re: There are some major issues lurking in the US financial markets

Financial "news media" is a complete joke and a wonderful contrarian indicator.

How much weed stock you buying?


And how much have you smoked?

It's going to be somewhat volatile for a while I think....we are headed into a presidential election cycle while at the same time at the end of an extended "recovery" fueled by QE and other stimulus money

Now, the central banks are trying to scale back and normalize interest rates so ...

We find out where all that extra money went

quote:

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"recovery" fueled by QE and other stimulus money

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If QE fueled the recovery then why didn’t QE fuel the European recovery? Europe’s was even larger than ours.

Looks like €2.4 trillion has been acquired by the ECB since the beginning of their QE.

So my question stands, if you believe the Feds QE fueled a nearly 300% return in our markets... then why didn’t the European markets follow suit from the ECB stimulus?

Market =/= economy or GDP

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Europe and the collection of nations under one currency across borders faces quite a few more challenges economically than the U.S. - especially since (for now) the Dollar is still the reserve currency of the World

But to really answer your question, I HAVE NO IDEA OR I WOULD TRADE ON IT

right. exactly. I thought I made a point there but I'll have to dig deeper when my brain has a moment

I think you make an interesting point. Can I try to answer that since I'm someone with the hypothesis that low interest rates and QE boosted US asset prices?

If the easy money idea is correct, this Bloomberg article from June 29 may hold some clues. The EU markets are experiencing capital outflows while other markets are experiencing inflows. There have also been numerous political issues these past few years, such as Greece debt issues, the Brexit vote, Italian populist government, and the trade war/skirmishes with Trump. European bank stocks are also trading at low valuations due to low interest rates and other issues, such as Deutsche Bank, Italy, etc., dragging down their stock indices. Meanwhile, the US got tax cuts recently that boosted our stock prices.

I don't know if these answers are sufficient, but there are likely others if the easy money idea is correct. If it's not, what's your opinion?

I see 4 problems with your arguments:

(1) You are not articulating a very important distinction between fiscal policy and monetary policy.

(2) You are making too artificial of a distinction between particular central banks (the FRB vs. the ECB) in driving QE. It's a global phenomenon.

(3) It's difficult to make an argument that the 10-year Treasuries market is in a bubble, while at the same time the equity markets are fairly priced. The bond markets win, or nobody does.

(4) You may be misplacing trust in Brian Wesbury, at least when it comes to his analysis of what drives corporate earnings and makes them sustainable versus unsustainable.

A bond portfolio manager at Morgan Stanley, Jim Caron, made the argument today that the equities market was overreacting to Powell's statement about the sticking to schedule for the reverse-QE balance sheet runoff (i.e., “I think that the runoff of the balance sheet has been smooth and has served its purpose. I don’t see us changing that.”).

I agree. Basically, you had Powell signaling to the market (with his reversed course on language indicating how far away we were from "neutral") that he was a market guy who was going to be sensitive to market drops. Then today he acted like the market didn't matter to him at all, and said he foresaw another 1-2 rate hikes in 2019, along with business-as-usual for B.S. runoffs (without inserting some hedging clause about monitoring for data that might cause the Fed to adjust or postpone its runoff schedule).

But even so, Powell used language that gave the Fed all the room it needed to stand pat throughout 2019 supposing that core inflation doesn't show up, which Powell said had surprised somewhat on the downside (and which I think will likely continue to surprise on the downside going into 2019).

You can see Caron's statements in the following article from CNBC: " Here’s what spooked the market about the Fed today"

quote:

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Jim Caron, fixed income portfolio manager at Morgan Stanley Investment Management, however, said the market may be reading Powell wrong.

“I don’t think they’re seeing the dovish aspect of this. The bond market does,” he said. “The Fed was bound to disappoint. They just couldn’t be dovish enough. That’s just the way it was set up. Do I think this is the correct response? No. I think this is the equity market saying they didn’t cut their interest forecast the way they should have. There’s disappointment…I read what Powell said as very dovish. The bar I think he set to hike was very high.”

As expected, Powell did emphasize the Fed would not be on a preset hiking course. “From this point forward we are going to letting the data speak to us and inform us,” said Powell, adding that that would make the path of tightening uncertain.

Powell’s message was moderated and stocks came off the lows of the day when he said the Fed was at the bottom end of the range of estimates for the neutral rate.

Neutral is the level that is neither stimulative nor slowing for the economy, and there is much debate about where that level is. Powell also gave a nod to weaker financial conditions and said they played a role in the change in forecasts and interest rate expectations.

Caron said the fact the Fed changed its average long-run rate for fed funds to 2.8 percent from 3 percent was very dovish, indicating it sees interest rates near neutral. The Fed raised its fed funds target range to 2.25 to 2.5 percent Wednesday.

Powell also said during the news conference that the Fed was near the low end of the range for neutral.

“What they’re saying is you’re going to stay at full employment and there’s going to be no inflation pressures. that’s their dual mandate. he’s basically telling you through the forecast that there’s no reason for them to raise interest rates,” said Caron.

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The bond market is not pricing in Powell's superficial forecast of two rate hikes for 2019. (For those of us still on the yield curve inversion watch, the 1yr has now inverted with the 5yr.)

Given that Powell does seem to be a market-sensitive guy, I wouldn't be surprised to see him make some more remarks in the coming days that would emphasize his dovish stance on not raising rates until he sees more inflation. He might even throw the market a lifeline by commenting on how his plan for balance sheet runoffs in 2019 could be suspended based on weak housing or employment data, or something. We'll see. I think he'll say something in the coming days to assuage the equities markets.

Ultimately though, I think we're getting closer and closer to the big plunge.