You Don’t Bet Against the Fed (Part 1)

June 26, 2019
You Don’t Bet Against the Fed (Part 1)

Traders have a saying: You don’t bet against the Fed. What this basically means is that it doesn’t matter what the charts say, it doesn’t matter what geopolitical factors are at play or whether analysts and pundits are screaming “overbought” and “reversal” from the rooftops; if the Fed decides to pull the right levers, the S&P will continue going up.

It’s as simple as that. And up it did go last week after Chair Powell announced the Fed’s decision to leave rates unchanged but signalled that the case for a rate cut was growing stronger.

S&P 500 Index

US equities promptly set a new all-time high before retracing and now seem to be searching for a lower high. Why did US stock markets react in this manner? Perhaps because they read Chair Powell’s announcement as a sign that a change of policy is underway.

A change that could well lead to the Fed resuming its quantitative easing program, which equity markets love because all that free money inevitably floods back into stocks. That and the fact that… You don’t bet against the Fed.

Powell’s European counterpart, Mario Draghi recently stated that there may be a case for further rate cuts from the ECB as well as additional stimulus through asset purchases, given the region’s weak inflation figures.

President Trump has also been very vocal in campaigning for the exact same thing; rate cuts and more easing, routinely crossing the line between the White House and the supposedly independent Federal Reserve by publicly telling Chair Powell how to do his job.

Trump, just like everyone else, knows that you don’t bet against the Fed and that regardless of how imprudent a return to quantitative easing would be in the long run, it certainly supercharges stock markets in the short term, which looks great when you’re trying to get re-elected by convincing people that the economy is booming.

Following Draghi’s statement, Trump hit Twitter again, saying that Draghi’s forward guidance amounted to “making it unfairly easy” for the EU to compete with the US.

Very interesting. The same policy that President Trump wants to see the Federal Reserve adopting is a threat when announced by a foreign power.

Remind you of anything? Sounds like a race to the bottom, doesn’t it? Similar to the “beggar-thy-neighbour” policies of competitive devaluation and tariffs adopted by the major economies after the Great Depression (what is Trump’s trade war after all?)

The same policies that eventually led to the Bretton Woods agreement of 1945, to cooperation and free trade and the beginning of the global forex market as we now know it. Let’s go over this once more. The global financial system that we know and love began as a reaction against the types of policies that Trump and Draghi seem so hellbent on continuing.

The unconventional policies adopted in the wake of the last financial crisis may have helped economies ease themselves out of the depths of it, but they have not led to sustainable growth, as evidenced by the difficulty in maintaining higher interest rates and the problem of low inflation.

As a consequence, it doesn’t mean anything if the S&P 500 just rallied to all-time highs. It doesn’t mean anything whether the DAX is 10% away from its all-time high and the FTSE100 less than 7% away from its own. Unfortunately, it would seem the only thing these percentages mean, is that. You don’t bet against the Fed (or other central banks for that matter).

Categories: News , Trading

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