I should have been surprised that, despite the trifecta of\ngloomy headlines, US index futures were trading up about 0.2%, but I\nwasn\u2019t. That sort of thing doesn\u2019t\nsurprise me anymore. Stock markets seem\nto have taken on a life of their own, beholden only to money flows and positive\nsentiment.<\/p>\n\n\n\n
It is for that reason that I now consider myself a \u201cmarket\nnihilist<\/strong>\u201d. For those with neither a\nphilosophical bent nor a love of \u201cThe Big Lebowski\u201d, allow me to define\nthe term. Nihilism, derived from the Latin\nword for \u201cnothing\u201d, is defined as a philosophy of \u201cextreme skepticism\nmaintaining that nothing in the world has a real existence.\u201d While I hardly espouse that view in my daily\nlife, I have come to realize that if we substitute \u201cmarket\u201d for \u201cworld\u201d in the\nprior definition it pretty well sums up my attitude towards recent market\nactivity. <\/p>\n\n\n\n I have written here before (links below) about my belief that world markets \u2013 equity and fixed income \u2013 are being driven by waves of central bank liquidity. The most recent wave in the US was driven by a sharp increase in the size of the Federal Reserve\u2019s balance sheet during last year\u2019s fourth quarter as the result of the Fed intervening to provide a backstop to the fragile repo market. For that reason, I am shocked by the lack of response to the Fed\u2019s decision to reduce the size of their repo operations. We see, however, a 2-4-week lag between the stock market and the Fed balance sheet, so perhaps it is not unreasonable to see the market shrugging off that news in the short-term:<\/p>\n\n\n\n As for another central bank in the news, we see that the People\u2019s Bank of China (PBOC) has begun to withdraw some of the massive liquidity that it injected in the face of the covid-19 outbreak, though not enough to fully offset the increase:<\/p>\n\n\n\n And while the US equity markets charge towards new highs, reflecting rosy prospects for corporate America, the treasury yield curve is telling a vastly different story:<\/p>\n\n\n\n The two lines on the above graph compare the active treasury\nyield curves from today versus one month ago. \nWe see a major parallel shift to lower yields from the 2-3-year\nmaturities on outward, while the front end of the curve has slipped back into\nreversion. Neither of these bode well\nfor the economic outlook. The decrease\nin bond rates implies lower inflationary expectations, while the inversion in\nnote rates implies the need for Fed easing within the coming years. Over the course of my career, I have found\nthat when stock and bond markets disagree, the bond market is more likely to be\nproven correct.<\/p>\n\n\n\n There is only one way I can reconcile such glaringly\ndifferent economic outlooks \u2013 the flow of money. Money flowing into markets raises prices,\nwhich has the effect of lowering bond yields. \nWe see the Fed and PBOC pumping money into the system (along with\naccommodation from the European Central Bank and the Bank of Japan). Increased money supply should lead to\ninflation somewhere. Their efforts to produce\nreal-world inflation have been generally unsuccessful though \u2013as reflected in\nstagnant commodity prices. The\ninflationary effect is instead being seen in financial markets.<\/p>\n\n\n\n This leads to my nihilism, my belief that little else matters besides central bank liquidity. Markets seem addicted to that liquidity and behave well as long as global central banks are willing to provide it. My biggest fear right now is how bad the markets would react if central banks fail to feed that addiction. <\/p>\n\n\n\n For further analysis, please view the following links:<\/p>\n\n\n\n Stock Market vs Bond Market: \/campus\/traders-insight\/securities\/macro\/stock-market-vs-bond-market\/<\/p>\n\n\n\n Central Bank Balance Sheets \u2013 Here and Abroad: \/campus\/traders-insight\/securities\/macro\/central-bank-balance-sheets-here-and-abroad\/<\/p>\n\n\n\n Patterns in the Fed\u2019s Balance Sheet: \/campus\/traders-insight\/securities\/macro\/patterns-in-the-feds-balance-sheet\/<\/p>\n\n\n\n A Blast from the Past from the Fed: \/campus\/traders-insight\/securities\/macro\/a-blast-from-the-past-from-the-fed<\/p>\n","protected":false},"excerpt":{"rendered":" The most recent wave in the US was driven by a sharp increase in the size of the Federal Reserve\u2019s balance sheet during last year\u2019s fourth quarter as the result of the Fed intervening to provide a backstop to the fragile repo market. For that reason, I am shocked by the lack of response to the Fed\u2019s decision to reduce the size of their repo operations. <\/p>\n","protected":false},"author":4,"featured_media":27572,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[14700,18,6,8,9,26,3],"tags":[78,77,446],"contributors-categories":[13576],"class_list":{"0":"post-35268","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-ibkr-market-insights","8":"category-macro","9":"category-north-america","10":"category-region","11":"category-securities","12":"category-text-articles","13":"category-traders-insight","14":"tag-balance-sheet","15":"tag-fed","16":"tag-federal-reserve","17":"contributors-categories-interactive-brokers"},"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"\n![\"\"](\"\/campus\/wp-content\/uploads\/sites\/2\/2020\/02\/image-44.png\")
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