Start the conversation
I'm hoping to heck that the recent bone-jarring losses in the stock market aren't hurting you! If you have followed my advice, you're sitting pretty. While all about you are losing their heads amid the noise and strife, you took your money home and let it hug you.
If you haven't taken my advice, but you've been in the market for the better part of the past nine years, there's still time to harvest the massive gains that you've accrued. Then you can rest easy through the difficult times that lie ahead.
In light of the Fed's actions Wednesday and Fed Chair Jerome Powell's words at his press conference, the overwhelming weight of the evidence continues to show that capital preservation is the name of the game.
As we've been over many times, it's not about rates. The arguments about the Fed's pace of rate increases are pointless. This is about the shrinking supply of money in the system versus the increasing demand for it. When money is in short supply, investors liquidate assets to raise cash. The Fed has made sure that money is in short supply, and has made clear that it is not about to deviate from its course.
The Warnings Were Persistent, the Consequences Delayed but Not Denied
In the spring of 2017, I began warning Wall Street Examiner readers that when the Fed starts talking about shrinking the balance sheet, it would be time to start worrying about the QE-driven bubble market coming to an end. Then in July 2017, the idea of that balance sheet reduction process showed up in the Fed's meeting minutes. In September 2017, the Fed announced that it would begin the policy of starting to shrink the massive holdings of Treasuries and mortgage-backed securities (MBS) that it had built up under QE.
That's when I started to warn you to gradually get out of the stock market, and get to 60% to 70% cash by the end of January this year. I allowed that for latecomers, the end of March should be the goal. As the market rallied into mid year, I continued to warn you that, as the Fed gradually increased the size of its balance sheet reductions, the pressure on the markets would grow.
The bond market did buckle, but stocks continued to rally, fed by a couple of features of the new tax law. U.S. corporations repatriated cash they had accumulated around the world. They used that cash to fund buybacks so that CEOs and their C-suite cronies could cash out their self-granted stock options at the highest possible prices using corporate cash. In effect, they were using the tax law to grant themselves massive pay raises.
Helping that along was another provision in the tax code that allowed businesses to take advantage of higher deductions for pension fund contributions under the 2017 tax code until Sept. 14. Fund managers took that cash and spent the next week buying stocks.
Meanwhile, all that cash created a feel-good atmosphere in the stock market. Despite the Fed having already pulled the punchbowl, bullish revelers had their last hurrah at the bacchanal.
And surprise, surprise – the market topped out on Sept. 21, a week after those last tax law–driven pension fund contributions.
Of course, that rally made us nervous. Having failed to account for these stock market–friendly provisions of the new tax law, I had thought that the market would begin to crack in July. But I held firm in my analysis that the combination of the Fed starting to remove $50 billion per month from the stock market in October, and the Treasury pounding the market with hundreds of billions in new supply month after month, would spell the end of inflated asset prices.
I had become so alarmed at the continued expansion of the bubble that I even went so far as to recommend that you go to 80% to 100% cash and short the SPY to profit from coming market declines.
One Media Outlet Did Report Powell's Most Important Point!
Wednesday, after the Powell dog-and-pony media show, the stock market broke down, closing below the February lows. While the professional Wall Street propagandists focused on the utterly meaningless rate increase, most glossed over what Powell said about the most important thing: the Fed's balance sheet reductions.
First, contrary to the facts, Powell said that the "…runoff of the Fed's balance sheet has had very little impact on the credit markets." (Nutting, MarketWatch)
In essence, Powell has pledged to keep dissembling about what we know is a fact – that removing $50 billion a month from the banking system while the Treasury needs to raise $100 billion to $150 billion per month on average definitely has a massive impact on the credit markets. T-bill rates have risen relentlessly as a result.
Powell reiterated that the Fed will ignore stock market declines and will not reverse policy until the economy has an accident. "Some volatility, doesn't probably leave a mark on the economy."
Meanwhile, the market is leaving marks on professional investors who ignored Rule Number One – "Don't Fight the Fed" – and stayed fully invested in stocks.
Skidmarks in their underwear. Chairman Powell doesn't care.
Steve Goldstein at MarketWatch made the most important point.
About the Author
Financial Analyst, 50-year charting expert, finance + real estate pro, and market analyst; published and edited the Wall Street Examiner since 2000.