‘The King is dead. Long live the King!’
From John Gillin at Stansberry NewsWire:
Former Fed chairs Ben Bernanke and Janet Yellen were magnificent in their ability to stay on message. Time and time again, they delivered reassuring sound bites for an investing public that was still on a short leash after the financial meltdown of 2008.
Quantitative easing (QE) guaranteed that the Fed would be buying debt securities. In fact, you could set your watch by it. And this government largesse kept interest rates low, and that encouraged – no, demanded – that investors pile into risky assets. There was no real yield to be had anywhere on the globe… And because pension and annuity funding models “demand” a 6% absolute return, stocks have been jacked up to all-time highs.
Then Donald Trump storms the White House and like every other new administration sets a course to deliver on what his platform promised. Tax cuts were a big deal. Regulation reform has been a tailwind. The economy is back to growing at 3%, the unemployment rate is 4.1% (also known as full employment), and wages show signs of finally getting in the game. The “America first” mantra is also busting up trade agreements and enacting tariffs on steel and aluminum.
In the history of modern economic theory, when the economy starts to reach potential, the models say “pull the punchbowl.” The idea is that the economy is ready to put on its big boy pants and grow the heck up.
Yellen and her band did exactly that. Depression averted. The Fed has taken on a mountain of debt and it’s now the right time to let it start to roll off. Interest rates are perfect and inflation is contained.
And then Yellen exits stage right. Her reign was a triumph, and though she may have wanted to keep the keys to the kingdom, she moved on to give speeches at $200k a clip. Her mission epitaph will say “accomplished.”
Enter Mr. Jerome Powell as the new Fed chair.
He inherits what is believed to be the perfect scenario. But therein lies the problem. His testimony to the Senate Banking Committee was supposed to be Santa showing up with a full bag. Unfortunately, that high bar was impossible to achieve. And he exits the stage with investors wondering whether anybody has the wheel. And what about the deficit? Nobody has been talking about that monster under the bed.
The “what ifs” are everywhere. He tried to handle every question with thoughtful responses and a cool demeanor, but the bond bears are shouting that rates are moving higher and that no one at the Fed, European Central Bank, Bank of Japan, or the Swiss National Bank has a clue about real inflation. After all, we have been in a bond bull market for 25 years and stocks have been attached at the hip. This all relates back to taking on risk and pressing the bet. Thinking simply – but rationally – the Fed is lifting Fed funds. The cost of funding is going up. Isn’t that what is supposed to happen late in the cycle?
The new guy was tossed to the wolves… And skeptics believe that this chair’s tenure will be the most difficult in a generation. We are beginning to see the “green shoots” of VOLATILITY.
A cold reception indeed for the new King.
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