I’ve been thinking about the current Fed Funds rate hike cycle, which is logically gaining forward momentum now that the Fed can stand down from its 8-year, ultra-lenient monetary policy cycle. That is because the Obama administration’s goals required a compliant Federal Reserve to continually re-liquefy the economy as its fiscal policies drained it.
With the coming of Trump mania and its very different fiscal policy goals, we will witness the end of much of what I considered to be the “evil genius” employed by the Federal Reserve, mostly under Ben Bernanke. When he oversaw the brilliant and completely maniacal painting of the macro known as Operation Twist in 2011, I knew we were not in Kansas anymore. We’d gone off the charts and off the balance sheet into a Wonderland of financial and monetary possibilities.
What else would you call a plan to sell the government’s short-term debt and buy its long-term debt in the stated effort to “sanitize” (the Fed’s word, not mine) inflationary signals on the macro? It was evil, it was genius, and it worked. So too did various other financial manipulations that took place before and after Op/Twist. And here we are.
The Republican view is one where businesses and consumers are stimulated, not money supplies. I think it is a better economically, but not by much in this case. That is because the Trumpian ‘reflation’ would simply be another form of man-made stimulation attempting to deny market and economic excesses from being cleared. A normal economy goes through normal cycles. We have not had a normal economy or a normal cycle since at least pre-2000.
Since Alan Greenspan panicked and blew the credit bubble of last decade, we have been on a continuum further into uncharted waters. Trump’s policies are not going to stop it, either. Besides, he inherits this (chart source: SlopeCharts).
What we see above is a dangerous correlation between Monetary Base, which is the product of monetary policy, and the S&P 500. We see that the S&P 500, which followed the Base in lockstep for much of the bull market, is playing a little catch up to the Base, which itself is only bouncing within a topping structure. That is a dangerous looking chart if the assumption that monetary policy will be withdrawn as fiscal policy is anticipated/enacted is a good one.