird budgetary problems if they don’t raise rates. This is why they *already* raised rates (and then backed down as the economy crashed).

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