Quote:
Originally Posted by KC911
I don't like this....nope, me don't like this at all  .
It all just seem wacky, with so many issues yet to be addressed (China) yet the Fed is gonna do what now, when the inevitable recession arrives...
What then...rates already miniscule, more QE buying that they just keep on their balance sheet forever...how much more?
JYL...help me understand...
Does not the FED have a mandate to maintain moderate long term interest rates?
Cause the ones I just looked at just suck.....and they are going in the wrong direction fastly .
I'm locked in....but this is redonkulous....imo. |
Fed's mandate per statute is
"The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."
With unemployment <4%, CPI inflation around 2%, and 10 year Treasury yields a little over 2% (until recently), the economy was inline with its mandate.
The Fed tries to apply/remove monetary stimulus as needed to smooth out economic cycles to keep inline with mandate. Which means they apply stimulus when economy is in a recession and remove it when economy is recovered and overheating.
During Bernanke's term, the Fed applied unprecedented amounts of monetary stimulus (lowering rates and buying bonds) to help pull the US out of the Great Recession. During Yellen's term, the Fed started removing that stimulus (raising rates and not buying bonds). Powell started out continuing stimulus removal.
However, the President wants maximum stimulus as long as he's President, so he is forcing the Fed to lower rates (add stimulus). The escalating trade wars (US vs everyone including China) are acting as drags on the economy, further pressuring the Fed to lower rates. And the $1.3 trillion/year Federal budget deficit is forcing massive bond issuance, pressuring the Fed to resume buying bonds.
We are currently in a vicious cycle. President escalates trade war, markets drop, Fed cuts rates, markets rebound, President escalates again, repeat.
The President hopes this will end with China surrendering (agreeing to a trade deal that looks like a US victory) when maximum monetary stimulus is in effect, to trigger a monster market rally in time for the election. China hopes to wait it out until after the election, because there's diminishing time to negotiate and ratify a deal with this Administration, so why agree to painful concessions now and risk the next Administration demanding even more.
President sees he's running out of time to force a Chinese surrender and is choosing to keep raising the pressure. The more pressure from the US, the less China can surrender (lose face etc). So China is being forced to match with trade retaliation and currency devaluation. The collateral economic damage is forcing central banks around the world to cut rates, adding to pressure on the Fed to cut rates. The trade war mentality is spreading, with Brexit and now Japan/Korea.
So one way this can go is for the world economy to go into recession, with trade wars and tariffs high, but the Fed and other central banks having already cut rates as much as they can. At that point, the Fed will have very limited ability to apply more monetary stimulus by cutting rates. The budget deficit will be over $2 trillion/year, meaning very limited ability to apply fiscal stimulus. US companies are carrying the highest debt loads in history. US consumer debt is rising and savings are thin. The Fed will be forced to apply monetary stimulus by buying bonds, hence the risk of negative US yields.
Not a good direction.
Obviously this doesn't mean the stock market goes straight down from here. There will probably be more mini rallies and pullbacks before the "main act". So there are trading opportunities. But overall I think stock exposure should be on the lower side and getting trimmed with each mini-rally. Don't want to over-estimate how cleverly one can time trades.
From Jan 2018 highs to July 2019 highs, SP500 was up +5%, which is just +3% annualized. But during that time the SP500 had two -7% falls and a -20% fall. The ratio of return to risk (volatility) is deteriorating. And just eyeballing the chart, the time between falls seems to be getting shorter. Look like something that merits over-exposure?