Saturday, October 13, 2018

U.S. and global stock market turmoil should continue as last week showed that the Fed is now focused on inflation fears over market intervention

Last week saw the Dow fall over 1300 points on Wednesday and Thursday before a small recovery rally on Friday brought a modicum of relief to equity traders.  However perhaps the most important thing that came out of the Dow, S&P 500, Nasdaq, and even global markets cratering in the latter half of the week, is that Chairman Jay Powell's recent comments of a Fed no longer being accommodative appears to have indeed come to pass.

In the Federal Reserve's last FOMC in September, Chairman Powell initiated a sea-change in the central bank's monetary policy where they would no longer be 'accommodative' to the markets since the Fed needed to focus more on bond yields, recession fears, and most importantly, rising inflation.

Federal Reserve policymakers have been able to stave off sharply higher inflation even with low unemployment by managing expectations, central bank Chairman Jerome Powell said Tuesday. 
Should those attitudes change, Powell said in a speech, the Fed won't hesitate to respond.
"From the standpoint of contingency planning, our course is clear: Resolutely conduct policy consistent with the [Federal Open Market Committee's] symmetric 2 percent inflation objective, and stand ready to act with authority if expectations drift materially up or down," he told the National Association for Business Economics in Boston. - CNBC
Chairman Powell's last three predecessors were all low interest rate, cheap money administrators who helped fuel a multitude of financial bubbles that even led one in 2008 to bring the world to the cusp of a complete financial meltdown.  And despite the 'fake prosperity' these policies have helped create since 2001, and where the majority of this wealth transferred up to the 1% at the expense of the entire middle class, the one thing that the central bank have continuously lied about is how much real inflation their expansionary monetary policies have created in the economy.

As you can see from this inflation chart, the only real time inflation feel was during the deflationary aftermath of the 2008 financial crisis where liquidity completely dried up, and asset prices fell approximately 50% across the board.  And it was only after the central bank began to intervene on a continuous basis through a combination of near zero interest rates and four rounds of Quantitative Easing (money printing) that prices began to recover, but they recovered primarily through inflation rather than from growth in real value.

Ie... do you think that a company (Amazon) that earns 13 times less in revenue than Apple does is correctly valued at 9 times the tech company's stock price?

What we saw last week in the equity markets is the Fed finally capitulating to an overheated stock market and an overvalued asset bubble.  And with bond yields having risen to their 'danger zones' over the past two weeks, one of the tools that the Fed has left is to shock the markets is by proving it will no longer intervene in equity volatility and instead force sellers to move their cash into bonds which will provide the natural market means to drive down rising yields.

Stock selloff:

Bond Yields drop as cash goes into sector:


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