Morning Note: An Unlikely Source of Truth

Here’s yet another quote that should sound familiar:

“Not surprised by high asset valuations, it’s tied to easy Fed policy.”

Although it comes from a most unlikely source; the Fed itself. 

Well…. that’s true, but it’s from a Fed governor who happens not to be a voting member this year. That would be Boston Fed President Eric Rosengren. 

And here’s from yesterday post (in case you missed it):

So the Fed is in the unenviable situation where, having inflated these asset prices, like I said, if you go take S&P p/es (price/earnings ratios) and you put them against the Fed balance sheet you can argue that they’ve taken the p/e from about 12 to 30.”

Here’s a 10-year chart (top panel Fed Balance Sheet, bottom SP500 p/e):

Yes, as we continue to stress, the Fed, in our (and Brigden’s) view, is 100% committed to keeping bubbles afloat right here — they’ve left themselves virtually no alternative.

While (to name one of many) policy-mishap risk is therefore big at present, it also makes for some asymmetric opportunities (that we’re carefully exploiting) in certain sectors, certain commodities, and certain places outside our borders.

Asian equities struggled overnight, with all but 4 of the 16 markets we track closing lower.

Europe’s having a rough go of it this morning as well, with 13 of the 19 bourses we follow presently in the red.

U.S. stocks (save for tech) are mostly lower: Dow down 134 points (0.38%), SP500 down 0.02%, SP500 Equal Weight down 0.50%, Nasdaq 100 up 0.84%, Nasdaq Comp up 0.62%, Russell 2000 down 0.69%.

The VIX (SP500 implied volatility) is up 1.04%. VXN (Nasdaq 100 i.v.) — despite this morning’s tech rally — is up 1.92%.

Oil futures are down 1.23%, gold’s up 0.07%, silver’s up 0.31%, copper futures are down 0.21% and the ag complex is up 1.01%.

The 10-year treasury is up (yield down) and the dollar is down 0.02%.

Led by solar stocks, VIAC (Viacom/CBS), MP (rare earth miner), ag futures and utilities stocks — but dragged by energy stocks, banks, uranium miners, base metals miners and industrial stocks — our core portfolio is off 0.22% to start the day.

Think about the following from Albert Rutherford’s excellent book Learn to Think in Systems, as you think about the promises attached to what will essentially be the continuation of utterly massive government spending initiatives going forward.

“How can one possibly predict an accurate vision for future changes, let alone future achievements? How can an individual, group, or country be sure their well-intentioned intervention or proposal will improve things and not elicit negative unintended consequences?”

Have a great day!

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