The Fed Is the Bubble

by northmantrader

Occam’s Razor: The simplest explanation is often the best explanation. In this case: The Fed panicked in December and by caving to markets reignited the bubble in a major way and now they are losing control as they are trapped and twisted in their own narratives. No rate hikes until 2020 but markets are printing new all time highs less than 4 months following Powell’s famous balance sheet flexibility cave on January 4th, just a couple weeks after President Trump told him “to stop the 50Bs” on twitter.

And markets have done nothing but gone up since then:

But this appears to be only act one of the drama. Now a mere weeks after a constant drum roll by Kudlow and Trump demanding the Fed to cut rates by 50bp the Fed may actually do just that according to Nomura.

Such a move would surely end whatever may be left of the Fed’s “independence” credibility which one can critically question already following the December cave. Loss of credibility being ironically one of the key risk factors Deutsche sees as a threat to the expansion:

Whether they will cut rates at this meeting or not is speculative, but fact is global growth is slowing still and markets are pricing in a rate cut:

The Fed has already made itself the market’s play thing and hence can’t ill afford to disappoint markets this year and consequently the Fed faces a perhaps impossible choice this week:

Cut rates here by 50bp could only exacerbate the bubble and set markets onto their combustion path following a total credibility loss.

But disappointing markets this year could well set the stage for a larger selloff the Fed is so desperate to prevent at every turn, especially now that the Fed has fueled the most vertical rally in this cycle:

So now they’re trapped. Inside the bubble the Fed itself helped create. No, the market is not the bubble. The Fed is the bubble and they’ve blown up markets all around them.

And as a result:

 

But no worries, The Fed is already tinkering on the next version of QE.

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