Federal Reserve Stokes ANOTHER Asset Bubble

The Incredible NON-Credible Fed


Three months ago, the Federal Reserve expected to raise interest 3 times in 2019.  At the conclusion of the Fed Meeting on March 20th, the Fed announced that it expects NO rate increases as far as the eye can see. 

Chairman Jerome Powell also announced a MUCH earlier termination of the Balance Sheet reduction. During its various QE’s, the Fed acquired both Treasuries and Mortgage Backed Securities.  Holdings ballooned from $900 Billion to about $4.25 Trillion.

Not that long ago, plans were to reduce the Balance Sheet to the $2-2.5 Trillion range.  Now, after reducing holdings by $470 Billion, the Fed announced that it will terminate the reduction by September, 2019.

In addition, the Fed has lowered the maximum monthly repurchases of Treasuries from $30 Billion to $15 Billion. The remaining balance sheet reduction will be LESS than $200 Billion leaving roughly $3.5 Trillion. (https://www.zerohedge.com/news/2019-03-20/fed-returns-punchbowl-biggest-surprises-todays-fed-decision).

The Fed’s “Market Dependence” and “Quantitative Patience”


Chairman Powell often says the Fed will be “patient”, presumably a code word for “accommodative”.  At this moment, the Fed is neither pushing Quantitative Easing or the brief Quantitative Tightening that began last year and was abruptly terminated.

Powell has also said on many occasions, the Fed would be “data dependent”, presumably an Orwellian synonym for “Market Dependent”.

The Chart on the left shows exactly how “Data Dependent” the Federal Reserve has been over the last decade.  Any market weakness has been met with massive monetary stimulus.  The Data Dependence chart exhibits the effect upon one index: The Standard & Poor’s 500.  (https://realinvestmentadvice.com/why-the-fed-keeps-propping-up-the-market/).

The Equity Bubble: US and Global

The major equity indexes are heating up rapidly.  We discussed this in our last piece.  “Four Horsemen Pull Markets to New Highs”. (https://markonomics101.com/2019/03/21/four-horsemen-pull-markets-to-new-highs/).

Despite today’s shellacking, we stand by the “target levels” revealed in that piece.  Based on the charts and “Rules of Thumb”, we projected “the potential” for the Dow Jones Industrial Average to exceed 30,000 and the Nasdaq 100 to break the 8500 level.

But, the frothiness is not just limited to domestic markets. Markets around the World appear to be only a few steps behind.  The Vanguard Total World Fund, pictured on the left, has formed the same ROUNDED BOTTOM pattern that has successfully forecast higher prices on a variety of stocks and US markets.  (https://etfdb.com/etf/VT/).

Leading the way is Brazil’s market (BOVESPA) which recently vaulted to NEW ALL TIME HIGHS.  The Indian Nifty Fifty index is close to NEW HIGHS.

Even China has surged after a multi-year BEAR MARKET. The People’s Bank of China has poured record stimulus, to shore up its markets, and successfully so.

The Bond Bubble

Almost every type of Bond has made NEW ALL TIME HIGHS or is very close.  Below is a Slide Show of Bond ETFs which are all in scorching rallies.  Some key takeaways are as follows:

  1. The 1-3 Year Treasuries ETF (SHY) is moving higher PARABOLICALLY.  Parabolic Uptrends are a sure sign of a Bubble.
  2. The 3-7 Year Treasuries ETF and the Investment Grade Corporates ETF (LQD) have also vaulted to NEW HIGHS.
  3. Only the 7-10 Year Treasuries ETF has, thus far, failed to make new highs.  In light of all the NEW HIGHS, it would seem very, very likely that it too, will make new highs.

Another Cryptocurrency Bubble?

Cryptocurrencies are the ULTIMATE asset class ripe for a BUBBLE.   Cryptos have NO inherent value, whatsoever.  Holders of Bitcoin own NOTHING.  No patents, no technology, and ZERO cash flow.

In a BUBBLE, fundamentals DON’T MATTER. Cryptos are not much different than collectibles like Beanie Babies.  That they have value, and significant value, despite their utter lack of utility, or acceptance, practically defines a BUBBLE.

The chart of the Cryptocurrency Sector shows a bottoming type pattern which turns BULLISH at $150 Billion.  By being “Market Dependent”, the FED is likely to breathe new life into an asset class that will suck in a whole new class of investors who will eventually get clobbered.  That said, if this sector takes off, fortunes could be made and LOST yet again. “Crypto Rally Imminent?”. (https://markonomics101.com/2019/02/21/crypto-rally-imminent-chart-of-the-day-15/).

Will The Fed CUT Interest Rates?

One of the best forecasters of recession is the Treasury Yield Curve.  In particular, an INVERTED Yield Curve.  Typically, shorter term rates are LOWER than longer term rates.  But, occasionally Short Term rates EXCEED Long Term rates.  This is known as a yield curve inversion.

The Fed monitors the yield spread between the 2 Year and 10 Year Maturities.  However, Wells Fargo’s bond quants consider the 1 Year to 10 year spread to be a more accurate predictor.  (https://www.bloomberg.com/news/articles/2018-07-30/treasury-1-to-10-year-spread-is-best-recession-tool-wells-fargo).

The chart on the left shows the relationship between the 1 year to 10 year spread versus recessions.  Inversions occur PRIOR to recessions, but with a fairly long lag (6 months – 18 months).

The yield curve is on the left.  While the 1 year to 10 year spread is now less than 1 basis point, other parts are VERY INVERTED.  The 1 Year to 5 Year spread is nearly 20 basis points, and the inversion of 1 Year to 7 Year is almost 15 basis points. (http://www.cnbc.com).

The Federal Reserve is well aware of the adverse consequences of an inverted yield curve.  This makes an interest CUT very likely, probably no later than the next meeting which is May 1st.

In fact, 2 cuts are likely in 2019.  Quantitative Patience only applies when rates are going up.  When they’re heading down, a nice brisk pace is preferred.  The Fed must cut short term rates to reverse the inversion. It may now be too late to avoid a recession sometime in 2020 with interest rate cuts alone.

Another probability is that the Fed completely terminates the Balance Sheet reduction as soon as the next meeting.

Could QE4 start in the second half of this year?  It may be the only means to satisfy the stock market and mitigate any looming recession.

Playing The Bubbles

Creating serial Bubbles has been the game plan of the FED since the days of Alan Greenspan.  The Fed is highly likely to go back to the well ONE MORE TIME.  If the next bubble in the series does not occur, it will be in spite of Jerome Powell’s “ever changing game plan”. .

The good news is that Bubbles, in their early stages have a plethora of trade opportunities which we’ll bring to your attention.   Information is Power and Wealth when one can possess it. Most information in the Financial Media is misleading.  That’s where we come in. And the best part is we’re free.  Consider joining our mailing list,  so you NEVER miss a single piece again.

Be Informed, Not Misled!

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