Is The Fed Trying to Stop A “Market” That Has Gotten Ahead of Itself?
A few years ago, you were laughed at for calling the stock market a bubble. Now everyone, even the financial mainstream media is calling it a bubble and continuing to openly promote it. A few years ago, you were laughed at for saying that the monetary policy experiments that the Fed and every other central bank embarked on would be a failure, and would not lead to any growth and only reinflate the previous Fed induced asset bubbles. Even former Dallas Fed President Richard Fisher called QE “a massive gift for the rich” because they are the only ones to have benefited from it. Now everyone, even the financial mainstream media and politicians are openly agreeing on that fact, with talk of record income inequality all the rage.
So where are we now? Well, nothing has changed. Markets continue to surge to new record highs on a daily basis, all on hope, while growth remains MIA. PE ratios are at levels not seen since 1929, the Dot com boom, and 2007. Volatility is at record lows. It has been 100 days since the “market” has had a 1% drop. Complacency continues to reign supreme. And, as we have seen, everytime markets have dropped (ie brexit etc), the Fed and every central bank stepped in with either verbal or actual intervention to prop stocks back up. Meanwhile in the last few years, you were also made fun of if you said stock prices were the Fed’s true mandate. Then as time has it, even Minneapolis Fed President admitted that the Fed has a third mandate and it’s financial stability. But in the same speech he went on to say ” we are keeping our eyes open for asset prices to try to look for signs of bubbles…..very hard to see asset bubbles in advance.” Which of course, is a complete load of shit. In 1999, Alan Greenspan uttered the following: “bubbles generally are perceptible only after the fact. To spot a bubble in advance requires a judgement that hundreds of thousands of informed investors have it all wrong. Betting against the markets is usually precarious at best.” It is truly funny because it has been Fed policies in the last 20 years that have led to 3 bubbles. Stanley Fischer even set up a bubble spotting team in 2014 to “spot asset price bubbles”, but we haven’t heard anything since then. Yellen even gave up on talking about asset valuations, saying in December ” I do not want to comment on stock prices”, which was funny because on multiple occasions in the past her comments/warnings fell on deaf ears.
So here we are, 8+ years since the last crisis, where we had rates at or near zero with only 2 rate hikes in that time (since 2006), with new reinflated asset bubbles across the map (houses, cars, stocks, art etc.) Then a strange thing happened. February 22nd FOMC minutes were released, where they said some noteworthy things, but nothing new. The FOMC even commented on the “low levels of implied volatility” saying the equity markets appeared “inconsistent with the uncertainty attending the outlook for such policy initiatives” But, after the release, March Rate Hike odds dropped briefly below 40% and remained around there. The markets didn’t care about the normal bullshit talk from the FOMC about “gradual” rate hikes. Then this week came, and we have had 4 Fed officals come out and talk up a March rate hike (Brainard, Kaplan, Harker, Williams, & Dudley). March Rate hike odds exploded, sending odds of a March hike to 80%. So what gives? The only thing that even makes remote sense is that the Fed has realized stocks have gone up way too fast, and are trying to slow it down. But is it working? Nope. Trump gave an address to congress last night, and that sent stocks, and global stocks, to new record highs, even though nothing new was promised. As previously mentioned in previous posts, the Fed created the Frankenstein market, and now the monster they have created is not listening. Markets will probably continue to surge higher on hope, and even if it does drop, market participents know that no matter what, central banks have their backs….until they don’t. The next few weeks will be interesting, as the March FOMC meeting slowly approaches. Meanwhile, continue buying stocks, DOW 36,000 here we come!