Artifical Forces > Natural Forces

Forecasting the stock market used to be about predicting economic growth, but now its about predicting central bank actions.  The two are related, but the Fed works with a lag.  When everyone can see huge economic growth in the near future, the Fed sees it too, but try to downplay it in order to keep pumping the markets.  They want to squeeze out every last bit of their easy money policies for as long as possible until the economic data undeniably shows the growth and they can't lie anymore.  

If it wasn't obvious since the Greenspan days in the 1990s, the modern day Fed could care less about inflation or jobs, their supposed 2 mandates.  They are short term thinkers looking out for their post Fed careers.  Obviously pumping the markets and giving huge favors to bankers is in their best interest for their Wall St. backed golden parachutes.  Don't blame the player, blame the game.  When the government recklessly wields its power, the influence of politicians and central bankers becomes enormous.  

The balance of power has shifted from New York and California to Washington D.C.   That has changed the game from focusing on natural forces driving the economy such as population, productivity, wages, etc. to artificial forces of fiscal and monetary stimulus.  When heavy handed government policies overwhelm the natural business cycle, they become the driver of asset prices, not the economy.  

The market is doing its usual job of front running economic and central bank decisions by 6 to 9 months.  It is no coincidence that with the Rona vaccine rollout well underway, with expectations of the majority able to get the vaccine by summer/fall, with all the stimulus working its way through the system, the bond market saw the future 6 months from now and promptly panicked, regardless of what Powell and company said. 

When the artificial forces driving the economy begin to recede, then the natural forces become more important in driving financial markets, at least until you get the next stimulus. 

With this in mind, the only carrot remaining for the stock market is not the reopening after the vaccines, but the infrastructure bill that Biden will be pumping soon.  The re-opening is now a risk asset negative event, as it will now force the Fed to either choose between:

1. Lose their credibility and the dollar by continuing their dovish talk and easy money policies or

2. Tighten policy by talking about tapering Treasury and MBS purchases.  

Since market participants are now used to getting the baby treatment and having a tantrum at even the slightest hint of tighter policy, I am sure the Fed will go out of their way to only talk about taper, and not actually go about doing it until its way too late and the economic cycle is near its peak.  Or they could actually start to taper but do it as such at excruciatingly slow pace that the market will quickly realize that the Fed will never hike again.  

If the Fed chooses number 1, by dragging their feet and talking about inflation being transitory and about unemployment still being too high, even with blockbuster GDP growth, the stock market will love it.  That will just increase the everything bubble even more and make policy normalization that much more of a nightmare when it happens. 

If the Fed chooses number 2, they will likely officially announce a turtle taper in the December meeting, but only after trial ballooning and testing the market response like little pansies for a few months before pulling the trigger.  The number 2 option is more likely, just because the growth will be so big and inflation talk so intense that even the cooing doves like Powell will feel the pressure to ease back on the throttle.  

The Rona is the only excuse that the Fed has left.  Once Rona is in the back burner, likely as the numbers settle down to a much lower plateau after the vaccine rollout, then the pretext for more stimulus is gone and the market will have to stand on its own, which means down.  

But there are still a few months left before the majority can get their vaccine shots, so we'll likely see limited downside until the summer, SPX 3700 at the worst.  With the bond market weakness, stock strength will be more limited as well, just because the weight of the now interest rate sensitive Nasdaq is so large.  It used to be utilities and consumer staples stocks that were the most sensitive to interest rates, now its tech stocks.  That's what overvaluation and too much popularity does for a sector, it makes it more sensitive to tertiary factors it used to ignore.  

As for the Fed meeting this week, I expect Powell to be mealy mouth as usual, trying to run out the clock with a 5 point lead in the fourth quarter, trying not to do anything rash to threaten his reappointment for a 2nd term as Fed chairman.  Powell is a politician first, central banker second.  He could care less about fomenting bubbles as long as they don't crash on his watch before reappointment.  

The market probably breathes a sigh of relief and we probably hit a euphoric peak over the next few days.  I'm not interested in putting on any big short positions until the re-opening, so probably until summer time.  Until then, will mostly play small looking to capture short term moves more out of boredom rather than any big edge.  There will be a time later this year to try to catch the big down move, no need to rush in yet.

By the way, I've been writing fewer blog posts mainly because from a trading perspective, I don't see much to do here.  If I don't put up anything for a while, its probably because there is nothing to say.  The joy of trading just for the sake of trading and the ups and downs is not there for me anymore.  I've been there, done that.  Looking back, the short term trading and trying to make money every day doesn't create wealth.  I do it to keep abreast of the market, not to make any kind of meaningful money.  Its about putting on big positions at the right time, holding on and catching big moves that make the difference.