Fed Induced Flood

So where are we in the midst of this ongoing equity market melt up? The Federal Reserve (Jerome Powell) continues to flood the banking system with liquidity causing risk assets (stocks, bonds, derivatives, etc.) to inflate relentlessly. Get this: The current thinking is that the Fed may cut interest rates again several times this year. They say the U.S. economy is “fragile” and could tip into recession. One thing we know for certain is that sustained periods of “free” money lulls brilliant people into making stupid investment decisions.

Central bank policies are directly driving asset prices and the bubbles therein. It’s what they do.

ZeroHedge reports “And not just the Fed: soaring recession fears in 2019 which sent a record $17 trillion in debt in negative yield territory prompted 49 central banks around the world to cut rates 71 times in 2019, according to JPMorgan. The Fed itself reduced interest rates three times last year, and launched QE4 in October ostensibly to “fix” the repo market but in reality, to push stocks higher, just as the president had demanded.”

“Greg Jensen, the co-CIO of Bridgewater, warned that he (fund is $160 Billion)was cautious on stocks, describing them as “frothy” as ‘most of the world is long equity markets in pretty extreme situations’, and predicted that gold would soar to $2000 and higher because the Fed and other central banks would let inflation run hot for a while and “there will no longer be an attempt by any of the developed world’s major central banks to normalize interest rates. That’s a big deal.”

“It gets worse: while the “tinfoil” blogosphere has repeatedly said the Fed could cut rates back to zero, if not negative, Jensen is one of the first “serious people” who told the FT he would not rule out the possibility that the Fed could slash rates to zero this year as it looks to avoid recession and disinflationary pressures.”

“But the main reason why Bridgewater is going long gold is also the most startling one: as a result of coming inflation surge and the ballooning US budget and trade deficits, the status of the US dollar as the world’s reserve currency could be threatened.”

CNN MONEY 1/15/2020

This graph shows the recent trajectory of Fed’s growth in total assets in red. The green is the trajectory of the S&P 500. This is a major factor for the current valuation of the stock markets.

I find it fascinating that the Fed has reengaged Quantative Easing, though they deny that’s what they are doing. The chart above tells the whole story.

To finish, below is a chart of the current members of the Four Comma Club. They are the Trillionaires.

Who are they?

The Big Four

J. Brock Hamilton
January 2020