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The Fed Has Won the Battle But At What Cost

Massive Fed intervention has once again tilted the long term playing field. Evidence is increasing that we will not see the March low materially exceeded in nominal terms. This may have little meaning in terms of the future purchasing power of a dollar, but at least nominally the worst seems over. The Fed has won this round and is, for now, again in control of the stock market.

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  1. Jim McGinty

    Hi Lee, I find this article most frustrating when it was only a few days ago that you recommended not to invest in the market either stocks or bonds until there is clarity as to stability of this market. Now that you claim the “FED has won the Battle” How long do you believe they will continue to control the upward momentum of this unbelievably farcical market.

  2. Lee Adler

    I think that that’s a fair criticism in some respects.

    But is there clarity here? No.

    There’s no playbook for the Fed injecting a trillion into the market in a few weeks, and then cutting back from that a few weeks later. When the Fed did original QE, it took a year to inject a trillion. And when they tapered, they sent advance warning. Not the case now. They’re doing everything seat of the pants.

    Would I chase this? No. Might this still fail? Yes.

    I said that the Fed won the battle, not that it had won the war. I’m still doubtful that they’ll have the resolve to keep printing enough to keep this going. I don’t pretend to be able to read their minds. And there’s no policy framework any more to guide us.

    Guidance was a key tool of Fed policy in the past decade. Now there’s no guidance because the reality that they don’t know what the fuck they’re doing has come home to roost.

    I do suspect that the unintended consequences that I’ve written about in the Liquidity Reports will force the the Fed to hold back. So yes, a couple weeks ago the technicals pointed one way, and now they point another. That’s why I said the Fed has won the battle. It took monstrous firepower, but they did it.

    I am very surprised that they’ve been able to achieve what they have with stock prices. The Fed has achieved the seemingly impossible. Now it seems that nothing is unthinkable. I’m doing my best to understand this new paradigm where the Fed uses unlimited, previously unimaginable, unthinkable firepower, so that I can do better in the forecasting department.

    I think that I was thrown off by the fact that when they started the massive printing and pumping operations, at first those operations weren’t working. The market kept plunging. It appeared that maybe we could “fight the Fed.”

    Well the old rule still applies after all. But now that the Fed is cutting back, what exactly does not fighting the Fed mean? At what point is policy tight again? I attack that issue in the Liquidity Trader reports. That establishes the context for reading the charts.

    But is there clarity yet? No. Because this is all new ground. The Fed is playing a different game now, and making up new rules as it goes.

    In the nearly 20 years that I’ve been publishing these reports the recent weeks have been the most frustrating time of all. I apolgize to you and all subscribers for not getting it as right as I’d like to, and as you should expect. I’ll keep working on collecting, reading, and analyzing the data, and we will get there.

  3. Jim McGinty

    Thanks for you honesty and I don’t doubt your integrity. I have found to be successful in business to expect the unexpected and think outside the box. ” Don’t fight the Fed” may have just entered a new horizon that knows no boundaries and to hell with the consequences. I trust your judgement and that’s why I subscribe to your Liquidity Trader.
    Best regards

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