A World Where Emergencies Are Good


A SICK JOKE - Ok so Wednesday was a let down day without question. While the trend certainly was not favoring a continued downside pressure in US equities and other risk assets, the price action heading into Wednesday looked quite promising and encouraged the possibility for extended declines. But as I had warned, we had not seen three consecutive negative closes in the SPX since January, and with the market still locked within an unreal uptrend, it was going to take a lot to break this trend. In the end, it was a day of consolidation at best, and possibly another short pause ahead of the next bullish resumption. Fundamentally, we were once again proven correct that nothing else matters except Fed policy. Economic data out of the US was horrendous, with both GDP and durable goods disappointing. And yet, the only thing the markets could take away from this was that it ensured the Fed's free money proponomics would be with us a little longer. I sent out a tweet on Wednesday highlighting the sick humor of it all. Son - "Why are stocks up on weak data?" Dad - "Because Fed will keep emergency policy in place." Son - "So emergency is good?" Dad - "Ya." This is the backwards world we live in right now. Market participants have grown comfortable with weak economic data and have even come to hope for it, if it means more time with ultra accommodative monetary policy.

OK, IF YOU SAY SO - The Fed has stuck to its guns and maintains there is no threat of inflation and no need for concern over asset bubbles.Yet by real world metrics, it seems inflation and asset price bubbles are everywhere we look. It is most difficult to reconcile this incongruity, and all I can think is the Fed is not happy with the economy and is trying to buy as much time as possible before being forced to reverse policy. The trouble is, the longer the Fed waits, the more it puts itself in the position of managing out of yet another crisis. Better to start reversing policy now when inflation is in check and asset prices haven't blown up, than to wait for these things to happen. I guess the thing I have the hardest time dealing with, particularly over the past few months, has been the ability for the market to continue to rally without any respect for what should normally be an uptrend that sees periods of natural correction. The super low volatility and continued push to record highs in stocks is eery to say the least, and the market forces driving this madness need to be contended with. On the currency front, EUR/CHF and USD/JPY are still offered, so at least we have that, and I believe currencies that have been well bid of late like the commodity bloc currencies, should soon relent. Kiwi and Cad stand out for me. Perhaps USD/CAD sees a little more weakness towards 1.0600, but I believe any opportunities to buy USD/CAD towards 1.0600 should be swallowed up. Similarly, Kiwi is once again trading above 0.8700 against the buck, and the price is just way too overvalued at current levels, even with the favorable yield differential. So don't expect this party to last much longer.

How much longer can the Fed keep up with this charade? @jkonfx
 

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