As far as monetary policy goes, the US Federal Reserve has been the only central bank to tighten. But the Fed cannot raise rates faster than is discounted in the interest rate curve. The rest of the economically weak world will continue to need easy monetary policy. Since the world is connected, this will ultimately impact the US such that the US Fed will have to increase QE at some point within the next year or two, despite the current and planned rate hikes.
Former Reagan budget director David Stockman said, “The real culprit behind the economic distress in Flyover America that brought the Donald to the Oval Office is a rogue central banking regime,” Stockman says. "The U.S. economy is an exceedingly fragile house of cards. It will buckle like a lawnchair in the face of rising interest rates, a multi-trillion drain of cash from the bond pits and the end of the Fed’s price-keeping operations at anything remotely close to current stock index levels.”
When the unwinding begins and stocks get pummeled, Stockman predicts the Fed will scramble to reinstate some form of QE but he thinks it will be too late.
In the meantime, QE continues to distort a host of metrics such as markets, trading, price/volume action, inflation, and commodities prices. For example, it was reported that S&P 500 stocks on average are expected to see earnings growth of 17.3%. This is the fastest rate of expansion since 2011. The capital from QE finds its way into U.S. stocks which gives companies the ability to buy back shares in materially greater quantities thus artificially boosts earnings.Over in commodities, oil prices are trading at their highest level since 2014. Commodities overall have been on the rise since mid-2017. The price of oil correlates to some extent with the price of other commodities but this rise in price has to do with the price of hard assets in general moving higher as fiat currencies continue to be printed by global central banks at record or near record levels.
The rising price of hard assets makes sense given how much fiat has been printed since 2009. Yet CPI figures are well below what they should be due to the removal of items in the CPI basket of goods that rise the most in price. Thus inflation is higher than what is being reported but not due to demand which would suggest a strong economy. Rather, rising prices are due to unprecedented levels of debt that devalue fiat currencies. Further, an artificially low CPI has the added benefit of artificially boosting GDP thus gives the appearance that economies are recovering in the US, Europe, the UK, and in other countries.
Thus QE helps the general stock market recover, pushing it back toward old highs, even as the economic engine sputters. This year marks the 10th year of this bull market run that began when QE was fully launched in early 2009. Any corrections of major averages along the way did not exceed roughly 20% and were due to QE being retired such as in 2011 which prompted the Fed to launch a new money printing program.
But despite this market being highly manufactured, buying stocks on constructive weakness using various techniques we have illustrated such as undercut & rally and voodoo formations has worked well in this environment. Keeping stops tight has also been essential as the market becomes increasingly prone to pullbacks as this ageing bull market wears on.