Weekend Reading: Markets Love Central Banks - No Matter What They Do

Authored by Lance Roberts via RealInvestmentAdvice.com,

I discussed yesterday, the apparent “myth” of the Fed’s proposed “balance sheet reduction” program as the most recent analysis shows a $13.5 billion “reinvestment” into their balance sheet which has helped fuel the recent market advance.

But therein lies the potential “fatal flaw” of the “bullish logic.” 

At the September FOMC meeting, the Federal Reserve announced their latest decision which contained two primary components:

  1. No rate hike currently, although, further rate hikes are likely in the future, and;
  2. The beginning of the process to cease reinvestment of the Fed’s balance sheet. 

That announcement was notable for two reasons:

  1. The Fed did NOT hike rates because the underlying economic data, and, in particular, the inflation data, suggests the economy is too weak to absorb a further increase currently, and;
  2. The unwinding of the balance sheet is generally believed to be bullish for stocks. 

So, despite the clear evidence of the support for the markets provided by near zero-interest rate policy and trillions in monetary injection, it is believed that “unwinding” those supports will have “no effect” on the market. In other words, it doesn’t matter what the Fed does, it’s “bullish.”

The same is also believed to be the case for the European Central Bank and Mario Draghi who just announced yesterday that the ECB’s QE program will begin to be reduced by €30 Billion per month (down from €60 Billion). While this will continue the expansion of their balance sheet currently, the end of “QE,” as the markets have come to know it, is coming to an end.

Don’t misunderstand me, Central Banks are still very actively engaged in the support of the financial markets for the time being which keeps asset prices positively buoyed. However, with Central Banks now “tightening” monetary policy, the risk of a policy error has risen markedly. This is particularly the case when the financial markets insist on ignoring the knock-off effects of less liquidity.

Tax Reform With Complete Disregard

Yesterday, the House of Representatives passed the Senate-approved budget. This budget is an anathema to any fiscally conservative policy. As the Committee for a Responsible Federal Budget stated:

“Republicans in Congress laid out two visions in two budgets for our fiscal future, and today, they choose the path of gimmicks, debt, and absolutely zero fiscal restraint over the one of responsibility and balance.


While the original House budget balanced on paper and offered some real savings, the Senate’s version accepted today by the House fails to reach balance, enacts a pathetic $1 billion in spending cuts out of a possible $47 trillion, and allows for $1.5 trillion to be added to the national debt.


Make no mistake – this is a defining moment for the Republican party. After years of passing balanced budgets and calling for fiscal responsibility, the GOP is now on-the-record as supporting trillions in new debt for the sake of tax cuts over tax reform and failing to act on the pressing need to reform our largest entitlement programs.”

Passing fiscally irresponsible budgets just for the sake of passing “tax cuts,” is, well, irresponsible. Once again, elected leaders have not listened to, or learned, what their constituents are asking for which is simply adherence to the Constitution and fiscal restraint.

As the CFRB concludes:

“Tax cuts do not pay for themselves; they can create growth, but in the amount of tenths of percentage points, not whole percentage points. And they certainly cannot fill in trillions in lost revenue. Relying on growth projections that no independent forecaster says will happen isn’t the way to do tax reform.”

That is absolutely correct.

Here is your weekend reading list.

Trump, Economy & Fed


Research / Interesting Reads

“There have been three great inventions since the beginning of time: fire, the wheel, and Central Banking.Will Rogers


JMKeynez Fri, 10/27/2017 - 16:30 Permalink

This may be the last hurrah for US stawks. . Shepwave is getting these jumpy patterns correct. Their calls for gaps in Dow and Friday's big rally move in Nasdaq flawless¡!!!!!

Wait What JMKeynez Fri, 10/27/2017 - 16:42 Permalink

The Fed has yet to remove even $1 of liquidity from its holding of TSYs and MBS. In fact, since the end of Sept, they're +2B as of Wednesday. The day they remove any liquidity will be the day that 1987 analog finally comes to pass. So they won't do it. The Fed can't remove liquidity b/c the whole house of cards comes tumbling down IMMEDIATELY. Shepwave may be a nice predictor of stocks' direction, but the Fed balance sheet is an even better one.

In reply to by JMKeynez

Rebelrebel7 Fri, 10/27/2017 - 16:36 Permalink

The only part of the markets that love the Fed are their member banks!, which consist of 37% of banks in this country! Everyone else wishes that they would cease to exist! It is no coincidence that the Federal Reserve Act and the Federal income tax both started in 1913!The cornflakes want their fair share, a bank tax on citizens, for which they have no right to claim!

Rebelrebel7 LawsofPhysics Sat, 10/28/2017 - 11:05 Permalink

Then the liquor tax and other taxes should have been abolished, they have increased. The government made the mistake of using the gold standard. Had they not made that mistake, we would have avoided over a century of nearly continuous war, and have no debt. Had the government not made the mistake of using the gold standard, we could have avoided nearly 2 centuries of nearly non stop war, and $20 trillion debt.The only year that America was ever debt free was in 1835. 

In reply to by LawsofPhysics

Wait What Tugg McFancy Fri, 10/27/2017 - 17:50 Permalink

ZH has become a 'bullish only' site now, like CNBS. Anything disturbing the narrative is off limits."One day your grandchildren will eat cornbread that's sweet and drink iced tea that ain't, and they'll think that's a southern tradition... What is ain't and what ain't is. They turned it all around on y'all and you didn't even notice."

In reply to by Tugg McFancy

SloMoe Fri, 10/27/2017 - 16:46 Permalink

And the audience loves me.And I love them.And they love me for loving them.And I love them for loving me.And We love each other. 

rrrr Fri, 10/27/2017 - 17:24 Permalink

No. No. No. This is wrong. The three greatest inventions since the beginning of time are the eraser, the bicycle, and pre-moistened wipes.