What Happened Yesterday…
The numbers and charts say that it was the end of something, not the beginning.
Let’s look at the footprints.
- The FED made a big mistake by not ending easy money in August 2020.
- They compounded the mistake by adding to the balance sheet for another 16 months after August 2020.
- While they talk about it, the fact is that the balance sheet has only slightly declined. Therin lies their problem of really squashing inflation, they are afraid of what would happen if they cut the balance sheet in half. See Chart below.
- All their efforts to squash inflation have been to talk bearish and raise interest rates to a normal level, and now wanna-be Volcker hotshots.
- Their efforts have bludgeoned asset prices, see chart below of total market valuation that we calculate using stock, bond, commodity and gold prices. Valuation has dropped down to close to the important support level set prior to the 2020 COVID crash. See chart below.
- On the plus side the fact that they have raised interest rates to a normal, sustainable 3.5 % area is commendable.
- On the negative side, trying to use interest rates as the only solution and raising rates to 4.5 % area is overkill. They underestimate how increased supply chain availability and increased productivity can carry the load going forward.
- And then we go back to the balance sheet, therein lay the seeds of a monster paper asset rally.
Here is the total market valuation chart:
And the FED Balance Sheet Chart: