Be Careful What You Wish for

I was watching Bloomberg and CNBC as Trump, US politicians and pundits, in general, were having ulcers – about Powell’s policy of raising the Fed funds rate. They felt that the economy was only just reviving and the rate rise would cause it to stall.

Can it be that the Fed knows something but is not telling?

The chart above shows the growth of M1 since 2000. The chart below shows the relationship between M1 and inflation. Shifting the M1 chart 18 months allows for the time lag between M1 hitting the market and its impact on the CPI.

But, you may ask, if the relationship holds then why have not seen inflation rise in the United States? The chart below shows that the CPI 12-month rate of change has been fairly benign.

The Adjusted Monetary Base holds the key. It shows that the bulk of QE ended up in one of two places: the stock market or the St Louis Fed Reserve.

The problem is the chart may now be showing an exit from the Fed to Main Street. If so, the Fed may not be able to control the rate inflation rises.

Volker confronted this problem in the late 1970s when inflation rapidly rose from 5% to 14.8%. To prevent hyperinflation, Volcker raised the Fed funds rate from 11.2% in 1979 to 20% in June 1981. As a consequence of the rise, a severe recession occurred in the US.

It seems to mean that the Fed has recognised the problem and is endeavouring to ensure that it won’t need to raise rates rapidly.

But, even if it raises rates at an even pace, what will this mean for the US stock market?

Above we see a logarithmic chart of the cash S&P. The yearly trend of swing line (Green) has turned that down. The most likely target (if the yearly uptrend is still intact) is 1856. Acceptance below 1810 will turn the yearly trend down.

With that in mind, I would be looking to sell the current rally. The chart below shows the two zones were I would be looking for shorts:

• 2649 to 2677
• 2723 to 2749

My preferred zone is the 2677 to 2649 area

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