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
Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.