Don't Fight The Fed

Deja vu of the election, Trump has once again monkey hammered the bond market...

Wall Street used to have an iron clad axiom "Don't fight the Fed". Throughout the many years that dopium was increasing, gamblers followed this rule religiously. However, for the first time in casino history, this axiom has been conveniently ignored since tightening began. Nevertheless, as Minsky wrote, financial imbalances accumulate throughout the course of every cycle, which have an unbroken record of self-destructing.

This week we got a strong taste of how that self-destruction will take place...

To begin with, implementing a deficit-sponsored fiscal stimulus while tightening monetary policy is the dumbest fucking idea the Idiocracy has yet attempted. It's the economic equivalent of a brake stand. The net effect is to raise interest rates at both ends of the curve, while the Fed is at the same time shrinking the balance sheet - it's a triple tightening...

Crowding out is a situation where personal consumption of goods and services and investments by business are reduced because of increases in government spending and deficit financing sucking up available financial resources and raising interest rates

Up until this week, Fed tightening efforts were flattening the yield curve by raising short-term rates while long-term rates fell. That all changed with the passage of the tax cut. The only thing worse than flattening the yield curve is raising interest rates at both ends of the curve at the same time. Apparently the bond market isn't interested in financing tax cuts for Bill Gates. 

All of which means that liquidity is coming out of markets, while borrowers are getting squeezed by higher borrowing costs. When was the last time we saw this movie? When the reflation rally came to an abrupt halt last March. Meanwhile, the net effect of higher bond yields is to make growth stocks and dividend stocks less attractive. 

The stock/bond ratio has never been more extreme, as the net effect of the tax cut is to incentivize rotation out of stocks back to bonds. Just in time for the cycle to end...

Booyah Skidaddy!!!