Bubble Trouble – Fed Mismanagement

INVESTOR’S first read.com – Daily edge before the open
DJIA: 26,935
S&P 500: 2,992
Nasdaq Comp.: 8,117
Russell 2000:1,539
Monday  September 23, 2019
  9:15 a.m. 

Well, we are back in the Fed-micro-managing  mode, which features low interest rates and possibly a return to QE.
As a rule, this is good for the stock market.
Here’s what few economists and Street pros are acknowledging.
Earlier this year, the Fed reversed its policy from one designed to prevent the economy from overheating to one of propping it up. At first this took the form of verbal promises to cut rates if needed to one of actually cutting rates twice.
PANIC !  That, or just over zealous intrusion by the Fed on the marketplace.
       This kind of stimulus is normally  employed  when the country is in a recession and the stock market in the crapper.
        So, what if the economy goes into recession ?   That has never happened without a bear market, which in this case could be a hummer, since stocks are at all-time highs and historically very over-valued.
The Fed  will not have any tools in its kit to employ the bring the economy out of recession and stocks out of a bear market.
Bottom line: longer recession and bear market.
All this attempt to keep a business expansion going has the potential to create a huge bubble in stock prices, perhaps  greater than the 2000 bubble which was followed by a 50% drop in the S&P 500 and 78% drop ion the Nasdaq Composite.
Be ever so careful here. If this bubble inflates it will be tough to resist going all in, which would simply be the human thing to do.

Friday’s rally failure suggests sellers are waiting to hit buyers  at slightly higher levels.  Today’s market will start on a positive note, but bulls must push up beyond DJIA 27:306, S&P 500:3,021 and Nasdaq Comp. 8,243 to get the market moving upward again.
Minor Support: DJIA:26,857 ; S&P 500:2,979 ; Nasdaq Comp.:8,071;
Minor Resistance: DJIA:26,991; S&P 500:2,999; Nasdaq Comp.:8,179
Friday Sept. 20    “How Much Risk Can You Afford”
Politico’s Morning Money featured an article this morning, “Economists see sustained low growth, but no recession.
The article quoted economists  from the IMF, World Bank, central banks, rating agencies, mainstream economists, Fitch’s Global Sovereign Group, and the OECD, all giving reasons for continued growth albeit at a slower pace.
At the end, Politico adds this addendum, “Be smart: Economists almost never see recessions coming. Ahead of the global financial crisis [2007 – 2009], economic leaders from the Fed, Treasury Department and major retings agencies gave no warning of what was to come.
This time may be different.  However, the question for investors is, can they afford to be wrong after 10 years of economic growth and a bull market that is by historic standards vastly  over valued ?
The question for reasonable investors, how much risk can you afford – 10% – no sweat …..20% – “ugh”…. 30% – horrors….40% ?
Nasty corrections happen , bear markets happen, and most of the time they strike when just about  no one expects them.
Thursday Sept. 19  “Follow the Bouncing Ball”
Our economy is much like a golf ball bouncing on a pavement, each bounce is pronounced but recovers less than the one before it, eventually there is no bounce and you have a recession.
Determined not to let this happen, the Fed cut its fed funds rate, the second in three months,  to range between 1.75 percent and 2.09 percent, down from 2.0 percent to 2.25 percent, a clear indication it is concerned about  a recession.
Fed Chief Jerome Powell indicated additional cuts may be necessary if the U.S. economy slides further.
The economy has been a mixed bag for nine months with manufacturing in a recession but employment still strong. Consumer sentiment bounced in September from a three-year low.
Bottom line: The Fed must fear a recession to act as strongly as this, and there has never been a recession without  bear market.
It doesn’t help that the  36-member Organization for Economic Co-operation and Development just slashed its  forecasts for global growth,  warning of “entrenched uncertainty” with downside risks mounting.
CEO confidence has been in a tailspin hitting a three-year low, as reported by Axios Markets The Business Roundtable  survey of 138 CEOs recorded its biggest quarter/quarter decline since 2012.
        U.S./China trade talks will resume in coming days. Expect a lot of market-moving hype about potential progress, which will stands to produce new highs in the market, further inflating the bubble.
Wednesday Sept. 18  “Fed in a Quandary”

Last week President Trump urged the Fed to cut rates to zero, or lower. I wrote that would be insane.
Monday, I speculated the Fed won’t cut its benchmark fed funds rate today at all, something the Street has been hoping for, having run stocks up over the last two weeks.
We’ll see.
While the Duke University/CFO Global Business Outlook finds 53% of those surveyed expect a recession within a year.  The 10 year business expansion that began in July 2009 is  not going without a fight, and that may cause the Fed to pass on a rate cut today.
The University of Michigan’s consumer sentiment index bounced in September, albeit from a three-year low, U.S. industrial production edged up in August and a 0.3 percent rise core consumer prices (excl food and energy) in August brings  year/year increase to 2.4 percent.
Pre-open trading in futures is a ho-hummer, so it looks like the Street expects a rate cut or doesn’t care.
The Fed and U.S. banking system is struggling to cope with a scarcity of bank reserves, which Axios reports have been declining for the last  five years. Axios.com’s “Markets” also reports the Fed could indicate it plans  to stabilize the level of reserves today resulting in an increase in bond purchases on the order of quantitative easing (QE) in the opinion of Gennadity Goldberg, senior U.S. rates  strategist at TD Securities.
If there is a bottom line here, it is confusion, things happening that were unexpected and that spells uncertainty, a stable market’s nemesis.
Yesterday, I headlined, “A Bubble Waiting to Be Pricked,” an obvious reference to the fact stock prices are  historically overpriced and vulnerable to a nasty decline.
When ?
       When several major institutions abandon their inflexible “buy” algorithms and sell.  You’ll know it when you see it – straight down 12% – 16% in days.

Tuesday Sept. 17  “A Bubble Waiting to Be Pricked”
      Yesterday, I headlined, “Any Chance the Fed Won’t Cut Rates Wednesday ??”
Clearly that is NOT what anyone on the Street expects, but clearly it is possible.
As noted yesterday, the core consumer price index rose higher than expected in August, up, 0.3% for the third straight  month and 2.4% from a year ago.
Treasury yields jumped sharply last week in face of profit taking after a big Fed-induced bond rally this year.(bond prices move inversely to yield).
       If the Fed does not cut rates, expect the market to take a big hit since it has risen sharply in expectation of  Fed action to cut, as well as in anticipation of progress in the US/China  trade talks next month.
Would it stop lending or borrowing ?  Probably not, it may enhance it, since borrowers would scramble to get loans ahead of further increased borrowing costs.
In fact, the downtrend in rates probably discouraged borrowing  as lower rates were anticipated.
Two weeks ago, I warned of the dangers of buying the long bond, noting a reversal to the upside in rates would crush the value of bonds.
I doubt that would happen, since   we may already be in a recession, or at least the early stages of one.
         Bubble bursting ?  Too early to tell.  October looms, anything can happen.
When it bursts, it will be straight down 12% – 16%.  That is because, so many big investors would get a “sell” signal at the same time.
Monday Sept 16   “Any Chance the Fed Won’t Cut Rates Wednesday????”
The S&P 500 stopped short of posting a new high Friday, odds favor that it won’t today.  The biggest issue remains the Fed, and will it cut its fed funds rate  on Wednesday ?
The Street is almost unanimously  expecting a rate cut, but Econoday.com points out that consumer prices are  firming up. Core inflation rose higher than expected in August, up 0.3 percent for the third straight 0.3 percent increase putting the core rate of increase at 2.4 percent.
This remains a high risk market. Cas reserves of 30% – 50% are  justified.

What No One on Wall Street Wants to Hear
>We are in the late innings of an economic expansion, so a recession is a good bet. The current expansion started in June 2009, has lasted 122 months, the longest  in history, twice as long as the average length of 11 cycles since 1945.
> Of the 10 recessions since 1950, the average time between the low point in the unemployment rate and the start of a recession was just 3.8 months.  The unemployment rate is 3.6% which was hit in May.  Technically, we won’t know when the start of the current recession is official for months after the fact, since that conclusion is  reached by the Nat’l Bureau of Economic Research (NBER) and they consider  host of economic indicators.
>Bear markets lead the beginning of recessions by 3 to 12 months.  The current bull market at 126 months is 4.2 times the average of the last 15 bulls going back to 1957
 >Nine out of the last 10 recessions have occurred with a Republican in the White House.
George Brooks
Investor’s first read.com
A Game-On Analysis, LLC publication
Investor’s first read, is a Game-On Analysis, LLC publication for which George Brooks is sole owner, manager and writer.  Neither Game-On Analysis, LLC, nor George  Brooks  is  registered as an investment advisor.  Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. References to specific securities should not be construed  as particularized or as investment advice as recommendations that you or any investors purchase or sell these securities on their own account. Readers are expected to assume full responsibility for conducting their own research pursuant to investment in keeping with their tolerance for risk.












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