Fed Caves – Bulls Run


I could almost just reprint last week’s newsletter as not much changed during the week.

“Importantly, the previous deep ‘oversold’ condition which was supportive of the rally following Christmas Eve has now been fully reversed back into extreme ‘overbought’ territory. While this doesn’t mean the current rally will immediately reverse, it does suggest that upside from current levels is likely limited.”

As I discussed previously, what was needed for the bulls to gain control of the narrative were several important issues:

  1. Central bank activity reverse from restrictive to accommodative,
  2. Washington to back off of “tariffs” and “trade war” rhetoric, and;
  3. The Federal Reserve to continue its more “dovish” stance.

Last weekend, we noted evidence of those changes. This week, the markets were given the clearest sign yet that the Fed, and Central Banks globally, were all too ready to come to the markets' rescue.

It started with a WSJ article suggesting that the Fed would not only stop hiking interest rates but also cease the balance sheet reduction which has been extracting liquidity from the market. This was quite the change as noted in an early morning tweet.

In mid-2018, the Federal Reserve was adamant that a strong economy and rising inflationary pressures required tighter monetary conditions. At that time they were discussing additional rate hikes and a continued reduction of their $4 Trillion balance sheet.

All it took was a rough December, pressure from Wall Street’s member banks, and a disgruntled White House to completely flip their thinking. 

But the Fed isn’t alone.

China has launched their own version of “Quantitative Easing” to help prop up their slowing economy. 

Lastly, the ECB downgraded Eurozone growth and there is a likelihood that not only will they not raise rates this year, they will also extend the TLTRO program. 

(What the *** is TLTRO?)

Good question. It is the Targeted Longer-Term Refinancing Operations scheme which gives cheap loans to struggling Eurozone banks.

Think about this for a moment. 

For a decade the global economy has been growing. Market participants are crowing about the massive surge in asset prices as clear evidence of the strength of the economy. As noted last week:

“We’re the hottest economy in the world. Trillions of dollars are flowing here and building new plants and equipment. Almost every other data point suggests, that the economy is very strong. We will beat 3% economic growth in the fourth quarter when the Commerce Department reopens. 

We are seeing very strong chain sales. We don’t get the retail sales report right now and we see very strong manufacturing production. And in particular, this is my favorite with our corporate tax cuts and deregulation, we’re seeing a seven-month run-up of the production of business equipment, which is, you know, one way of saying business investment, which is another way of saying the kind of competitive business boom we expected to happen is happening.” – Larry Kudlow, Jan 24, 2019.

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