Apocalypse Later

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This week Fed Reserve chairperson Yellen managed to end quantitative easing without causing a financial meltdown. Just two weeks ago the market was a in free fall, but by the close of the month have more than managed to keep its head above water. The Fed will however keep rates low for the foreseeable future and that dichotomy kept many players off balance. The key question one might ask is how the rate of change in the money supply should be considered in forecasting the future.

Generally speaking easy money brings on a sunny climate for equities, and therefore the logic dictates that the elimination of unprecedented bond buying called quantitative easing should cause the markets to take a hit. However, the Fed is still effectively leaving short term rates at zero. This is analogous to asking yourself if you have the gas pedal floored on your Ferrari, driving at top speed, and you ease to ¾ throttle, what will happen. Most likely you won’t slow down quickly or stop (unless you hit something or spin out unexpectedly because you are doing this on a curve) as you have so much momentum that it just doesn’t matter. Additionally, cruising at 170 MPH versus 200, you will still get to your destination quickly.

At the moment, the market just said, “easing off the throttle” doesn’t matter. The huge momentum of rates at zero leaves some upside at least until short term rates actually rise and credit tightens in a meaningful amount.  Former Fed Governor, Alan Greenspan (formally known as the Maestro) hit the lecture circuits this week just as the Fed was letting the world know its intentions and publicly stated that the Equity markets will take a hit once the Fed actually hikes rates. He also said gold should rally as it is the only store house of wealth. Greenspan states that the huge experiment initiated by the Fed to save the world from a meltdown has yet to play out.

Interestingly enough,  the Fed passed the QE torch to Japan who announced its own program to stimulate the lagging Japanese economy and will be buying global equities with the excess liquidity. This move is one of the slicker ones by the central banks that we highlighted in this column last week.

The massive uninterrupted rally off the lows is fairly unusual as measured by one technical indicator and has not occurred in 75 years. The cross currents are that this move off the lows shows overbought market internals while we are now entering seasonally, the strongest period of the year. In a period of unusual market behavior, short term price patterns illuminate the path.