Not to say that Coronavirus is not a real and ongoing threat or that it will not impact economic activity. It is and it will. But the point here is that the backdrop is right for the Fed to promote the next inflation, as it says it is trying to do. Importantly, it has the bullets with which to do so.
But… “For now, fundamentals supporting household spending remain strong, Fed chairman says”
When factoring the January Payrolls report and its overwhelmingly Goldilocks signaling, is it any wonder that the stock market is using Coronavirus as a trigger to further upside and potentially a manic blow off scenario? Didn’t the 1998 Asian Contagion (of a different kind) help promote the 1999-2000 blow off? Come to think of it, wasn’t that a contentious election year too? This time we’ve got the Trade War of 2019 and the Coronavirus as a side stimulant… yes, stimulant. Because after all, when talking about the stock market it’s a sentiment thing.
The fix is in because the bond market says it is in. Not that any single indicator has all the answers, but the US 30 year Treasury yield (below) has historically had a lot of them. Bulls were dumbfounded when the Fed refused to roll over and support the stock market in late 2018 as stock prices declined. That correction eventually tamped down the 30 year yield (sent herds into bonds) and fixed the problem of a hawkish Fed.
Today? Oh so predictably we’ve pinged the opposite end of the spectrum due to the Trade War angst last summer and now, the 8-ball out of left field, a new and deadly global contagion (viral as opposed to 1998’s financial/economic) emanates from China.
It’s bullish, at least in theory. You’ve got to remember that sentiment often works opposite to logic (which makes sense because herds knee-jerking due to riled up emotions use anything but logic). In sentiment, for every action (in this case a spike in fear) there is a reaction (in this case power behind the FOMO as the herds get a clue that Central Banks stand ready to inflate the system). And the 30 year bond yield below states that the Fed is fully licensed to at least try to do just that. Never under estimate a Central Banker and his will or license to manipulate asset prices.
Bears just refuse to look into the situation and realize that it’s about more than just nominal charts, prices, conventional metrics like P/E, etc. It’s about the position the people who regulate the markets are in. Today they are fully backed by a deflationary drop in yields and pervasive angst and worry. Perfect.
* The title says the fix is always in. But let’s amend that to the fix is always in when the Fed is not faced with a hint of its own existential crisis as it was in Q4 2018 after the Continuum busted the limiter (monthly EMA 100) and yields threatened to get way out of hand. That would in essence, have ended the Fed’s inflationary reign.
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