The market has whipsawed back and forth like Florida Man on a meth bender. There are ton of answers as to why, but the simplest one that underlies everything is ‘instability’. Markets like to look 6 months into the future. That is about as far as they can go with any statistical reliability and that’s not saying much about the group who didn’t understand they were being sold trash at a premium in 2006-07. If they don’t feel comfortable ‘seeing’ six months out, then you have a prescription for instability. Everything becomes magnified… a trade spat between China and the US? Disaster. Interest rates going up? Disaster. A minor problem with a GS bond issue? Disaster. Leveraged loan issues increasing? Disaster. The Fed raising interest rates? Disaster.
That is what Trump has brought to global markets. Investors and traders feel like there’s no ground underneath them and they quickly rush to the relative safety of bonds and cash. These leaves a liquidity hole that causes an aggressive down draft in equity markets.
What is most shocking to me is that the Fed is actually feeding into this. As an economy, we are in uncharted territory. We have never seen a central bank carrying a balance sheet of $4 trillion and the question is, what to do about it? The answer is to let the balance sheet liquidate of it’s own accord, or runoff. There is no need to actively reduce assets through sales, they need only to let the assets ‘pay off’. Instead, they seem hell bent on aggressive sales of assets, just the thing you’d want to do when demand for credit is high and inflation is moderate to non-existent. Add to this the Fed’s desire to ‘normalize’ interest rates, without even a thought to the idea that we may be IN a new normal, and you have all the makings of a panic.
Over the long term, this will amount to little unless Powell continues to drive rates up DESPITE moderating inflation. My biggest fear right now isn’t a trade war with China, it’s Chair Powell deciding to continue on in the wrongheaded direction he’s been going.