Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks Correct into Bitcoin Happy Thanks Halving - Earnings Season Buying Opps - 4th July 24
24 Hours Until Clown Rishi Sunak is Booted Out of Number 10 - UIK General Election 2024 - 4th July 24
Clown Rishi Delivers Tory Election Bloodbath, Labour 400+ Seat Landslide - 1st July 24
Bitcoin Happy Thanks Halving - Crypto's Exist Strategy - 30th June 24
Is a China-Taiwan Conflict Likely? Watch the Region's Stock Market Indexes - 30th June 24
Gold Mining Stocks Record Quarter - 30th June 24
Could Low PCE Inflation Take Gold to the Moon? - 30th June 24
UK General Election 2024 Result Forecast - 26th June 24
AI Stocks Portfolio Accumulate and Distribute - 26th June 24
Gold Stocks Reloading - 26th June 24
Gold Price Completely Unsurprising Reversal and Next Steps - 26th June 24
Inflation – How It Started And Where We Are Now - 26th June 24
Can Stock Market Bad Breadth Be Good? - 26th June 24
How to Capitalise on the Robots - 20th June 24
Bitcoin, Gold, and Copper Paint a Coherent Picture - 20th June 24
Why a Dow Stock Market Peak Will Boost Silver - 20th June 24
QI Group: Leading With Integrity and Impactful Initiatives - 20th June 24
Tesla Robo Taxis are Coming THIS YEAR! - 16th June 24
Will NVDA Crash the Market? - 16th June 24
Inflation Is Dead! Or Is It? - 16th June 24
Investors Are Forever Blowing Bubbles - 16th June 24
Stock Market Investor Sentiment - 8th June 24
S&P 494 Stocks Then & Now - 8th June 24
As Stocks Bears Begin To Hibernate, It's Now Time To Worry About A Bear Market - 8th June 24
Gold, Silver and Crypto | How Charts Look Before US Dollar Meltdown - 8th June 24
Gold & Silver Get Slammed on Positive Economic Reports - 8th June 24
Gold Summer Doldrums - 8th June 24
S&P USD Correction - 7th June 24
Israel's Smoke and Mirrors Fake War on Gaza - 7th June 24
US Banking Crisis 2024 That No One Is Paying Attention To - 7th June 24
The Fed Leads and the Market Follows? It's a Big Fat MYTH - 7th June 24
How Much Gold Is There In the World? - 7th June 24
Is There a Financial Crisis Bubbling Under the Surface? - 7th June 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Stock and Bond Market Shock Waves!

Stock-Markets / Stock Markets 2013 Feb 22, 2013 - 03:36 PM GMT

By: Robert_M_Williams

Stock-Markets

Yesterday around 2 pm EST a small tremor shook Wall Street. Minutes of the Federal Reserve’s January meeting released reveal that many Fed officials are worried about the costs and risks arising from the $85 billion–per–month asset-purchase program. And they all seem to have their own ideas on how to proceed. Several Fed officials said the central bank should be prepared to vary the pace of the asset-purchase plan depending on the outlook or how the program was working. One wanted to vary it on a meeting-by-meeting basis. One new idea backed by a “number” of Fed officials would have the central bank promising markets that it will take its time when selling its massive holdings of Treasuries and mortgage-backed securities.


This was only one possible scenario discussed as the minutes show a committee that is far less unified than at any other time in the past few years. The Fed said a review of the program had been set for March. Fed Chairman Ben Bernanke will hold a press conference at the end of the two-day meeting on March 20. Without the Fed’s unconventional program, the 10-year Treasury would yield 3% or more, according to research published by Goldman Sachs. A number of Fed officials said the central bank may have to taper off or end the purchases before reaching the stated goal of a substantial improvement in the labor-market outlook. On the other hand, several Fed officials warned that ending the asset purchases too soon would damage the economy. They stressed that it was important to communicate that the Fed would hold to an ultra-easy policy stance as long as warranted by the weak economy.

One Fed official said that the central bank could adjust the size of the asset-purchase program every meeting. Some officials said they were worried about the effects of more asset purchases on the functioning of particular financial markets. As it stands right now the bond, dollar and stock market are all greatly affected, some would say corrupted, by the Fed interference. Some far all of this is just talk, and it might be designed to slow the markets down a bit. Stocks are close to all-time highs so this may be nothing more than “jawboning” in an effort to slow the car down a bit. There has been a lot of commentary directed toward the Fed pressuring it to come out with a plan to move out of QE.

 

Whenever you hear comments like this the first thing you have to do is ask yourself if it’s probable. Right now the Fed is acting as a buyer of last resort for a government that is running trillion dollar plus deficits. This way it can   

keep the government funded, prevent defaults, and keep rates lower. Even with all the QE the interest rate has still been climbing over the last seven months!

Here’s the trillion dollar question: if the Fed stops QE here, who will buy the trillions of dollars of new debt issued by a fiscally irresponsible administration? Who will pay off the bondholders when the old debt comes due? The answer is that no one will be standing in that line so that means the government will have to become fiscally responsible almost overnight. For those of you pay attention to what goes on in Washington, you know that almost no one is willing to sit down and have an intelligent discussion regarding debt, and there is absolutely no political will to resolve the issue. So an intelligent man will look at all of this and come to the conclusion that we’ll see business continue as usual.

That means that the US Dollar Index, now at the key resistance level of 81.45, is something that should be sold rather than bought. In spite of the recent run-up the trend continues to be headed lower. Without a doubt we’ve seen efforts by Japan, Europe, China and Switzerland designed to cheapen their currency with respect to the US dollar, a sort of competitive printing war if you will, but the US is the debt king. Right now the greenback is coming up against a long-term trend line, so I would look for it to stall out and turn lower:

For months the dollar has been range bound, trading between 79.00 and 81.45, supported at the bottom by the printing coming from other nations. Sooner or later that will end.

Finally, the Fed has taken great pains to ensure that the banks remain solvent and the stock market floats higher. The end of QE would undo all of that. Yesterday’s 100-point drop would be a grain of sand in the desert if QE comes to an end now:

Tuesday’s close at 14,035 was just 129 points shy of the all-time closing high. Since the Dow is the sign post everyone points to when they say that the recovery is here, they will do everything possible to support it. The Dow has been moving sideways for several weeks, trading between 13,850 and 14,025, and I still look for one last breakout to the upside and a new all-time high.

Finally, on Tuesday the VIX closed at 12.31, its lowest close since 1907. Even with yesterday’s spike the VIX is still at extremely low levels. The key to the VIX is the price of puts. If investors want insurance against a declining market, they buy puts. In general, the cheaper the puts, the lower the VIX! So why are investors so disinterested in protection against a declining market? The answer, according to Richard Russell, “is that the economy and the markets are floating on a veritable river of liquidity. Furthermore, investors are convinced that if anything unseemly occurs, Ben Bernanke and the Fed will turn the current river of liquidity into an ocean of liquidity”. That is reality and yesterday’s comments are just more smoke and mirrors.

Robert M. Williams

St. Andrews Investments, LLC

Nevada, USA

rmw@standrewspublications.com

www.standrewspublications.com

Copyright © 2013 Robert M. Williams - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in