Unintended Consequences Grow.
The Fed flaked today. It reversed its rhetoric as we thought it would, as Draghi portended last week. It is more worried about the lack of inflation than the employment situation. Translation: We are done raising, and we cannot unwind our balance sheets now. Europe bought stocks after Draghi's speech. Fund managers sold hedges today, The USD was crushed, and the rally in that yellow doorstop known as Gold was likely an unintended consequence of Fed flip-flop. The main takeaway regarding future market behavior for us is that the ECB and Fed are working closer, and that means fear again.
It would seem that ECB/ FED talk of delaying balance sheet unwinds is having less of a positive effect on stocks as it usually does. But more of an effect on Gold than usual. We've said it recently. Gold may be entering the"Good News is Good news, and Bad News is Good News" bubble previously only inhabited by stocks.
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Here is an excerpt from yesterday's post
The Fed has room to hike as long as stocks continue to remain strong. The ECB is now buying ATH, as the US Fed BTD. But Gold is now also starting to go up on hawk and dove talk. Let's see if that continues.
The unintended consequences of never ending easy money may be growing just as the desired effect is dissipating.
We mentioned yesterday that the notes were more important than the action. We stated that the words to look for were Inflation vs Employment.
From the same article:
Inflation vs. Jobs - The Fed will jawbone how close we are to full employment when they want to hike rates. They will wring their hands at not achieving higher inflation when they want to lower them. just watch the Fed notes closer as well as when their ECB puppet Draghi speaks.
Full post: Gold: CBs Running Out of Places to (Publicly) Park Their FIAT
Apparently we were correct. Apparently, the Fed and ECB can neither unwind as they say, or continue to raise rates. Can QE4 be far behind?
Ignoring the "relatively soon" balance sheet unwind, the dollar index is careening lower (at 14-month lows) on inflation-weaker signals from The Fed.
And gold spiked back above its 200DMA ($1251)...
For us this is some serious unintended consequences. And we do nto think the buying is US based as the ECB has been running out of assets which it can buy. Now that EU banks are buying stocks, what is left? We think the Central Bank front running has begun. EU funds are probably adding to their Gold positions in anticipation that there basically is nothing left to justifiably buy with their xeroxed money. enter Gold, the harbinger of "bad inflation" or in this case possibly collapsing currency confidence manifested in a deflationary situation
However, stocks limped higher as VIX crashed to a record low 8.84...
The muted rally in stocks could merely be that the equity market had discounted this dove-ish FED chat. But the VIX drubbing is important to note. it is a sign of portfolio managers pukingtheir puts and their downside hedges. Their fear of a downside move dissipates, and they believe that price now in insurance (VIX or S&P Puts) will be price tomorrow.
All that means is that If the sell-off ever comes, and the Fed is not sitting on the VIX in a washout, Equity protection will be very expensive indeed due to the growing unhedged longs.
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