Nanny Markets : FOMC

I am not sure if, like me, you feel like you are living in a Nanny marketplace because for weeks and months, I have been struggling to find an apt word to describe the stifling mood that many have tried to depict, like me, in a variety of colourful analogies.

So I have arrived at Nanny state markets.

Don’t we love being nagged by indulgent parents ? Better so if they are over indulgent.

Because their efforts are not translating into meaningful numbers.

This chart of GDP, Market Cap and the Fed balance sheet looks good until you work out the numbers.

mkt cap fed bal sheet and total gdp

Since Aug 2008.
Fed balance sheet rose from 0.9 to 4.4 trillion = 388%
Market capitalisation rose from 15.3 to 23.5 trillion = 53.6%
Nominal GDP rose from 14.7 to 16.8 trillion = 14.2%

If we throw in wage growth, the differential would look pretty glaring.

And according to the NY Times, the 94% of households are worth less, adjusted for inflation, than 10 years ago whilst 4% of households in America are worth more.

Next week, we have the FOMC on 31 Jul which will be preceded by the GDP numbers on the 30th.

Following the FOMC, we will have US Non Farm Payrolls on the 1st of August.

The exodus is starting in the junk bond market ahead of the FOMC and the recent Humphrey Hawkins where Janet Yellen observed that  “Signs of risk-taking that could leave parts of US financial sector vulnerable to adverse events have risen modestly from subdued levels”.

“Investors pulled $2.38 billion from funds that buy low-rated corporate bonds in the week ended Wednesday, according to Lipper. That marked the biggest outflow since June 2013, when investors fled the asset class due to fears about the end of the Federal Reserve’s bond-buying stimulus program. In the previous week, investors pulled $1.68 billion from junk bond funds.”

Long end yields are falling, however, as the IMF cut the US GDP forecast for the year which oddly, coincided in a new high for the S&P 500.

The 10Y US treasury is at its year to date lows, while the US 5y forward rate is at its lowest in a year which is a sign of slower long term growth even as the front end prices in rate hikes.

Chart : US 10Y Note Yield


Chart : US 5Y rates in 5 years’ time


The pain would be unbearable if the 10Y US note yield were to rise, which would exacerbate the HY bond exodus. That is an idea ……

If the Fed were the Nanny, and the market were all like Naughty Children, investors would do as they are told and corporates would not do as they are told (because hiring and employment could end a lifetime of easy monetary policy) to continue enjoying the Fed’s largesse. That recipe has worked well so far.

And as an investor,  if you want to do as you are told, read Yellen’s lips “biotech & social media forward PE ratios are ‘high relative to historical norms’” and sell those junk bonds !


Chart of HYG US (iShares iBoxx US$ High Yield Corporate Bond ETF)