The goal laid out for reducing the enormous balance sheet build up of the Federal Reserve was presented in much the same way any-and-all prospective Fed policy dictates are. i.e., “We got this!” The problem that has been inherent in nearly every one is they seem to have anything but.
The Fed’s balance sheet was nearly 4.5 $Trillion when this all began. Hint: It’s on its way back to where it began – and that’s if it stops there, or rather, stops at all.
Confused? Don’t be. For this is where simple math like 1+1=2 is still relevant and useful, even though the underlying “money” being counted was created ex nihilo. But that’s for another column.
What many of the so-called “smart crowd” seem to forget (intentionally, I’ll insinuate) is that the schedule for this process, combined with another schedule known as “raising rates,” was all put forth in 2017 via then Chair Ms. Yellen.
What this same crowd, in-addition, conveniently never recalls, is that it was none other than the entirety of the FOMC that backed up Ms. Yellen’s 180º about-face with their votes for approval to implement such.
In October of 2016 Ms. Yellen was arguing to run a “high pressure economy” (Fed speak for lower for longer rates and high balance sheet level continuance) when it was virtually assured via the polls and press that Ms. Clinton would emerge victorious.
Then the exact opposite happened, and the Fed then announced they were now “Hawks-R-U.S.” complete with a detailed schedule of implementation for reducing the balance sheet, along with signalling that rates would now rise – and fast!
Funny how that happened, no? Pure coincidence, I’m sure. But then another “funny” thing happened: the “markets” rocked higher. Why?
Hint: the possibility of the proposed tax cut policy actually happening superseded anything the Fed was scheduling. Because if it passed (and I was skeptical it would, at best) it would again, supersede, or said differently, allow front-running positioning for earnings, where the term “EPS beat!” could be relentlessly hammered, and was. Even though it was nothing more than another mirage. i.e., Top line and bottom line misses now had even more “plaster” available to cover over poor performance.
But the above was nothing more than a one time thing. And ever since (i.e., Jan 2018) it’s been welcome to the “new reality” where the “markets” have experienced no higher euphoria’s than where it basically was two years ago.
However, that’s if you conveniently forget to consider the down side realities, since. Because once you begin looking back at those? The term “near death experiences” is what seems to have come to the mind of the Fed more often than not. To wit:
The above chart is of the S&P 500™ as of Friday’s close represented by weekly bars/candles since the end of 2017.
As one can clearly see, since Mr. Powell was handed the
bag baton from Ms. Yellen, the “markets” have basically gone nowhere.
Again, that is if you don’t consider “free-falling onto the abyss” type gyrations as nowhere. When you include those we’ve had +10% as well as 20%. All the while remembering – that’s to the downside, not up.
When it comes to up? It’s a bit less that 2 percent per year. Yes: 3.9, and that’s over two years. So, if we do a bit more math, that equates to a bit over one one half % per year.
So now with that in-mind as a benchmark, that would imply that the best the market has done in, two years, is the equivalent of matching two rate cuts, so far.
Does that even qualify for a “T-shirt?” But I digress.
“So what about the new ‘NotQE4’ QE? Doesn’t that imply we’re going higher?” you ask.
Great question, but the answer may not be as “great” as most want to infer.
The issue here is the best any new “QE” (even if the Fed wants to laughably argue it’s not) appears to be able to do, is about the equivalent of throwing life preservers into an already sinking armada of once considered “blue chipped” entities.
In other words, not everyone is going to be saved. And the first to be abandoned has already been decided. i.e., The entirety of the “disrupter” class known as “cash burning” vessels.
I’m of the opinion, we’ve already moved past, the beginning of the end, when it comes to these lunacy enabled entities. The WeWork™ IPO debacle was just the one that brought it all to the forefront. For the once unquestionable or unshakable business ideas such as Uber™, Snap™, Spotify™, Lyft™, just to name a few, have been taking on “water” ever since their debut.
And they’ve been sinking, in unison, ever since.
What used to transpire the moment the Fed announced anything just implying, let alone, actually following through on anything resembling more “easy money” over the last decade. Entities such as these would would immediately rise in hype for immediate investing to help push up “valuation” metrics.
Today? It appears everyone can’t get out of them quick enough – literally.
One of the most important sectors to watch for possible clues to the health of the “markets” has always been the banks. And the “banks” pretty much just finished their biggest reporting week and the results are about flat, but the guidance is anything but. It’s negative.
Now we await the others of the most vaunted set known as FAANG.
Netflix™ has since reported, and the entirety of the mainstream business/financial media trampled over their mothers to get to the nearest camera, microphone and keyboard to express how they were still “knocking it out of the park” based on their European sign ups, as the stock surged up +10% after hours.
Then, the very next day, it appears those that no-longer believe this crowd (just look at their ratings for proof, that is, if you can find them) sold that “news” horns-over-hooves erasing the entirety of it and then some.
Can you say, “It’s different this time?”
Speaking of “different,” what else truly is, is that the Fed would still like you to think that it’s the sole arbiter of the “autopilot” meme. It would appear, once again, that their calculations are wrong. Why?
Because here we are, precisely one year later, where the Fed has completely reversed itself on every stance it was proclaiming – and it appears so to has the “market.” Or said differently…
From buying every dip before earnings on “autopilot,” to selling every rip after, using the same vernacular.
All I can say is: Happy anniversary!
© 2019 Mark St.Cyr
Addendum: I erroneously calculated the year over year math originally at less than 1% per year. It’s actually just over resulting in 1.95% per year. The math has been corrected, but the argument and implications remain precisely the same and are unaffected.