Eight times each year each Federal Reserve Bank interviews key business contacts, economists, analysts, etc., in their respective districts to assemble what we can view as a real-time general conditions snapshot for the U.S.
Suffice to say, the gist across the 12 Federal Reserve districts, not to mention today’s release of the latest job openings number (10.9 million), does not (given continued epic top-down support) reflect an economy that is on the verge of collapse.
U.S. Job Openings:
Which ironically, if not counterintuitively, makes for a precarious financial market setup when we consider what clearly drives the bullish action these days. That would be ultra-easy monetary policy.
Chatting with a friend earlier today I found myself declaring that the present overall setup is unique to his and my lifetimes. Not in terms of market dependence on policymakers, but on the utter lack of policymakers’ ability to take the measures that current conditions would typically call for. I.e., should the Fed indeed implement the tools they proclaim they have to quell inflationary forces, well, overwhelming probabilities point toward an epic bursting of what we’ll deem are right here historic equity and debt bubbles.
Hence, tapering of bond purchases notwithstanding, there’s nothing consequential, in terms of a Fed-induced tightening of financial conditions, coming down the pike.
Now, that’s not to suggest that the market won’t deliver notable tremors upon the Fed announcing a tapering timeline, it’s just that there’s no course they’ll embark on that isn’t subject to immediate reversal at the mere sign of a serious market meltdown.
So, I said to my friend, “the key question is, do we simply go where everyone continues to go, and assume the Fed has the market’s back ad infinitum?” I.e., do we just buy U.S. growth companies like they’re going out of style? “Or do we exploit the areas that would likely outperform in a weak-dollar environment ad infinitum?” I vote the latter…
You see, as macro thinker Julian Brigden puts it, we’re staring down an “impossible trinity”; the credit market, the equity market and the dollar. Something absolutely has to give! All three simply can’t hold at these levels, let alone continue to ascend.
Clearly, the dollar’s the loser (read long-run rising inflation). Which, ironically, stands to rectify, for the second stretch in our history, an over 100% government debt to GDP ratio.
Here’s the same chart, but for the period that captures the previous bull market (from the tech bubble bottom to the real estate bubble top):
Note the performance premium for non-US equities as the dollar trended lower.
Highlights by Federal Reserve District