June 25, 2018
The Stock Market is SCREAMING That the Fed Has Crushed Economic Growth
If you need more evidence that the Fed screwed up during its latest FOMC meeting, take a look at the below chart.
This chart shows the Dow Jones Industrial Average (a stock index comprised of economically sensitive bell-weathers such as Caterpillar) vs. the NASDAQ (a stock index that is heavily skewed towards Tech giants).
As you can see, for most of this year to date, these two indices have moved in a virtual lockstep. The NASDAQ began to outpace the DJIA in April when the Fed increased its QT program from $10 billion to $30 billion per month.
However, it wasn’t until last week’s FOMC that the divergence became extreme. As you can see in this second chart, the DJIA rolled over IMMEDIATELY after the Fed meeting and has taken a nosedive ever since. The NASDAQ, on the other hand, has gone straight up.
Put simply, the market is discounting that Fed policy is going to crush the economic expansion, leaving the only growth in the large Tech space.
Jerome Powell is Playing "Chicken" With $10 Trillion in $USD Shorts
Thus far in his tenure as Fed Chair, Jerome Powell has emphasized that he is more concerned with the real economy than the financial markets.
Put another way, the Powell Fed, unlike the Bernanke or Yellen Feds before it, is willing to sacrifice stocks in the name of normalizing monetary policy provided the economy can withstand it.
As a result of this, the Powell Fed intends to continue with its rate hikes as well as the increase in QT (we go to $50 billion per month in July), despite the clear evidence that these policies is putting the financial markets under duress.
Indeed, already we’re seeing something of a meltdown in the Emerging Market space with Brazil, Turkey and other Emerging Stock Markets crashing.
Here’s where it gets interesting.
Globally there is over $10 trillion in $USD shorts floating around the system. And with both rate hikes and QT strengthening the $USD, Powell is effectively playing “chicken” with this massive issue (at $10 trillion, this is roughly the size of the GDP of China).
So while he claims he is willing to stomach market volatility, this might prove to be a bluff if the $USD short issue becomes systemic. Most Emerging Markets are already 20% off their recent peaks. If US stocks were to experience a similar drop, the S&P 500 would be at 2,300.
On that note, for the first time in 18 months, there is a significant risk that the markets might actually enter a free fall. Powell is playing a dangerous game. And if the Fed doesn’t walk back its policy there is a very real chance that the US markets could experience carnage similar to that which has already hit the Emerging Market Space.
If the Fed doesn't figure this out soon, we could very well see a market bloodbath hit.
Chief Market Strategist DHF.
George Town. Cayman Islands.