My take on the FED liquidity discussion

Last week we saw the annual Jackson Hole conference, where the chairmen of the biggest central banks of this planet come together and discuss their current measures. FED chair Jerome Powell kicked off the meeting, which was held online for the first time caused by the covid situation, with a speech. And he addressed to the world what many people already thought.

With immediate effect, the FED will deviate from the previous inflation target of 2 percent and instead introduces a more variable target above 2 percent in order to be able to achieve this 2 percent sustainably.

He also gave the signal that the Fed will do everything it can to keep interest rates as low as possible for the next five years.

The main focus of the FED is currently clearly on the labor market and the unemployment figures as well as on the stability of the credit- but also stock market.

The FED floated the market with liquidity like never seen before. The consequences, coming with these measures, are still unclear.

I have therefore prepared a small diagram to illustrate the current situation as I see it for the moment.

FED liquidity, Lukas Kuemmerle

I guess in the end money behaves the same like water. It seeks the least resistance and flows in the corresponding directions. This is also what I would like to bring closer to you with this little graphic, but let me explain it to you a little further.

A big consequence of the covid crisis, which is making me think at the moment, is that the banks receive enormous amounts of money from the central banks, but they are more and more careful or even fearful to pass these amounts on to consumers and companies. Why? Because the risk of default increases in times of Covid 19. What the financial markets continue to support are the huge amounts of direct bond purchases and the hope or even the insurance that monetary and fiscal policy will act quickly if needed (or in short if it gets bad, they will print even more money). Personally, I would not be surprised that after we have already seen corporate bonds purchases in the junk bond area, we could soon see direct purchases of US stocks by the FED. (approval by the US congress is becoming more and more likely and is no longer a pure theory)

The short and mid term consequences are already visible. We see on the one hand a plunging US Dollar and bond yields were already directly dropping through the floor. On the other hand we see equities still going through the roof and also rising commodities (not only gold , but also the whole market breath of commodities like Wheat or Corn)

The consequences for the real economy of these measures by the FED and also the fiscal policies could be enormous, but no one knows whether the bubble will burst in the end and if so, when. So it means to be prepared for everything, but still ride the current wave, because watching the rally would be naive and harmful too.

Still we have to say that the valuations of stocks are on the moon and depending on which models you use, we are currently getting valuations again like in the year 2000 and you know what happened there. For this year we will see a decline in earnings growth of minus 30 percent. That means to justify the current valuations in the NASDAQ 100, earnings growth has to grow about 120 percent in 2021. Good luck with that!

My stance is market neutral and I take several long and short positions every day.

Nevertheless my mid till long term view makes me very thoughtful at the moment.

Thats my take, thats my view.