Equities Fly with Dovish Fed: The Market Doesn’t Get It

US equities bounce back on hopium, but traders miss the farce.

Bullion.Directory precious metals analysis 8 October, 2014
By Christopher Lemieux
Senior FX and Commodities Analyst at FX Analytics

Hopium (noun); the drug-like state of irrational over-exuberance, clouded judgement during stock market tops. Also see, central banking, quantitative easing, asset bubbles and the Federal Reserve.

Hopium is a term I have used for a while, now. It is best used when trying to explain the recent “bull” market within equities. A bull market created by the Federal Reserve during a period where growth forecasts repeatedly miss their marks, and, in turn, slashed on an ongoing basis.

The S&P 500 did a 44-plus point reversal from the session’s low-to-high point, and the Russell 2000 (small cap index) jumped the most in three years, after finding itself in bear market territory yesterday. In today’s FOMC minutes statement, the Fed indicated that US economic growth:

might be slower than they expected if foreign economic growth came in weaker than anticipated.

There is a problem, though. Growth has been huddled around a pedestrian two percent for this entire monetary experiment. Those greedy traders bidding risk higher are equality to blame.

What the Fed has conducted sounds impressive within the walls of an Ivy League university, as if it was the economic cure all. However, this is the real world. Instead of all this money going towards infrastructure, jobs, etc., it has been thrown at the stock market.

I have remained bearish on the US dollar, even as it hit a four-year high and a winning streak only the 2007 New England Patriots could pull off.

Stubborn? No. The fundamentals just do not support it.

Markets run off on a tangent on the hopes that something that has little chance of happening will. The Sterling did the same exact thing earlier this year hoping the Bank of England (BoE) would increase rates on what looked like the strongest data the UK will see this year.

They didn’t, and the pound tanked.

I stated many times over, the Federal Reserve will not increase rates (meaningfully) because they cannot.

The withdrawal symptoms would be brutal. It is, also, more likely that once the latest round of QE ends, another will start soon there after. They are in a QE-trap, and market participants are holding them hostage within their own devices. There is an illusion that if stocks do well, the economy will do well. Not so, and we’re seeing it now. The data – globally – shows that central banks cannot and will not fix the economy; and they are prolonging the inevitable: a market crash.

The Fed just stated that rates will remain low on the risk that foreign economic slowdown could impact the US. We already know China is slowing down. Japan has seen a 180 in economic growth and potentially on their way to the fourth technical recession since the financial crisis.

Europe is ugly, to say the least. It’s strongest economic contender Germany, is slowing quickly. All one would have to do is read in between the Yellen-lines: the Fed will not pull the plug.

What is interesting is that there is a small but growing fraction within the Fed that wants to lift rates much sooner than later. Their reason is not so much that the economy is better, but they are worried that if the Fed cannot get out of their zero-bound rate policy, and the economy really does turn for the worst, that the Fed will be defenseless.

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