Pro Perspectives 10/28/19

October 28, 2019

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Stocks have lifted off to new record highs as we start the week.

We have a Fed meeting mid-week, and that will be followed by a Bank of Japan meeting.

While the market is pricing in a third rate cut in the Fed’s flip-flop campaign, let’s take a look at the most important Fed-related chart…

This is a look at the Fed’s balance sheet.

Remember, it was not only the Fed’s rate path of the past three years that ultimately shook market late last year, it was the withdrawal of global liquidity, and the signals given by the Fed and the ECB that it would continue, if not accelerate.  This was thanks to the one-two punch of the Fed’s mechanical process of shrinking its balance sheet and the end of the ECB’s QE program. 

This sent global interest rates haywire, plunging, in many cases, into negative yield territory.  What has turned the tide?  Balance sheet expansion is back!

The Fed quit shrinking the balance sheet in July, and as you can see in the chart above, they have been back to expanding the balance sheet again.

Add to that, as of next week, the ECB will be back in the business of QE.

So, what happens when the balance sheets of the two most powerful central banks in the world are expanding?  The history of the past decade tells us, stocks go up.  And despite the fact that central banks are buying government bonds, bond prices go down (yields go up). 

That’s what we’re getting.

Below is the chart of U.S. stocks, breaking out to new record highs …

And here’s a look at U.S. 10 year yields, bottoming as the Fed starts expanding the balance sheet again (in September) and a break of the downtrend looks like it’s coming …