Is Trump Chasing Venezuelan Stocks?

Trump’s relentless pounding of the Fed for not pumping the stock market is concerning if not downright scary.  Makes us think he is envious of the YTD  500 plus percent return of the Caracas Stock Market Index (IBVC) and wants Powell to beat it.  Winning is everything even though winning may be result in nothing.

More seriously,  the Fed’s independence and credibility is slowly being chipped away by the White House, which is probably setting up the Fed to take the fall for the next crisis.  We raised these concerns last July.

Quantitative Tightening had zero impact on monetary policy but forced the Treasury to increase the size of its monthly note and bond auctions by $300 billion (plus/minus) annually.  Coupled with skyrocketing  deficits, the Treasury was floating an unprecedented  $1-1.5 trillion annually of new marketable securities during an expansion.  Rates spiked in September and stocks collapsed.

It doesn’t take a Ph.D. to figure out the Treasury is now starting to crowd out markets and longer-term rates can only stay low funded with haven flows. The removal of QT will help by taking $300 billion of Treasury supply out of the monthly auctions.

Moreover, the debt ceiling has forced Treasury, among other means, to fund itself with its checking account at the Fed rather than increasing its outstanding debt further easing new supply and relieving pressure on long-term rates.

This is only temporary, however, and there will be a “trampoline effect” or a new supply shock  once the debt ceiling debate is resolved. But not before an ugly political fight.  Stay tuned.