With Trump As President, The FOMC Moves To Pop Their Bubble

The Dow Jones Bear’s Eye View (BEV) chart below is so weird.  Immediately after the November 8 Presidential elections, the Dow Jones leaped up to a new all-time high (0.00% / BEV Zero line) and has stayed within 1.21% of being a new all-time high for the past four months (Red Oval).  Making 32 new all-time highs in the past 77 NYSE trading sessions, or seeing a new all-time high in 41% of the daily closings since the November election is simply historic market action.

How much longer can this go on?  I don’t know about you, but after four months of this I’m getting bored with it.  Reason tells me we’re closer to the end of this amazing string of new all-time highs than to its beginning. That plus the FOMC, after eight years of zero interest rates, is finally seeing the necessity of increasing their Fed Funds Rate.  Now that Donald Trump is president, it seems the dudes making “monetary policy” now feel an obligation of popping the bubble they’ve inflated in the stock and bond markets.

Those policy dudes always make it sound as if they’re above politics. That “monetary policy” is always driven by economic data.  But that’s ridiculous. Obama is a community organizer from the South Side of Chicago, the part of town that’s now seeing a bloodbath of gang violence. That’s something the guys at the top of the economic food chain could respect. Trump on the other hand wants the prosperity of the 1950’s to be restored to America’s middle class, and that’s something they cannot allow.

Here’s a chart plotting the Fed Funds Rate and the US Long Bond Yield going back to 1995. The FOMC sets the Fed Funds Rate as they “execute monetary policy.”  And each time the Fed Funds Rate (Blue Plot) was increased above the Long Bond Yield (Red Plot), a bubble in the financial markets began deflating.  First the NASDAQ High-Tech bubble in 2000, then the Sub-Prime Mortgage bubble in 2007.

The “policy makers” kept their Fed Funds at near zero for the entirety of the Obama Administration – eight years. We can be sure that isn’t going to happen during the Trump Administration. They won’t come out and publicly admit it, but the FOMC has finally found the motivation to once again invert the yield curve by increasing their Fed Funds Rate above the yield of the US Long Bond, knowing full well the bearish consequences of doing so. I know it has to be done sometime. But the FOMC’s timing of popping this bubble is off by about six years.

My readers will not want to own stocks or bonds when that happens.  And we may see the financial markets begin deflating before the yield curve actually inverts.

So, how are the banks doing?  Like the Dow Jones, apparently since the November election, they can only do one thing – go up in valuation. Well, it’s about time.  After having trillions of dollars “injected” into their balance sheets, the Federal Government altered accounting standards to maintain a fiction of solvency, and have every stock tout on Wall Street extol their virtues; should we be surprised these banks are finally going up?

But things are not right with the big banks. Former Fed Governor, Kevin M. Warsh retired from the Federal Reserve in March 2011.  After five years at the Fed, he obviously felt the need to come clean, which he did in the May 2011 issue of Central Banking.

“Market participants, for example, need a clearer, better understanding of large financial institutions to be good policemen themselves. But the financial statements, the annual reports, the 10Ks, the 10Qs of the largest banks around the world tell us so little about their true risks. If you spend a few hours reading the financial statements of Wal-Mart or Proctor & Gamble, then you would understand their business and financial statements reasonably well. It is virtually impossible to do so for the largest global banks.”

– Kevin M. Warsh, member of the Federal Reserve Board of Governors February, 2006 – March, 2011. Quote from May 2011 issue of Central Banking (pages 32-40)