Thursday, December 17, 2020

Morning Note: Fantasy...

For reasons we'll explore in our year-end letter(s) (it'll come in several parts), the Federal Reserve has, over many years, manipulated itself -- well, the economy and the markets -- into a corner that leaves it (in the minds of its governors) left with no choice but to continue to inflate asset bubbles and, well, pray...

So much so that in their obvious need to mask the reality/consequences of their actions, they have their leader presenting a narrative that, frankly, insults the intelligence of the tutored observer.

In yesterday's press conference Jerome Powell stated that the Fed could provide more accommodation by buying up more bonds and pushing out maturities... Note that they've added literally trillions to their balance sheet already this year, and, keep in mind, vaccines are a real thing over the coming months.

Thing is, anything less than the above statement would've tanked the stock market yesterday...

He said that they are reluctant to move in the area of credit allocation. 

Excuse me! 

The Fed literally owns one-third of the mortgage backed securities market and is buying another $40 billion a month -- and that's with housing prices rising through records

That's credit allocation by definition!

He says -- amid several valuation metrics that have stocks more pricey than the bubble days -- he's unworried as long as rates stay low. 

Okay... Man, if it were that easy!!

Lastly -- I could say more but you get the point -- amid the inflation pressures we've highlighted herein of late, he sees a world of "significant disinflation pressures."

Bottom line, the world picture (fantasy) Powell paints -- but simply can't himself believe -- justifies the Fed continuing to socialize financial markets, as he fears (knows) that by allowing markets to work... well, you get it...

Asian stocks traded mostly higher overnight, with 10 of the 16 markets we track closing in the green.

Europe's feeling little pain as well this morning, with 15 of the 19 bourses we track trading higher.

U.S. major averages are green across the board: Dow up 126 points (0.42%), SP500 up 0.34%, Nasdaq up 0.44%, Russell 2000 up 0.37%.

The VIX (SP500 implied volatility) is down 2.18%. VXN (Nasdaq i.v.) is down 1.83%.

Oil futures are up 1.02%, gold's up 1.47%, silver's up 2.41%, copper futures are up 1.02% and the ag complex is up 0.26%.

The 10-year treasury is interestingly -- i.e., not consistent with a risk-on rally in stocks -- up (yield down) and the dollar, thanks to the Fed and a rallying Euro (Brexit trade-deal optimism), is getting trounced to the tune of -0.66%.

Our weak-dollar positions (save for energy stocks) has our portfolio besting the equity markets a bit to start the day: Led by silver, gold, base metals, Eurozone equities and materials, our core mix is up 0.51%. AT&T, banks, energy, financials and Verizon are our laggards.

Here, from Lee, Lee and Coldiron's excellent, enlightening book The Rise of Carry, is what I'm talking about:
"Each carry crash brings forth more central bank and government intervention that hastens the demise of the market economy."
Think of "carry" in this context as leverage.

And, in case you're wondering, the risks and opportunities in today's regime are manageable, assuming one's aware of them...

Have a nice day!

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