FOMC: Total Absurdity Prevails

Source: Michael Ballanger for Streetwise Reports   06/19/2019

Sector expert Michael Ballanger offers his take on various factors affecting the stock and commodities markets prior to today’s Federal Open Market Committee meeting.

Question #1: With unemployment rates at 50-year lows, inflation below the Federal Reserve’s target, housing (bankers’ major collateral) at or near record highs, and stock markets within 2% of all-time highs, why in the Lord’s name is a rate cut even being contemplated?

Question #2: Can there be any doubt that the Federal Reserve Board is no longer “steward of the economy” but rather “Defender of the S&P”?

Many, many years ago, long before central bankers became rock stars, and during an era of true free market capitalism, to even imagine a Fed funds rate of 2.5% was to paint a backdrop of high unemployment, negative growth verging on depression, and sagging asset prices verging on deflation. A Fed funds rate of 6-8% was associated with vigilant inflation controls, strong growth and tight labor markets, where bond market vigilantes controlled long rates by their (as opposed to Fed or U.S. Treasury trading desks) selling or buying of treasuries.

This was the last period of non-interventionist monetary policy and it was a safer, kinder world within which investors could navigate their portfolio voyages with relatively reliable, simple indicators upon which to implement strategy. If one forecast accelerating growth and constrained supply, one bought gold and oil and waited for the reactions; if one predicted Fed tightening due to overheated labor markets, one sold bonds or shortened maturities while staying defensive in equity posturing. It was a dot-plotless, tweetless, FOMC-meeting-less, CNBC-less world, when the only financial show worth watching was Louis Rukeyser’s “Wall Street Week.”

I suspect that by the time this missive is delivered, the Federal Open Market Committee (FOMC) has either cut or left alone the Fed funds rate, sending stocks either higher or lower, but what is painfully obvious, at least to this self-effacing scribe, is that economic performance no longer propels stocks. All stock price movements are either event-driven or interference-driven, and that might also be said for both gold and silver.

Another idiosyncratic feature of all markets in the Year of Our Lord 2019 is that these FOMC circus shows are treated like Major League baseball final games, complete with interviews, guest appearances, and revisionist commentary with the only thing missing being the guy in the yellow frock selling beer and hot dogs. In the hours that lead up until 2:15 p.m. EST on FOMC day, stocks go into lockdown as the algobots are unable to focus on anything that doesn’t have the word “Fed” in it. You could have an outhouse explode in Times Square and stocks would barely budge. . .

The following charts are illustrations of just how benign the U.S. economy has become. There are no emergencies, financial crises, or political boondoggles that would prompt anyone to action in the arena of fiscal stimulus or interventionist molding of “conditions.” Take a look at these four charts and ask yourselves whether a rate cut is warranted or whether a return to “quantitative easing” is required.

The answer: They are not required. However, since it is the fourth chart that governs Fed policy, a 100-point crash in the S&P would indeed prompt a call-to-arms by the Fed and you can bet that is what Trump will demand if there is any type of negative reaction after 2:15.

( Companies Mentioned: GS:NYSE, )