As you would know, since the ''repogate" ( I call it repogate because its the Fed's QE that not QE) last Sept, the Fed had been pumping billions of dollars in liquidity in the financial system that drove the stock markets higher and higher defying all risks and hurdles in its pathway (more on this in my previous posts). Now that normalcy has returned to the repo market, the Fed's "QE" has become an addiction the markets depend on - the Fed is now in a quandary.
This morning I wanted to comment on Jerome Powell, the Fed chief. In last quarter of 2018 , while still wet in the ears he did what the Fed would do during the good times- tighten monetary policy and unwind the balance sheet , but if you remember that was a Christmas market participants would rather forget as the markets tank and almost became a bear market , only saved by the Fed's U-turn on the policies. Since then, Powell has learnt to listen to the market and more than listen, appease the markets and appease POTUS. As POTUS appointee to the Chair, Powell , unlike his predecessor, lacked independent mind - the Fed is supposed to be independent of the White House. But as we know, POTUS autocratic rule of its my way or the highway , Powell would have to cave in to the man (eventually). This is all done in the name of the election so Trump will win this November - which is why he keeps boasting about how well the markets have done during his administration.
The dangers with manipulation is to drive markets to giddy heights completely divorced from economic and earnings fundamentals and Fed then saying it would employ more QE and other unconventional tools to fight the next recession. And this is where the difference lies with Powell compared to his predecessors. His predecessors especially Greenspan knew that you would be playing with fire to fuel a bubble. During Greenspan's time, he used words like irrational exuberance to reign back a bubble in the market, but Powell is stoking the bubble , ever encouraging it. He is like a doctor who tells his diabetic patient dont worry eat whatever you want , diet rich in sugars and all, because I will give you the drugs to resolve your problems and if it is not enough, I will increase the dosage for you. Now he says he will employ more QE and other unconventional tools to fight the next recession. He will but do you believe he can contain it (and in time)? And if it happens after a Trump re-election, what incentives are there to continue propping up the markets?
POTUS is laser focused in engineering policies that will improve his re-election chances - there has to be something in it for him. The Fed doing his bidding (finally) may well be cheered for short term boost to the markets but is irresponsible to create a speculative mania environment that central banks the world over have always been cautious to prevent one from happening- remember the Goldilocks economy (not too hot not too cold just right) ?. Because speculative bubbles eventually create a much harder landing that is harder to control.
And with all time record debts across all fronts- corporate, household, government - it is playing with big fire!
