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Fed s Stealth Tightening: Unintended Consequences for Stocks ?

September 21​ ( From ​ FRED, IMF, TradingView  )
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​​​​The Situation

​Must of us follow the shift in rates from Central Banks and try to
forecast their impact for the Financials Markets.

In fact, Monetary Agregates and Shifts within Central Banks
​Reserves are also a must follow that very few​​​​ of us do.

From an old IMF article:​​
​When a central bank speaks publicly about monetary policy, it
​usually focuses on the interest rates it would like to see, rather
​than on any specific amount of money (although the desired
​interest ​rates may need to be achieved through changes in the
​money supply). Central banks tend to focus on one “policy rate”—generally a short-term, often overnight, rate that banks charge one another to borrow funds. When the central bank puts money into the system by buying or borrowing securities, colloquially called loosening policy, the rate declines. It usually rises when the central bank tightens by soaking up reserves. The central bank expects that changes in the policy rate will feed through to all the other interest rates that are relevant in the economy.

​​​The sharp rise in the US monetary base since 2008 has coincided ​with the quantitative easing (QE) programs of first QE1 then QE2 ​and QE3 ( which was finally ended in October 2014 )...

On top of that, we had the buildup of excess reserves of US Banks ​because ​of the slower economy at that time. And generally, in times​​ of crisis, people tend to hold more currency in their accounts...

All those factors made the Growth in the ​​St.-Louis Monetary Base tremendous since the financial crisis in 2007.
( See first Chart Below )

 Fed s Stealth Tightening: Unintended Consequences for Stocks ?  $SPY  #Trading #investing #spy #SP500 #macrotrend
St. Louis Adjusted Monetary Base (BASE) Billions$ ( Blue / Left Scale )
SP500 Index ( Red / Right Scale )​
St. Louis Adjusted Monetary Base (BASE) Billions$ ( Blue / Left Scale )


But the most surprising, is the fact that the financial assets, like the SP500 behave now depending on the growth of the monetary base as shown by the chart below.

Is the SP500 just become a simple new Monetary Aggregate ?​​​​
And IF there is some that still doubt about it. ​So we see on the chart above a very good trend between the two series, but what about correlation ? Check the chart below... So here, not only​ the trendiness is the same but there is also a good correlation between both set of data...
St. Louis Adjusted Monetary Base (BASE) Billions$ ( Left Scale )
SP500 Index ( Bottom Scale )​
By broadening our Monetary Agregates by including the China Central Bank Reserves excluding Gold and Total US Treasury Bonds Securities held by the Federal Reserve all of them compare to the Mighty SP500 on a year over year basis in %. ( See Chart Below )
Year Over Year in %
​St. Louis Adjusted Monetary Base (BASE) Billions$ ( Blue / Left Scale )
Total Reserves excluding Gold for China ​ ( Red / Left Scale )
​US Treasury Bonds Securities held by the Federal Reserve ( Green / Right Scale )
SP500 Index ( Orange / Left Scale )​

QE Consequences

One of the first direct result of the quantitative easing (QE) programs of the FED was lowering rates of bonds.
It did it tremendously since November 2008 when the first QE was announced as shown bu the chart below.​
BofA Merrill Lynch US Corporate BBB Effective Yield©, Percent ( Red )
​BofA Merrill Lynch US Corporate BBB Option-Adjusted Spread©, Percent ( Blue )

The other Major consequence of those QE was to cheapen the US Dollar against most of their trading partners til the Technical Break Out in September 2014 as shown by the chart below.
US Dollar Index - DXY  ( Weekly Candles - Right Scale )
Unintended Consequences

One of the most unintended consequence was that US corporations did borrow tons of money by issuing corporate bonds to buyback their own shares. Getting High on Their Own Supply

But US Dollar strentghening tremendously since 2014 and corporates bonds rates started to rise​​ is changing the financial behavior in US stocks and a new trend is emerging from thoses factors and very few did notice.

So the first factor is that Buybacks having less and less impact on the overall maket trend. In fact, Corporations that Buybacks their shares started to underperform the whole market since April 2015.
But the most interesting technical factor is that it is the first time it is breaking the Major Support Trendline that started back in 2008 as shown by the chart below. ( Red Trendline - Ellipse )

Few did noticed also that we already peaked in terms of Global valuation​​ for US equities as shown by the chart below. What I mean is that taking the SP500 Index but seen in Global currencies to take into account the valuation of Foreign Investors ( SP500 times the US Weighted US Dollar Index ). It did not break the Support Trendline yet as the Buybacks Ratio. 

​Previous peak of that SP500 adjusted currency Index was June 14 2007 if it remind you something!​
( See Chart Below - Red Trendline - Ellipse )​
PKW ETF ( ​PowerShares BuyBack Achievers Portfolio )
SP500 Index​​ (SPX )
SP500 Index
​ US Dollar Index - DXY
​( Candles - Right Scale )


The end of QE3 ​​( quantitative easing programs of the FED ) in October 2014 ( so end of Fed injecting cash into the system ) have bring a US Dollar skyrocketing ( Technical Break Out in September 2014 ), Commodity prices collapsing ( CRB index peaked in August 2014 ) and began the Major Deleveraging process from Emeging markets ( EEM ETF peaked in September 2014 ).

That FED Stealth Tightening process will have a bigger impact than in the past becuase the tremendous amount previously injected is unprecedent and as more debt and more leveraging than in 2007​​. and US Dollar Index at level not seen since 2003.

The Fed have started the most restrictive monetary policy move ever without knowing it as we re getting into uncharted territories by the experimental QE programs...

​​US Financial Assets are the next one on the list. We already had a shot across the bow from Commodities and Emerging Markets; we can t say now that Mr Market di​​d not warned us...