Tag: Federal Reserve

Q4 Approaching: Markets In Rarified Air

Posted on by Noah Kiedrowski

The bulls have been trampling the bears in a near orderly uptrend for the past ~10 straight months now. The bear thesis couldn’t have been more wrong despite the markets facing a trifecta of rising interest rates, an unknown delta variant backdrop, and the Federal Reserve tapering later this year. The major indices are in unprecedented territory breaking through all-time high after all-time in what seems to be a daily occurrence. With Q4 2021 coming into the picture, the S&P 500 is up over 20% and places the market in rarified air.

The S&P 500 index recorded its 53rd record high on September 2nd, which makes 2021 the 5th-ranked year over the past century in terms of record highs, per Bank of America. This significant milestone has been achieved with four months remaining in 2021. The other major indices, such as the Nasdaq and Dow Jones, are showing similar patterns as measured via QQQ and DIA, respectively.

Stocks are overbought and at extreme valuations, as measured by any historical metric (P/E ratio, Shiller P/E ratio, and Buffet Indicator). Valuations are stretched across the board, with the major averages at all-time highs and far away above pre-pandemic highs.

Markets
Figure 1 – Adopted from Buffet Indicator analysis via Current Market Valuation

When the Fed Taper and Inflation Hit

As the Consumer Price Index (CPI) continues to push higher in conjunction with better-than-expected employment numbers, the Federal Reserve may be compelled to finally not only entertain the idea of raising rates but implement a rate increase. Although interest rate risk disproportionally impacts fixed-income investments such as bonds and annuities, stocks will undoubtedly be impacted as well. This is especially true for highly leveraged companies such as tech and super-charged growth companies. Even the prospect of higher rates hit the Nasdaq in March for a sharp decline, albeit that decline was quickly erased. This is a case in point of how quickly the markets can turn negative with the hint of rising rates which may be exacerbated in an already very frothy market. Continue reading "Q4 Approaching: Markets In Rarified Air" →

Jackson Hole: The Fed Taper

Posted on by Noah Kiedrowski

Federal Reserve Chairman Jerome Powell indicated that the central bank is likely to begin withdrawing some of its stimulatory monetary policies before the end of 2021. However, the Chairman did note that he still sees interest rate hikes off in the distance. In the Fed’s annual Jackson Hole, Wyoming, symposium, Powell said the economy has reached a point where it no longer needs as much monetary policy support.

Thus, the Fed will likely begin cutting the amount of bonds it buys each month before the end of the year, so long as economic progress continues. Based on statements from other central bank officials, a tapering announcement could come as soon as the Fed’s Sept. 21-22 meeting. Despite this pivot, it does necessarily mean rate increases are looming.

This pivot in monetary policy by the Federal Reserve sets the stage for the initial reduction in asset purchases and downstream interest rate hikes. As this pivot unfolds, risk appetite towards equities hangs in the balance. The speed at which rate increases hit the markets will be in part contingent upon inflation, employment, and of course, the pandemic backdrop. Inevitably, rates will rise and likely have a negative impact on equities.

Rates Hikes

Jerome Powell stated, “The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test,” He added that while inflation is solidly around the Fed’s 2% target rate, “we have much ground to cover to reach maximum employment,” which is the second prong of the central bank’s dual mandate and necessary before rate hikes happen. Continue reading "Jackson Hole: The Fed Taper" →

The Inflation/Deflation Debate Wears On

Posted on by Gary Tanashian

Our 30 year Treasury yield ‘Continuum’ chart indicates that deflation is the dominant trend, but…

Steve Saville has written a post that got me thinking about carts and horses and more precisely, which comes before which. Is the inflationary horse pulling the deflationary cart uphill or is the deflationary cart leading the horse to drink from the shrinking liquidity pool periodically?

See The Crisis-Monetisation Cycle

In conclusion to this short post, Steve asserts…

“The crisis-monetisation cycle doesn’t end in deflation. The merest whiff of deflation just encourages central bankers and politicians to do more to boost prices. In fact, the occasional deflation scare is necessary to keep the cycle going. The cycle only ends when most voters see “inflation” as the biggest threat to their personal economic prospects.”

And over the course of decades now that is exactly the case. Every damn time that the public becomes terrified of declining asset (especially equity) prices the Fed springs into action.

On March 19, 2020, we asked… Continue reading "The Inflation/Deflation Debate Wears On" →

Signs Of Inflationary Reflation Running Low On Gas

Posted on by Gary Tanashian

The summer (inflation) cooldown continues…

We anticipated it in NFTRH well ahead of time using the (monthly 30yr yield) Continuum as a visual guide. The idea was that the inflation uproar of Q1…

Inflation

…needed to be tamped down, preferably to a roughly symmetrical right side shoulder to the one on the left side of a would-be inverted H&S. Continue reading "Signs Of Inflationary Reflation Running Low On Gas" →

Looking Past Powell

Posted on by George Yacik

Jerome Powell's term as chair of the Federal Reserve doesn't end until next February, but the handicapping of his reappointment has already begun. A recent poll by the Wall Street Journal found that three-quarters of economists it surveyed believe Powell will be renominated by President Biden, but I would argue that the odds are at best 50-50, if not lower.

Powell has unquestionably been friendly to the financial markets, which counts in his favor on Wall Street, but that may be a detriment when it comes to the progressives who are likely to have the biggest voice in choosing the next Fed chair. Right off the bat, Powell checks off none of the boxes that progressives are looking for, and as he has shown since his inauguration, Biden almost never goes against what they want.

Let’s look at Powell’s negatives: He's a white male. He's a Republican. He comes from Wall Street. He's rich (although most people at this level are). Let's also not forget that Powell was nominated to his position by President Trump, which automatically disqualifies him in the eyes of many, never mind the constant barrage of criticism Trump leveled at him once he was seated.

Just the taint of being associated with the former president should be enough to make him unsuitable for another term.

More importantly, however, Powell has not publicly bought into the prized objectives of the left, namely using the Fed to further social policy (i.e., wealth redistribution) and climate change initiatives, asserting that those are political decisions better left to Congress. Continue reading "Looking Past Powell" →