The Not QE4 Is Now Nine Weeks Old

Since mid-October the Dow Jones has been at a new all-time high, or within 2.5% of one in the BEV chart below. I can’t complain about that.

C:\Users\Owner\Documents\Financial Data Excel\Bear Market Race\Long Term Market Trends\Wk 629\Chart #1   DJ BEV 2013_20.gif

Looking at the Dow Jones in daily bars below; Monday and Tuesday saw some weakness in the market, but by Friday the market had recovered almost all of its losses. What’s next? I’m still thinking the market has more to go before it sees its Terminal Zero (TZ) in the BEV chart above – the last all-time high (Last BEV Zero) of an extended bull market advance.

C:\Users\Owner\Documents\Financial Data Excel\Bear Market Race\Long Term Market Trends\Wk 629\Chart #2   DJIA OHLC.gif

The table below lists the daily BEV values of the major market indexes I follow. No new all-time highs last week, but the week closed with fifteen of these indexes in what I call scoring position; within 5% of making a BEV Zero. Twelve of them are less than 1% away from making a new BEV Zero. This is a market positioned for further advances in the weeks to come.

What are the chances this advance will continue? Right now the stock market is operating as a well-oiled machine, and as long as it continues to do so I’m expecting this advance to continue. But I’m looking for weakness in the financial indexes (#18 & 19 above) for a clue of pending disaster in the stock market. Should their BEV values slip below -20% it wouldn’t be a positive for the market. Seeing the XAU begin an advance toward its -30s would also indicate that flight capital is beginning to flow towards precious metals assets. 

No sign of anything like that yet. Looking at the dividend payouts for the Dow Jones below; this week ended with the Dow Jones paying out $636 in dividends. Earnings also continue to increase. These trends in dividend payouts and earnings are driven by monetary inflation flowing from the Federal Reserve, but then so are the gains in the Dow Jones’ valuations, and no one is complaining about that.

C:\Users\Owner\Documents\Financial Data Excel\Bear Market Race\Long Term Market Trends\Wk 629\Chart #3   DJ Dividend PO 1925 to 2020.gif

So everything is coming up roses, right? Yes, but there is a disturbing trend now developing with the Federal Reserve’s balance sheet we all need to follow.

We all knew it; that our “monetary-policy makers” would never admit they had begun a fourth round of quantitative easing, as seen three times during and following the 2007-09 sub-prime mortgage crisis.Here’s what Federal Reserve Chairman Powell said in an October 8th press conference:

“While a range of factors may have contributed to these developments, it is clear that without a sufficient quantity of reserves in the banking system, even routine increases in funding pressures can lead to outsized movements in money market interest rates. This volatility can impede the effective implementation of - monetary policy -, and we are addressing it.

“Indeed, my colleagues and I will soon announce measures to add to the supply of reserves over time.

* "I want to emphasize that growth of our balance sheet for reserve management purposes should in no way be confused with the large-scale asset purchase programs that we deployed after the financial crisis.”*

- Federal Reserve Chairman Powell.October 8, 2019

Yeah, right. Reminds me of something Robert M. Bleiberg warned Barron’s readers of in June 1979: forty years ago. As some things never change, for my readers in December 2019 I’d keep the following quote in mind as we progress towards 2020.

“To serve as a central banker, as BARRON’S again reminded its readers early last year when G. William Miller took over at the Fed, one needn’t be a flim-flam man, but it helps.”

- Robert M Bleiberg:Barron’s Managing Editor, 11 June 1979

What’s interesting is a month prior to the Federal Reserve Chairman Powell’s statement above, the Chairman of the SEC also made a public statement:

“A ripple of anxiety ran through Wall Street on Sept. 9 when Jay Clayton, chairman of the SEC, warned that corporate debt now stands at $11 trillion, half the annual gross domestic product of the United States. "Should we be cognizant of the growth in corporate debt, who holds that debt and the potential ramifications for our markets and our economy?" Clayton asked. "Of course we should."

- Hollywood Reporter, 5:15 AM PDT 9-Oct-2019 by Stephen Galloway

For my readers’ information: the banking system has plenty of “reserves.” What they don’t have are “reserves” that haven’t been trashed. Reserves that can be sold by one bank to another as these banks are still stuffed to the gills with abandoned mortgages from the 2007-09 mortgage debacle. These illiquid “assets” have never been written off, as they would have in days of old, because if they had been the global banking system would have ceased to exist as we know it a decade ago.

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