Wednesday, April 25, 2018

High Plateau Drifter: The Lloyd Blankfein Interview

(See transcript also.)

The meteoric rise in the popular stock indexes after Trump's election victory in 2016 greatly surprised me. I assumed that money managers and those generally employed in - and generally controlling - the financial industry to react in shock and tank the markets. Instead, we got a rip snorting rally. Clearly, the titans of finance were pleased with the result.

I rationalized that perhaps the euphoria in the markets was a result of their impression that nothing would get done or change. But then how does one explain this market response in the face of the outright anti-Trump hostility from the main stream media. Do the titans of finance inhabit an alternate universe from the rest of the liberal society that surrounds them?

After much thought I figured that as long as they are free to make money, they do not care about the political strife surrounding and beneath them.

The Lloyd Blankfein Interview makes that clear. Without mentioning Trump's name, he approved his policies. The main stream media is clueless. 

But more important as a signal is his calm reassurance that the markets are just fine. Indeed there was no other possible purpose for him peeking around from behind the curtain than to reassure investors.

And that means it is time for caution. Indeed the six month T-bill yield tells a different story.

Money managers can now go to t-bills while collecting their 2% without reducing client cash balances. With treasury debt growing at record levels, interest rates are going to keep rising until something breaks, and breaks badly. The government has two choices. Issue more debt and drive rates higher, or flood the markets with new cash as the Federal Reserve purchases the new debt, thereby driving inflation much higher - albeit with a lag.

My bet is that the Federal Reserve wants to drive the stock market down for a spell to cool the animal spirits. My second bet is that they underestimate the fragility of this debt driven economy, and that the rising rates will cause a crash. Beware the Fall of 2018.

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