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“These contradictions are not accidental, nor do they result from ordinary hypocrisy: they are deliberate exercises in doublethink” – George Orwell

Morning stock market summary

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In foreign relations, a policy of strategic ambiguity can often be effective.  Conflicting messages regarding responses to a potential action leave all actions on the table and keep the parties involved guessing regarding any reaction you might have.  The US has been employing this strategy with respect to China and Taiwan. Over the years, various officials have repeatedly given conflicting messages regarding how we would respond to a Chinese invasion or if Taiwan sought to declare independence.  By doing this, it keeps China from invading under the threat of a US military intervention, but by also supporting the one-China principle, Taiwan has refrained from declaring independence from China. It may not be a long-term answer, but in the short term, it maintains the status quo.

One area where a policy of strategic ambiguity may not be as effective is in the handling of a banking crisis.  Within the span of under 30 minutes yesterday, we saw the heads of the Federal Reserve and US Treasury give somewhat conflicting signals regarding the US banking sector.  At 3 PM Eastern, Treasury Secretary Janet Yellen told a Senate Committee that she is not considering a broad increase in deposit insurance at US banks. Besides the fact that she made somewhat contradictory remarks just a day earlier, her statement seemed to be the complete opposite of FOMC Chair Powell who said just a few minutes later in his post-meeting press conference that the Fed has the tools to protect depositors and is prepared to use them in order to safeguard deposits. Given the conflicting signals, most rational investors would not stay put thinking that there is a good chance their deposits are safe, they would step on the gas and get out of dodge!

The conflicting signals given by Powell and Yellen yesterday certainly didn’t instill a whole lot of confidence on the part of investors, and that helped spark a sharp late-day sell-off in equities towards the close. From the end of Powell’s press conference through the closing bell, the S&P 500 sold off more than a full percent to finish right near the lows of the day.

Powell made another subtle shift in his messaging yesterday.  While he has tended to kick off prior speeches lately with an adamant anti-inflation message (remember Jackson Hole), that wasn’t in yesterday’s speech. Instead, he used the opportunity to highlight the ‘decisive’ actions taken by the Federal Reserve and Treasury to address and contain the crisis and keep the banking system ‘sound and resilient’.  If you thought the omission of the anti-inflation message was a sign of a more dovish Powell, though, he tried to dispel any notions of that when he closed out his press conference with the statement “I mentioned with rate cuts, rate cuts are not in our base case. And you know, so that’s all I have to say, so.” Always keep them guessing!

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