The FED has been the willing slave like (pawn) of the elite/wealthy as they purposely in the endeavor to transfer massive wealth into their vaults blew up asset classes to Hindenburg like proportions (especially the equity markets) creating many new bubbles at the expense of the working class / poor! The new-asset inflator master Powell: warns about DEBT, but in his next breath/statement he wants to give more crack-cocaine (free-flowing extremely cheap “near 0%” money) to the crack “junkies” many of which are zombie firms that are overly-indebted and fiscal irresponsible corporate idiots; via cheaper free-flowing money wherein they will run up even larger debts & deficits (many will use the money to buy-back stock) where is the logic...then again its perfect logic if your primary goal is to enslave the masses/working class in debt as far as the eye can see as they are the real back-stop for this endeavor, the rich get richer the poor get poorer!
Stocks remain at/near their all-time highs despite the mega-warning
signals that these levels of sheer euphoria suggest a counter-trend correction is
imminent. I have been suggesting that markets are in or may be headed for a
mega bubble all of the preconditions for a mega bubble are in place. Financing
costs of new-debt to subsequently use it to buy-back-stock are at record historic
lows, new participants are being drawn like moths to a flame into markets, and
the combination of significant accumulated savings and low prospective returns
on traditional assets have created both the means and the desire to engage in massive
speculative activity! In the months ahead, investors will need to pay close
attention to risks of a monetary policy reversal, massively raising equity
valuations, and the rate of the real post-pandemic recovery.
The past 5-7 months can best be characterized as a period of unprecedented market extreme optimism and pure euphoria... As I pointed out previously in my weekend write ups there was a wave of bullishness due to recent news, with (3) Covid-19 vaccines showing promise against a backdrop of FED manipulated zero interest rates, a record fiscal deficit and an ultra-dovish Janet Yellen soon to be in charge of it all. Another way of describing it is extreme euphoria, the likes of which surpass even the dot.com bubble. Naturally, stocks have taken the recent news flow very well, with prices hitting record highs despite traveling at significantly elevated nosebleed valuations. As I have discussed before, the November-December rally has been driven by the most shorted hard-to-borrow equities, taking the SPX-500 to technical levels not seen in many-many years, like we saw back to 2000. The November-December rally was clearly a short covering rally. As the most shorted stocks were up 28.48% in November alone since, while the SPX-5000 was up about 11.1%.
So, the $64,000 question to be answered is what kind of inflationary pressures concern this manipulative FED? This FED has set an extremely high bar for removing their lame historic low policy rates off the zero mark [ I wonder why?] Some FED-heads have suggested that the FOMC would initially treat almost all inflation as transient.
The tolerance in this new age of “bailouts” called fiscal stimulus is striking. Powell was invited several times during the post FOMC statement to express concern on overdoing fiscal stimulus and each time he refused the invitation: “the judgment on how much to spend, and in what way is really one for Congress and the administration and not for the FED” he stated! By contrast, in his June 2018 press conference he said in response to a question on the King-Trump tax cut (giveaways to the elite and most wealthy): “You asked, is the … neutral rate moving up because of fiscal policy? Yes.… there should be an effect if you have increased deficits that should put upward pressure.” Seems he speaks with fork tongue! Of course, underlying economic conditions are quite different now but his comments at the January 2021 press conference avoided any and all implications that this massive wave of fiscal stimulus would put upward pressure on yields [I wonder why?].
This is important because the sustainability of the massive onslaught of the government’s fiscal plans advocated by Placating Biden and Grandma Treasury Secretary Yellen depend on historic low-interest rates to enable debt servicing. His agnosticism on the appropriate level of fiscal stimulus can be seen as the FED now abandoning a forward-looking approach to their “BS” cover-up inflation policies. Their new monetary policy framework enables the FED largely to make policy based on their manipulated realized inflation rather than expected inflation.
It is economic 101 low yields and low debt servicing costs
allow deficit/debt spending to be used significantly to achieve “believed” economic
and social goals, without significant redistribution through needed taxation;
at least for the time being. Under this guise, the Fed need not act in
anticipation of hitting maximum employment or of hitting troubling inflation,
because it will likely have ample time to manipulate the calculation of both from
incoming inflation data.
Reality is that after hunkering
down for much of this past year and into this new one, folks are quite eager to
get out and party, and enjoy life again sort of making up for lost time. So called
policymakers, who are taking ad hoc reckless massive actions in order to recoup
significant lost economic output and return to their bogus level of maximum
employment as quickly as possible.
This lecherous FED has moved to a lame self-serving flexible average inflation targeting framework, making a overshoot of the 2.0% inflation target an likely explicit policy goal. The FED has also redefined their so-called employment mandate from full to maximum employment, which Powell called a more “broad-based and inclusive goal.” We have also been seeing massive fiscal policy being deployed to supposedly address the pre-existing issue of wealth inequality [like the large-scale government transfers to working-class income households]. According to government data cumulatively, the Covid-19 recession has cost US households $425 billion in income, but they have already received more than $1 trillion in transfers bailouts payments and this was before the last “late December” King-Trump stimulus [it does not even account for the Biden massive give-away proposal]. According to data households have already accumulated close to $1.5 trillion in excess saving, which is set to rise to over $2 trillion (9.5% of GDP) by early March 2021 once the additional “bailout” fiscal package is enacted. These policy shifts also mean that central bankers will likely tighten much later in the recovery cycle than in the previous cycles (they are committed to enriching the elite, most wealthy and keeping zombie firms alive).
I have repeatedly argued that this massive deficit/debt spending policy response has for the time being averted significant economic scarring effects. Furthermore, the massive negative impact of the exogenous Covid-19 shock is likely to fade (hell with after close to $5 trillion in stimulus can go a long-way to cure economic contagions), and I foresee a likely surge in demand as the economy reopens more and more as spring in looming. Spending patterns have indicated that households have been forced to accumulate excess saving as restrictions on their mobility have limited their opportunities to go out and spend-spend-spend. Now with warmer temperatures coming and vaccinations set to cover a larger part of the vulnerable population, I am convinced that the coming relaxation of restrictions, which has begun in many states with the tightest controls, will pick up momentum as spring approaches.
The speed and strength of this pent-up demand pressure will likely
put a strain on the supply side, which has limited time to respond. Against
this backdrop, inflationary pressures will build up very quickly (and despite
the FED hype they will not be transitory). But the nature of the recovery (what
I call a new-age massive transfer-driven consumption cycle which implies
that inflation risks are to the upside). If I am correct and underlying
inflation momentum accelerates it could precipitate a significant disruptive
shift in FED tightening expectations, raising the probability of a FED induced recession.
Another sign of a market that is very frothy and bubblicious is that the average yield on U.S. junk bonds dropped below 4% for the first time ever as investors seeking a haven from the FED’s manipulative ultra-low interest rates, as folks are forced to chase and pile into an asset class historically known for its higher yields (not so much anymore now. We saw that this past week the measure for the Bloomberg Barclays U.S. Corporate High-Yield index dipped to 3.96% on Monday, as yield-hungry investors have been gobbling up junk bonds as an alternative to the meager income offered in the less-risky highly manipulated bond markets. Demand for this type of debt has outweighed supply by so much that some money managers are even calling up various firms to pressure them to come to the market and borrow instead of waiting for deals to come their way even those rated in the riskiest of levels “CCC” tier of junk the worse of the worse “risky” debt issuers have been more than significantly oversubscribed (this is thanks to the FED and their lame interest rate policies). The lower yields could encourage more speculative-grade firms (zombies” and those with very-very risky business models and mountains of existing debt to tap the market after raising more than $7.2 billion last week. January was a record month for sales Junk-bond sales with a tad over $52 billion placed.
Buyers that have been starving for yield (as a result of the FED manipulating rates to near 0%) have been snapping up CCC graded issues as yields for that portion of high yield portfolio need. They CCC rated “Crap paper” dropped to 6.21% on Monday, also a record low. I find it absurd that issuance conditions have been so conducive that some of the riskiest types of transactions that have been coming to market, such as bonds that are used to fund dividends to a company’s owners and so-called pay-in-kind bonds that allow a borrower to pay interest with more debt. I, unfortunately, see continued outperformance from the junkiest part of the market. CCCs, is insanity!
No comments:
Post a Comment