Central Banker Comes Clean

Central Banker Comes Clean by Brian Maher for Daily Reckoning

Reuters broadcasts the confession:

I do think the growth in the balance sheet is having some impact on the financial markets and on the valuation of risk assets…

Here we have the unassailable and unimpeachable testimony of one Robert Kaplan. He, Mr. Kaplan, presides over the Federal Reserve’s Dallas branch office.

And so a central bank grandee gives it straight… and stamps our dark suspicions with an official seal.

For this has been our claim:

The latest stock market fever owes not to trade, not to economics, not to “fundamentals.”

It owes rather to a delirious four-month expansion of the Federal Reserve’s balance sheet.

Irrefutable Evidence

Let us re-enter Exhibit A into evidence:


And Exhibit B:


This, as we have noted repeatedly, is a direct response to liquidity shortages in the short-term lending markets. In brief summary:

The Federal Reserve has expanded its balance sheet $400 billion these past four months — a $1.2 trillion annualized rate.

The same balance sheet presently rises near $4.2 trillion… a mere holler from its $4.5 trillion record.

As Goes the Balance Sheet, so Goes the Stock Market

Now let Exhibit C go into the record:


As revealed, the stock market pandemonium since October matches nearly perfectly the balance sheet engorgement.

The Dow Jones once again crossed 29,000 today, as it did briefly last week. As last week, it lost its purchase… and skidded back down.

It ended the day at 28,939.

But tomorrow promises a fresh assault upon the peaks.

Should we then be surprised that investor sentiment presently runs to extreme greed?

Extreme Greed

Behold CNN’s Fear & Greed Index:


This Fear & Greed Index presently reads a sinfully avaricious 90 — “extreme greed.”

What did it read one year ago today?

It read 30… verging on “extreme fear.”

But that was before the Federal Reserve furled back its sleeves, spat upon its hands… and set to work…

Before it began hacking interest rates, before it halted quantitative tightening — before it sent the balance sheet ballooning.

One year later the stock market rises to record highs and sentiment runs to extreme greed.

“The Bullish Sentiment We’re Getting Now Has Reached the Uncomfortable Stage”

Here at The Daily Reckoning, our distrust of crowds approximates our distrust of politicians, sellers of used autos… and statistics.

When the crowd goes herding into the same railcar, we instinctively jump tracks.

And the railcar is filling fast…

“The bullish sentiment we’re getting now has reached the uncomfortable stage,” affirms Jeff deGraaf, chairman of Renaissance Macro Research, adding:

“Some of the levels we’ve seen are, frankly, similar to what we saw in January of 2018.”

In reminder: The stock market “corrected” over 10% between Jan. 26 and Feb. 8, 2018.

We believe it is preparing to correct again. But not until the market uncorrects further yet…

“Peak Bullishness and Dovishness”

Tomorrow the president puts his signature to the “phase one” trade accord with China.

The United States will cancel scheduled tariffs on Chinese wares… and China will agree to purchase additional American bounty.

The computer algorithms will pluck the joyful news from the wires. They will proceed to pummel the “buy” button.

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