Has the Fed been forced into the type of asset price inflation that actually will be the cause of the next recession? And may that recession be unavoidable despite everybody now ringing the all clear on recession risk? Perhaps the ultimate contrarian question to ask, but I assure you it’s not just a theorem, it’s actually based on historical precedence and that precedence was the year 1999.
2019 was obviously about avoiding the global recession and central banks went berserk trying to prevent it with the renewed liquidity injections. System failure.[1] In the real word system failure has consequences and ironically it may well be the central banks who have planted the seeds of destruction.
Remember the Fed’s initial plan in reacting to market pressure was to cut rates and stop QT, but then they were forced into repo and balance sheet expansion.
As a result markets blew higher and perhaps too high. Far above the earnings picture and underlying fundamentals. And by blowing asset prices too high they are setting the stage for the reversion and it is the reversion that brings about the recession. The Fed knows the economy and asset prices are very much intertwined these days, hence all the intervention programs.
But repo was forced upon them and the result we all know, the massive run into Q4:
Cut away all the previous actions which still saw two way price discovery and you’re left with this:
And this is in essence exactly what happened in 1999:
These 2 weekly charts are almost like for like. Same structure, same backdrop, same result.
This is the point I made on CNBC Fast Money last night where I tried to put everything in...