This week’s FOMC Press Conference left me bewildered and confused. The FED did its standard expected 10 billion dollar taper cutting monthly purchase to 35 billion. The confusion came during the press conference. Yellen stated that Fed “currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal“. Are you kidding me?
First the Fed has a mandate and that mandate, when I last checked, was unemployment at 6.5% and inflation at 2%. Well unemployment is at 6.3% and CPI, the tool used to measure inflation, is at 2.1%. So we should see Feds inflation target met by 1st quarter of 2015. So why was Yellen so dovish? Well it doesn’t add up. The Fed continues to taper, hawkish, but sounds like a dove, jawboning. Lets pull back the curtain and see what’s really happening.
We had a few new members on the voting committee this time around. Let’s look at how the committee members look at the end of ZIRP taken from the Median Federal Funds Rate Estimate.
|*from the 16 members of the Federal Open Market Committee|
There it is. We see that the committee sees a 1.25% rate hike in 2015. Nothing for 2014 in the cards. Still bellow nominal levels but a start. We could see this either in the 1st or 2nd quart, in my opinion. April Fed meeting maybe the moment when ZIRP ends.
Now when will the asset bubbles that the Fed has created and continues to do so to this day pop? I have made my prediction of a 21-2200 top in S&P. It may go higher but doubt it. What is my reasoning for thinking this? First we cut through 1900 without much pull back. Second the P/E ratios are still low. I subscribe to a service that give me a more accurate P/E ratio adjusting for recession and interest rates. It sets below 22 as I write this. A lot more room to grow. Lofty P/E ratios stood at 38 in the dot com bubble and at 25 just before the global financial crisis. So up and away.
Even after rates are raised we could see stocks continue up. Remember people see a raise in interest rates as a sign that the economy is doing better. So stocks could do another jump on that news as well. This is why taper doesn’t weaken the drive up in stocks. Its looked at as the economy is doing better. We don’t need the Fed QE drug anymore. This is a hard pill to swallow because we know that this economy is built on a bubble and all bubble must pop. So again when is it?
The answer to this question is guess work but here goes nothing. The right answer is when “future potential benefits in the market is not worth the risks”. When P/E ratios get 25 or higher. When VIX starts heading to the upside. The VIX, let’s look at it here.
We see that lows where established December of 2006. From the bottom it took over a year before we saw the great crash in the fall of 2008. We are now approaching those lows again and I believe we will hang around here for the next few months. IE stocks should continue their gains. Volatility should pick up in 1st quarter of 2015 maybe because ZIRP will come to an end. Maybe. We like volatility. It makes us $$$. Heavens knows we haven’t seen it this year and volumes would defiantly increase on a hike in interest rates. So if we are to use history to gage our future, I would say stock prices should make a major shift and head south in the latter part of 2016.
Another chart I use to gage pull backs in S&P is the $BSPSPX. We see that we are approaching the highs in this index. Before the crash, we see that it held high for sometime before moving down, circled in pink.
Look for all time highs to be reached in this chart.
When we hit all the extremes, the reversal will be at hand. Be patient. This move will make many millionaires for those who are position for it and the wealth transfer will be huge.