• 2 days How To Invest In The Cybersecurity Boom
  • 4 days Investors Are Patient With Unprofitable Giants
  • 6 days Wells Fargo Back In The Scandal Spotlight Once Again
  • 8 days 5 Stocks To Keep A Close Eye On This Year
  • 9 days As Auto Giants Flail, Look To Chip Stocks For Gains
  • 10 days Central America Is Ready For The Bitcoin Hustle
  • 12 days China’s Video Game Restrictions Unlikely To Slow Down Booming Industry
  • 13 days Top Performing Stocks As Inflation Fears Grow
  • 14 days US Airline Stocks Take A Beating On New EU Restrictions
  • 15 days This IPO Could Open Sustainable Fashion Floodgates
  • 16 days Crypto Crime Nets Another $2B Fraudster
  • 18 days This Week’s Hottest Meme Stocks
  • 19 days Why World Markets Should Be Watching Germany Closely
  • 21 days Could ‘Cultured’ Meat Rival The Plant-Based Megatrend?
  • 24 days ‘Easy Money’: Crypto Is Still Attracting Newbie Investors
  • 25 days Foreign Syndicates May Have Stolen Up To $400B In COVID Benefits
  • 26 days Gold Jumps Above $1800 Ahead Of Jackson Hole Summit
  • 26 days International Banks Blacklist Afghanistan Following Taliban Takeover
  • 28 days China’s Tycoons Are Getting A Serious Reality Check
  • 29 days U.S. Cannabis Space Heats Up With Telling Tilray Acquisition
How The Ultra-Wealthy Are Using Art To Dodge Taxes

How The Ultra-Wealthy Are Using Art To Dodge Taxes

More freeports open around the…

Another Retail Giant Bites The Dust

Another Retail Giant Bites The Dust

Forever 21 filed for Chapter…

Dan Norcini

Dan Norcini

Dan Norcini is a professional off-the-floor commodities trader bringing more than 25 years experience in the markets to provide a trader's insight and commentary on…

Contact Author

  1. Home
  2. Markets
  3. Other

The Punch Bowl is Gone

It has been a long time since I put up this chart comparing the S&P 500 index with the size of the Federal Reserve's Balance sheet. The old adage that "a picture is worth a thousand words" is most appropriate in this instance.

S&P500 Compared to FED Balance Sheet
Larger Image

As long as the size of the Fed's balance sheet continued to increase on account of their purchases of both US Treasuries as well as Mortgage Backed Securities, the liquidity boosted stocks inexorably higher, in spite of the fact that the underlying economic growth was mediocre at best. In other words, the seeming disconnect between what we were seeing on Wall Street and what Main Street was experiencing was most baffling to many observers. If one looked only at the stock markets, they would no doubt come away believing that this economy was one of the best in decades. That was in sharp contrast to the struggling US consumer dealing with relatively stagnant wages and rising health care costs and a employment picture that was not nearly as robust as the headline numbers coming out of DC would suggest.

However, that liquidity ( massive amounts of it) had to go somewhere and since it was not going into Main Street, it ended up going into Wall Street. After all, what else are money managers supposed to do in a near zero interest rate environment except to buy something that is going higher, regardless of whether or not the economic realities actually supported it.

Now that the liquidity that has been supporting this market is drying up, the failure of QE to actually pass through and benefit Main Street is being disclosed. Throw on top of that the similar failure of QE in both Japan and in the Eurozone to produce anything more than an "L" shaped recovery in their respective economies, and investors are getting rightfully worried. What is the next trick that the Central Banks are going to be able to pull out of their magic hat if nothing works?

Further compounding the problem has been the woes besetting the Chinese economy. Perhaps the straw that broke the camel's back was the Fed rate hike of 25 basis points in December. Since that time, equities have moved generally lower.

My view all along has been the monetary policy can only do so much. It can perhaps prevent things from imploding but as to producing any SUSTAINED, ROBUST Growth, forget it. That requires STRUCTURAL REFORM And solid economic policy. Those of course have to make it through Congress here in the US but they first have to be endorsed or at least proposed by the executive branch. Given the current leftist occupant of the White House, that has ZERO chance of happening. In other words, I am of the view that this economy is going to remain moribund until late in 2016. Even then it might not see any solid growth depending on the results of the 2016 election in November. A Hillary Clinton presidency would spell disaster for the US economy since most believe she would merely continue the current policies that are crushing economic growth here in the US.

Fasten your seat belts - the punch bowl that has supported all this giddiness in equities is gone and now the market is going to be forced to deal with reality. None of this is going to go away anytime soon. I expect we will see rallies in equities as we move forward but I also expect that they will be viewed as selling opportunities. The mentality of "BUY the DIP" has given way to "SELL the RALLY". Such are the ingredients of Bear markets.

 

Back to homepage

Leave a comment

Leave a comment