Fed Balance Sheet $6.3 Trillion
The Fed’s balance sheet is at a record $ 6.3 trillion. Yesterday they approved another $500 bio and You can bet your last dollar there is more to come. The balance sheet is now about 27% of the size of the economy.
This is a record and there is no way out other than supporting the damaged industries and coming out with a massive spending program to rebuild the country through infrastructure, healthcare, and manufacturing. So, this will continue to grow.
What does this mean to the rest of the world? Will they all abandon the dollar? They cannot. US is still the world’s reserve currency. 70% of the world business is dollarized. All other central banks and governments are equally printing money. So, it is not only a US problem. It is a global problem.
Debt is being devalued and so are Currencies. But not against one another. Paper Currencies are being devalued against asset prices. But stocks, commodities and economies are crashing. It looks it is all deflation again but wait for the final outcome. The only way is to reflate economies and inflate the debt. That will happen eventually. It is economics 101. The world is very much on Keynesian economics.
By the way what we witnessed in the oil markets last two Days is an early warning of what could happen in the derivatives market. It is another story which we will discuss soon. Let’s turn to markets.
EQUITIES
We have argued that the move we are currently seeing is a counter trend rally or what technicians call a second wave rally. It is not that such rallies will go like a swimmer in a swimming pool, touch one end and go back. The main goal of the second wave rally is to convince the naysayers that we are still in the uptrend and to re-establish the bullish sentiment that existed in the prior uptrend.
The move up so far from Mar 23 is in line with our analysis. Volume has contracted steadily as the market has tried to make repeated highs. As the known money manager Howard Marks said in one of his recent interviews “we are only 15 % away from the all-time high of Feb 19 but it seems to me the world is more than 15 % screwed up”. As the saying goes “Capitalism without price destruction or bankruptcy is like Catholicism without hell”.
So, there should be more Price destruction. A close below 2730 in the S&P 500 should give more confidence to the expected down move.
BONDS
Bonds rose above 182^31, so we are less certain that the upside pressure is over. Will wait for better confirmation before we get involved.
EURO
Large speculators are increasing their long positions and it is getting to the peak level that occurred before the Feb 2018 peak high. So, it is worrisome. Still think the next directional move in the Euro is down but no recommendations at this point.
GOLD
Nothing specific to report on gold other than it has held on awfully close to the support level at 1670. Think there will be more back and forth movements before price resolves for the next move down.
Be safe. Be small. Be home.
Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.