Many of my long-term bearish friends believe that the Fed’s motives are nefarious. To them QE (Quantitative Easing) and ZIRP were about cronyism — designed specifically and cravenly only to bail out failing banks during the financial crisis, and nothing more. The Fed was just greasing the skids for the bankers to skim ever more profit from the economy.
Sure, there probably is an element of that. There’s a lot of cronyism between the Fed and its member banks. The door between the Fed and Wall Street is a revolving door. Even those Fed members who were primarily academics, have had their reward stints as high level officers of Wall Street banks. Yes, it’s a cesspool.
But I’m less certain that the Fed’s aim was that perverse. Certainly the Fed was panicked, and that was one of its motives. But the Fed continued QE and ZIRP long after the panic had subsided. So why did they create such massive dislocations?
I believe the answer is simple. The Fed did what it did because Fed policy makers are nuts.
The short term LAMPP is slightly in red territory, but the market keeps rising. What’s up with that?
The LAMPP didn’t change much last week, remaining red for the short term and still green on the long-term indicator. The red signal for the short term is not an exact timing indicator. It does tell us, however, that the market is ripe for a decline. For the time being, liquidity flowing from other sources, such as foreign capital inflows, continue to drive stock price inflation.
That is a common feature of the late stages of a bull run. I call it residual momentum. We have been indoctrinated to buy dips and chase rallies. There’s never a price to be paid for that behavior. So we keep buying until the cash runs out.
That could happen soon. A huge amount of new Treasury debt will hit the market this month. In fact, $40 billion in net new supply was issued on Friday and another $8 billion is being issued on Monday. That has caused some indigestion in the bond market. But stock buyers covered their eyes and sing “Tra-la-la” at the top of their lungs. They don’t want to hear any bad news.
This kind of denial is a hallmark of an end stage bull market.