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We May Be in for a Stomach Churner

February 25, 2019

This year could be a good one for those who like a wild ride because a lot could go wrong.

 

First is the Federal Reserve making a policy mistake, which it may already be doing by simultaneously raising interest rates and reducing its balance sheet. One or the other should occur, not both. And if this isn’t realized soon, it could make markets even more unstable.

 

The Fed’s quantitative easing flooded the economy with liquidity that seems to have become more lifeblood than catalyst – and it can’t be taken back easily. Done wrong, the system could swallow itself.

 

Another possible catastrophe is the Treasury’s penchant for trillion-dollar budget deficits while the Fed is shrinking its balance sheet. If borrowing needs increase and there is little to borrow, the ripple effect could be enormous. In other words, to support these budgets, the Fed’s balance sheet must grow, but that’s not happening.

 

A third issue is disappearing liquidity. Companies are sopping wet in debt, using leverage to buy their own stock, and yet investors continue to rain money down on them.

 

Highly-paid executives are buying back their own firms’ stocks at huge premiums. Scarily, much of this debt is in mutual funds, which mandate daily liquidity. So if investors want their money, they’re entitled to get it, which could create a huge issue.

 

Could it be because many executive compensation packages are tied to stock price? They certainly wouldn’t game the stock price to trigger bonuses before a predicted economic downturn, would they?

 

Yes, they would.

 

Annual meetings could be interesting this year.

 

Throw in our tax/political issues, global trade complications, USMCA ratification, plus the ever-present threat of more shutdowns, and it’s clear we could be in for a wild ride indeed.

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