It Gets The Hose Again

Analysts Perplexed by Prudence
November 5, 2019
The Tension is Palpable
February 14, 2020
Picture of people in hazmat suits wielding a giant hose, representing the drastic measures that the U.S. Federal Reserve is taking to provide liquidity to financial markets.

Well, that got troubling fast.

In October, I said that the S&P 500 would make it to between 3,100 and 3,150, because what would be necessary to prop it up beyond that level would be a truly unreasonable amount of liquidity offered by the Federal Reserve, on top of the already drastic measures taken and planned.

To quote myself:

“Our market appears very tired and very sick. The Fed is presently applying what looks a lot like palliative care. Soon, as soon as tomorrow, the effect might look more like life support. It is now apparent that this market is incapable of standing on its own legs. It requires more and more stimulus, and just enough does not appear to be enough anymore. To survive, this market needs more stimulus and earnings growth; but earnings appear to be rolling over and the amount of stimulus required to make a dent moving forward will be hard to stomach and, therefore, late in the coming, I believe. 

I would not be surprised to see the S&P 500 take a 100-150 point celebratory victory lap after convincingly crossing the 3,000 mark, aided by some trade optimism, of course. However, unless the Fed is willing to burn our financial house down to resolve the current kitchen fire, it seems implausible to me that the index makes new highs beyond that for, perhaps, years to come, given all other available information.”

After watching the S&P stall out at 3,150 a few times, it looked like it was all over but the crying…until…

Source: NewYorkFed.org

By my count, it appears that the Fed is prepared to mainline almost half-a-trillion dollars into the system over the next month or so. Whoa! Apparently, the Fed does have the intestinal fortitude to make decisions today to keep this market afloat which set a nice foundation for the catastrophe of tomorrow.

Just as a reminder, as of December 4th, the Federal Reserve had already added about $300 billion to its balance sheet since September 11th.

Source: FRED.StLouisFed.org

The question is, at what point do these unfathomably large numbers begin to lose their meaning; if we’re not already there? Can the Fed provide a nearly infinite amount of liquidity to keep the stock market afloat? And, if it can, is money real?

What might have been a painful but run-of-the-mill market downturn just a year ago is very quickly transforming into an environment that has the potential to become something truly troublesome. If it was the Federal Reserve’s intervention that staved off absolute financial collapse during the Great Recession – and it appeared that it was, from where I was sitting – what happens the next time we need to be rescued if the Fed has already tossed 90% of its lifeline overboard and it’s still not enough? In other words, what happens if financial markets collapse while the Fed is providing maximum amounts of liquidity?

I’m sure it’ll be fine.

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