Fed Asleep at the Wheel

2018 wasn't automatic pilot, even though Powell said so.  This is automatic pilot.  Automatic pilot QE.  When you ignore the data, when you look in the rear view mirror, when you look for any kind of excuses to justify the $120B/month QE.  Transitory.  Inflation above 2% for a substantial amount of time.  Employment levels back to levels pre-Rona.  Lots of hurdles, very high hurdles that the economy has to overcome for the Fed to put their foot off the gas.  

In a pre 2008 world, which many still believe, especially the fixed income "experts", you assume that a hot economy will get central banks to tighten monetary policy and the federal government to keep their hands off the stimulus button, not pressed firmly on it. 

But we're probably never going back to those markets again.  There is just too much debt.  Unless you have a debt jubilee, you aren't going back to a 2.5% Fed funds rate, much less 5%.  

What you have are central banks who are unwilling to accept secular stagnation.  In developed economies, the natural rate of economic growth is low.  Populations are growing slowly, and there have been no game changer technologies for the last 20 years.  The central banks are trying to solve a secular growth problem with cyclical growth solutions.   Cutting interest rates and doing QE are short term growth drivers, not long term ones.  And with yields so low, QE benefits stocks and bonds, not the real economy. 

Its like the heroin addict who keeps injecting to stay alive, to avoid deadly withdrawal effects, rather than to get high.  

In this irrationally dovish Fed world, where the hurdles are high to tighten policy, you get massive bubbles.  The excess liquidity is also creating huge pools of money that are going to the Fed reverse repo facility in order to avoid negative yields on their cash.  

The US government has clearly overcooked it on the fiscal stimulus, and the Fed is clearly overcooking it on the monetary side.  In this kind of fundamental environment, you can't overthink things.  Trying to be contrarian is the wrong play here.  This bubble will get a lot bigger before it eventually implodes in on itself, it won't be Fed policy that does it.  

So how did we get to this place, where you have such insanely dovish monetary policy?  Its pure incentives.  How did Bernanke become Time Man of the Year?  Because he did QE.  Its a world where the central bankers are lauded for boosting stock markets and bond markets and criticized when they cause stocks and bonds to go down.  Its not about the real economy. 

Remember how much criticism Powell received in December 2018 for raising 25 bps and saying automatic pilot?  There was nothing but praise when he made the pivot the following month and started cutting rates in 2019 causing a strong rebound in the stock market.  Doves are celebrated.  Hawks are criticized.

On a shorter term time frame, anytime the stock market rallies after a Fed meeting, usually when Powell is very dovish, they say Powell did a good job with "communication".  When the stock market falls after a Fed meeting, when Powell didn't meet dovish expectations, they say Powell did a bad job with "communication".   

This is how you get these irrational doves at the Fed.  They've been trained by the markets.   They get doggie biscuits from the media when they are super dovish, pleasing the markets, and get nothing but hate when they aren't dovish, disappointing the markets.   

I read the sell side research, and apparently they are thinking that there is a chance at a hawkish surprise at the Fed meeting on Wednesday.  I agree that there are dovish expectations, but post 2018 Powell usually meets those expectations, even if he has to be mealy mouth and BS his way through the press conference.  I wouldn't bet on a hawkish surprise until Biden decides on Powell reappointment.  

SPX stuck in a boring, narrow range, and of course, kissing all time highs.  Not a time to chase longs, and not comfortable shorting in this environment, so the only thing to do is wait for a dip to buy.  Think bonds are a short if/when 10 yr gets to 1.40%.  So close to a sell point there.