Will The Fed Buy Stocks Next?

Since he became Federal Reserve Chair two years ago, Jerome Powell has created a new mandate for the Fed above and beyond its “dual” Congressional mandate to “promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates” (that’s federal government math for you).

Powell has added putting a floor under stock prices, which usually has come to mean when the market reaches correction territory (i.e., prices fall by about 10%). When stocks reach that threshold, count on the Fed to cut interest rates or loosen monetary policy in order to restore order and investor confidence. So far in his tenure, the Powell Fed has been pretty successful in that regard. Even when overall economic conditions (GDP growth and unemployment) provide no justification for lowering rates, the Fed has stepped in to prop up the market.

Now, however, the current panic selling over the coronavirus has tested the Fed’s ability to wave its magic wand and restore peace to the market. As we know, the Fed’s recent decision to make an emergency 50 basis-point cut in the federal funds rate three weeks before its next scheduled meeting proved to be a dud. Investor confidence has now been so spooked by the uncertainty created by the virus that the rate cut caused barely a blip, and stock prices continued to tank.

Moreover, despite the market begging for the Fed to cut rates, Powell only opened himself up to criticism for actually delivering. The cut was either too small, some critics said, or a cut would have no effect in such a situation, so why bother doing it, others said. Yet the market consensus now seems to believe that another 50 basis-point cut is already baked in the cake when the Fed meets on March 17-18. But market anxiety being what it is, there’s no assurance that that will have any effect, either.

Already, many so-called experts are calling for some form of fiscal stimulus, as opposed to monetary stimulus, such as a Continue reading "Will The Fed Buy Stocks Next?"

U.S. 10-Year Yield: It's Not "If" But "When"

Life is full of surprises as we never know what could happen next, and it is the true phenomenon of our existence. Last time I shared my thoughts about the U.S. 10-year yield (10Y) in September of 2018 calling for a rise to 3.33% and more. JPMorgan Chase CEO Jamie Dimon warned that time to be prepared for a 5% 10-year yield. Let’s take a look a what you thought then.

10-Year Yield

Most of you agreed with JPM’s CEO and hit the 5% option. The atmosphere then was so elevated that it was easy to believe that the rates would keep rising. Indeed, the market went higher but stopped at the 3.26% mark, and that was it. The least favored target of 3.33% appeared to be the closest call.

The precious metals’ posts schedule was busy here on the blog at the end of last year, so I posted my call at tradingview.com for 10-year yield to drop to tag the previous low of 1.34% on November 14th of 2019. Below is the chart of that post. Continue reading "U.S. 10-Year Yield: It's Not "If" But "When""

The Fed's Newest Service: Portfolio Insurance

Every generation believes that they know more than the previous generation. Then, as they get older, they slowly start to realize that their elders aren’t as dumb as they thought. It's normal.

What's different today is that we seem to think, or at least many people do, that not only are we wiser today than everyone who has come before us but that humankind has been doing everything wrong for the past 5,000 years or so of civilization. Whether it's morally wrong to eat meat, or how many genders there are, or who can marry who, or whatever, it seems that we've been misguided since the beginning of time.

This attitude also manifests itself in the economic sphere. Based on the Federal Reserve’s recent actions, they appear to believe that everything we knew or thought we knew about economic cycles and bull and bear markets has been all wrong. Thousands of years of boom and bust cycles could have been eliminated, apparently, if only the proper monetary policy fixes had been applied.

Quite clearly, the Fed’s new mandate is that if economic growth starts to sputter, or the stock market moves beyond a correction, or some international crisis – Brexit, Megxit, Iran, North Korea, trade wars, you name it – threatens to upset the applecart, it will immediately turn its monetary policy tools into high gear.

Before now, economic growth and stock prices were pretty much allowed to take their own course, with some attempts to smooth out the worst excesses. It was considered to be both normal and healthy for markets and economies to go up and down periodically, as long as the general trend was upward. Now, however, that appears to be not only quaint, old-fashioned thinking but just plain wrong. There is no reason, the thinking goes, for us to suffer any economic pain as long as we have the policy tools to avoid it. Continue reading "The Fed's Newest Service: Portfolio Insurance"

Ignorance Is Bliss

Are the financial markets not paying attention? Or is that a good thing?

I keep asking myself those questions while I watch the major U.S. stock market indexes soar to new heights on a regular basis, while bond prices retreat – and yields rise – after hitting crisis levels early in the year.

The markets are saying: everything is just fine. The economy is humming along, consumers are spending, everyone who wants one can get a job, but just in case, the Federal Reserve is keeping interest rates low and monetary policy accommodative. How can things possibly get any better?

But are we getting a little too comfortable?

Stock prices are rising, and bond prices are falling even as the main Democrat presidential hopefuls try to top one another with the most profligate government giveaways they can think up – Medicare for All, free college tuition, student loan forgiveness, free health care for illegal aliens, reparations for slavery, you name it – while their peers in the House are trying desperately to drive President Trump from the White House, so they don’t have to face him on Election Day next year.

To say that there is a huge disconnect between the political world and the financial world is a huge understatement.

At some point, will investors look over this depressing – and rather scary – landscape and take their chips off the table? Or do they really believe that all of this silliness will eventually blow over and Trump – whom the financial markets seem to like, or at least are comfortable with – will arise victorious after the impeachment witch hunt plays itself out and the current field of Democrat presidential wannabes thins out? Continue reading "Ignorance Is Bliss"

That Precious Fed Independence

Well, what do you know? That precious Federal Reserve independence we keep hearing about turns out to be a crock.

That reality was exposed in the most blatant terms last week when William Dudley, just a year removed from his serving as the president of the Federal Reserve Bank of New York – the second most powerful position on the Fed, just below the chair – argued in a Bloomberg op-ed that the current Fed should do absolutely nothing to try to fix the economy if President Trump is hell-bent on destroying it through his tariff war with China. The Fed, he said, shouldn’t “bail out an administration that keeps making bad choices on trade policy, making it abundantly clear that Trump will own the consequences of his actions.”

But he went well beyond that, urging the Fed to use its monetary policy to help defeat Trump in the 2020 president election.

“There’s even an argument that the election itself falls within the Fed’s purview,” he said. “After all, Trump’s reelection arguably presents a threat to the U.S. and global economy, to the Fed’s independence and its ability to achieve its employment and inflation objectives. If the goal of monetary policy is to achieve the best long-term economic outcome, then Fed officials should consider how their decisions will affect the political outcome in 2020.”

Thank you, Mr. Dudley, for that admission. Some of us have suspected, Continue reading "That Precious Fed Independence"