Opinion

The Fed Is the Bubble

Occam’s Razor: The simplest explanation is often the best explanation. In this case: The Fed panicked in December and by caving to markets reignited the bubble in a major way and now they are losing control as they are trapped and twisted in their own narratives. No rate hikes until 2020 but markets are printing new all time highs less than 4 months following Powell’s famous balance sheet flexibility cave on January 4th, just a couple weeks after President Trump told him “to stop the 50Bs” on twitter.

And markets have done nothing but gone up since then:

But this appears to be only act one of the drama. Now a mere weeks after a constant drum roll by Kudlow and Trump demanding the Fed to cut rates by 50bp the Fed may actually do just that according to Nomura.

Such a move would surely end whatever may be left of the Fed’s “independence” credibility which one can critically question already following the December cave. Loss of credibility being ironically one of the key risk factors Deutsche sees as a threat to the expansion:

Whether they will cut rates at this meeting or not is speculative, but fact is global growth is slowing still and markets are pricing in a rate cut:

The Fed has already made itself the market’s play thing and hence can’t ill afford to disappoint markets this year and consequently the Fed faces a perhaps impossible choice this week:

Cut rates here by 50bp could only exacerbate the bubble and set markets onto their combustion path following a total credibility loss.

But disappointing markets this year could well set the stage for a larger selloff the Fed is so desperate to prevent at every turn, especially now that the Fed has fueled the most vertical rally in this cycle:

So now they’re trapped. Inside the bubble the Fed itself helped create. No, the market is not the bubble. The Fed is the bubble and they’ve blown up markets all around them.

And as a result:

But no worries, The Fed is already tinkering on the next version of QE.


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19 replies »

  1. The Fed tinkering via this new Standing Repo thing amounts to pushing the jello around the plate. There is no substitute for the real thing. Real money mainlined right into the financial system. The propeller heads at the Fed came up with a whole menagerie of special ops leading up to the 08 crash and ended up making it worse because it actually shrank the balance sheet and and starved the Primary Dealers. Those plans bypassed the Dealers. Evidently, well hopefully they were too dumb to know the very last thing you want to do with financial stress building is to starve the Dealers. I say hopefully because otherwise they pushed the crisis to be as bad as possible. Which from a strategic perspective was a win since their power has only grown.

    I’m sticking with dumb however.

  2. When this bubble burts…it will be the end of the “debt system” we live in…because the central banks will be powerless

  3. “The Fed owns the next crash.” – Exactly!

    Somehow they didn’t own 1929, 2000, 2008-9; they got off scot-free. Taxpayer bailouts all around.
    Somehow the nation endured The Great Depression, The Dot Com Bust, The Great Financial Crisis, and likely soon, the collapse of The Everything Bubble.
    Somehow the Fed has endured for over 100 years, as we’ve had to endure the inflation, financial repression and other machinations of the Fed. I don’t think the situation is any better for the rest of the OECD countries of the Western world in dealings with their own central banks.

    There is now a definite anti-Fed bias within the financial community, esp. those whom I respect; they see the Fed as the sovereign of “The Emperor’s New Clothes.” Author included. This is the zeitgeist of a growing, but vocal minority. It may be that the tide is turning. Quite possibly this time could see The Great Reset of the financial system. We’ll know soon enough.

    Fool me once, shame on you; fool me twice, shame on me; fool me thrice (?)

    “The spirit of Sauron endured. His life force is bound to the Ring, and the Ring survived. Sauron has returned. His Orcs have multiplied. His fortress of Barad-dûr is rebuilt in the land of Mordor. Sauron needs only this Ring to cover all the lands in a second darkness. He is seeking it… seeking it and all his thought is bent on it. For the Ring yearns above all else, to return to the hand of its master. They are one; the Ring and the Dark Lord. Frodo… he must never find it.” – Gandalf, Lord of the Rings: The Fellowship of the Ring 2001

    “The statesman who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.” – Adam Smith, The Wealth Of Nations, Book IV, Chapter II, p. 456, para. 10.

    “There is no art which one government sooner learns of another than that of draining money from the pockets of the people.” – Adam Smith, The Wealth Of Nations, Book V Chapter II Part II, Appendix to Articles I&II, p. 861, para. 12.

  4. Simple solution for US. Only buy value. If it’s any distance above its long time average PE, don’t touch it with a bargepole.

  5. The central banks make our “system” very similar to communism, where a small group of people and corporations basically have all the power. We simply don’t live in a capitalist system due to the existence of central banks.

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