I am not a bond trader or stock market analyst by original profession. Until 2004, when I became a public market writer and especially 2008, when I began to work with markets professionally (launching NFTRH), I was just an investor operating under the Greenspan regime while also running a small manufacturing company that had absolutely nothing to do with the financial markets.
I think the above preamble is important because it belies a writer who is not classically (i.e. Wall Street) trained to follow bond market signals. I only know what I have seen and experienced since 1996 or so, when I began investing casually and especially 2002 when I ripped our funds from a financial adviser and did it in a hands-on way. But once I began watching I watched closely and with few assumptions from prior schooling.
What I have seen is that a deflationary continuum ended in 2000 with the blowout of a great stock market bubble. But then Alan Greenspan’s monetary policy management became ever so tightly bound to the moves in the stock market. The orange dotted line on the chart below is the 3 month T-Bill yield, which closely apes the Fed Funds rate. Greenie had tried to take back permissive policy when he finally realized that a stock bubble was fomenting in 1999 but then immediately panicked when stocks topped and dropped.
In that period (2000-2002) ole’ Greenie birthed the credit bubble that lives on today. The resulting rise in easy credit throughout the economy brought on a whopper of an inflation issue and the 2nd term of Bush 2 enjoyed a rising stock market… and gold, silver, commodity and global markets. A classic inflation trade, after gold had led the whole mess during the preceding bear market.
When the credit bubble was resolved in 2008’s liquidation a new Fed chief was called to task and Ben the big brain Bernanke put his anti-deflation theories into practice, Hoovering up all manner of Greenspan-instigated toxic financial sludge and Treasury bond supply and instituting the worst blight on the US financial system to date… ZIRP (Zero Interest Rate Policy) in order to bail out the too big to fail entities by compelling capital all-in to the financial markets and sectors. He in fact financialized the economy even more intensely than Greenspan had. Money policy had become the economy.
We all know the result, under what today’s Trump supporters would revile as a the great redistributor (i.e. socialist) the rich got unimaginably richer and the paycheck-to-paycheck guy could not even make ends meet, let alone save.
So my point here is the chart and a question. What on earth distortions are in this picture compliments of 7 long years of ZIRP and other policy directly beneficial to big business and the asset owner class, as SPX (blue line) went to new highs and just kept on going?
Personally, I don’t know the answer to that question so I keep an open mind. Classical bond and market analysts have all sorts of opinions, most of which seem to lean deflationary and bearish today. I wonder if it is coming time for another inflation. But a big difference between today and the last two inflationary launch pads exists.
The last two inflation episodes were jerked into being by painful bear markets in stocks. On this occasion SPX continues higher (apparently toward our point #5 again on the Reverse Symmetrical Triangle) despite the declining T-Bill yield. The rest of the world is going balls out for inflation and I wonder if the US Fed is going to make an actual effort to join them. They have some bullets, after all.
The thing is, deflation cannot be allowed to purge the system because there would be no system left after such a purge. But does the Fed have reason to act, short of a stock market decline or crash? Will it sit on its ample behind and enjoy Goldilocks as long as she persists? Is SPX point 5 the key? And if so, is it a key doorway to the bull heavens or the final suck in to a massive bull trap?
Lots of questions, I know. And the only rational way I know of to manage an irrational market is day to day, week to week, month to month refining the questions, the answers and piecing together the puzzle. Anyone pretending to know even near exactly how this will resolve is playing guru or listening to and trusting conventional history or some kind of algorithm that extrapolates the past to the future, assuming no major distortions.
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