The Crack High Boom and Bust
Investors are gorging on a lethal overdose of monetary and fiscal stimulus heroin. Trump and Powell are on a collision course, unless markets implode in the meantime.
"How the two key public figures work together, or don’t, could determine how long the stock rally lasts"
Today the Fed cut rates by a quarter of a percent because that's what they've been telegraphing to markets since their last meeting in September. However, going forward the MAGA landslide puts Powell back in Trump's crosshairs. As I wrote in my last blog post, it's highly likely that Powell will be forced to restart raising rates sooner than later. At which point he will become the new Paul Volcker, who was much maligned for his abrupt reversal of rate cuts. Recall that Trump fired Janet Yellen and installed chair Powell in her place. Trump handpicked Powell for the job. However, during Trump's first term in office Powell largely refused to yield to Trump, with the exception being in late December 2018 when Trump demanded the Fed pivot on rate hikes.
The combination of profligate fiscal policy combined with rate cuts will be inflationary at some point in the coming year. In the meantime, the only inflation taking place is in asset markets which have been going vertical this week starting on Monday.
Which gets us to the casino.
This is the headline of the week:
Wall Street brokers are up 90% year to date and yet the year-end rally is just beginning.
Sure.
Trump is the first-ever Crypto President.
"He has pledged to make America “the crypto capital of the planet” and create a “strategic reserve” of bitcoin"
Granted, when you see the dollar being slowly destroyed by the combination of excessive fiscal and monetary policy taking place during an ongoing expansion, it's tempting to believe that the U.S. dollar is on the verge of becoming a Third World currency. However, this week the dollar soared relative to other currencies.
Here we see that the clock has been reset on the Yen carry trade unwind, but as we see the $USDJPY is making a lower high while Momentum Tech stocks are sky-rocketing as if the August crash never happened.
Meanwhile, the rest of the world is tracking exactly as it was at the August FOMC. What Trump acolytes don't know is that his protectionist policies are not conducive to a global rally.
It was this exact same week in November 2021 when risk markets made their high.
In summary, the dynamic duo - Trump and Powell - have pushed risk seeking to a level last seen at the 2007 subprime high.
