Weekly Commentary: $10.275 TN In Nine Months

Money, Burn, Dollar, Waste, Finance, Fire, Investments

Federal Reserve Assets surged $120 billion last week to a record $7.363 TN. Fed Assets inflated $3.593 TN, or 95%, over the past 66 weeks. M2 “money” supply surged $228 billion in this week’s report to a record $19.226 TN – with a 66-week gain of $4.255 TN (28%). Overheated markets have become wholly enchanted by this frightening monetary inflation.

In early rules-based versus discretionary central banking debates, it was long ago recognized that discretion came with the risk of one misstep leading invariably to a series of only greater policy mistakes. This is the story of the contemporary Federal Reserve – from Greenspan to Bernanke to Yellen and now Jerome Powell. Policy doctrine has become progressively in the clutches of a runaway financial Bubble.

The Fed was out digging a deeper hole this week – an error compounded by Chairman Powell’s press conference dovish overkill. We’re in the throes of a period of precarious Monetary Disorder. This is apparent in Credit data and the monetary aggregates, throughout the financial markets and, increasingly, in housing markets across the country.

Financial conditions are precariously loose. Yet virtually everyone is convinced extremely loose monetary policy is appropriate considering the economic hardship being suffered across the United States. This thinking – utter reverence for monetary and asset inflation – has become only more perilous during the pandemic.

Powell responded to a question on elevated equities prices: “Asset prices is one thing that we look at… We published a report a few weeks ago on that… And I think you will find a mixed bag there… With equities, it depends on whether you’re looking at PE’s or whether you’re looking at the premium over the risk-free return. If you look at PE’s, they’re historically high. But… in a world where the risk-free rate is going to be low for a sustained period, the equity premium, which is really the reward you get for taking equity risk, would be what you’d look at. And that’s not at incredibly low levels, which would mean that they’re not overpriced in that sense. Admittedly, PE’s are high, but that’s maybe not as relevant in a world where we think the 10-year Treasury is going to be lower than it’s been historically, from a return perspective.

December 14 – Bloomberg (Rich Miller): “U.S. financial conditions are the easiest they’ve been in more than a quarter century as stock markets scale new heights on hopes of an end to the Covid-19 pandemic, according to an index compiled by Goldman Sachs… The index, which dates back to 1990 and also takes account of the value of the dollar and interest rates, reached its loosest level ever last week. That came as financial markets have boomed, thanks to unprecedented support for the economy from the Federal Reserve and Congress.

Evidence of egregiously loose financial conditions is everywhere. The Fed’s ballooning balance sheet. Unprecedented system “money” and Credit growth, along with the largest quarterly Current Account Deficit ($179bn) since 2008. Dollar weakness and the rapidly inflating cryptocurrencies. Record stock prices – across market indices from the S&P500 to the small caps. Massive ETF inflows. 

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Disclosure: Doug Noland is not a financial advisor nor is he providing investment services. This blog does not provide investment advice and Doug Noland's comments are an expression of opinion ...

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