The Odds | Seeking Alpha

CNN’s Fear and Greed Index still sits at elevated levels. That index now sits at 89% showing extreme levels of greed. Remember, we take the stairs up in the market and the elevator down. In our last blog of 2019 we said that Greed lasts longer than fear and greed may very well continue into the New Year as central bankers in the US flood the market with liquidity. Well, that is still the case.

The Fed is currently injecting over $100B a month with T Bill purchases and REPO operations providing an added burst in the front half of January. Analysts at Morgan Stanley (NYSE:MS) see the Fed ending REPO operations but keeping the liquidity spigot open with $60B in T Bill purchases until after Tax Day and then committing to $15B in purchases across the curve. Will the reduced flow from the Fed produce a speed bump for stock prices? With elevated valuations we think that most will not stick around to find out. Front loaded returns in 2020 may produce volatility much like 2018 or 2000. We will see if $15B a month will be enough to keep the bears at bay.

…investors should well be aware that they are sitting on an artificial construct that is not only desperately disconnected from the size of the economy, but is reliant on ever larger liquidity injections to keep the momentum going. – Sven Henrich Northman Trader

Weaning addicts off a drug requires a painful withdrawal period. The question remains will the Fed ever attempt to wean the market off of easy money. The problems in the REPO market have continued into the New Year – which is not supposed to happen. We also see some evidence of hedge funds trimming positions. Could the Fed have delivered the message to hedge funds that they need to cut back on leverage and drawing liquidity from the REPO market? If so, less liquidity may be on the way. If not, more liquidity and higher prices are in store. Risk is more and more elevated – what we have is a runaway train. There are no authority figures incentivized to do anything about the Fed adding liquidity at every turn and asset prices are increasingly disconnected from reality.

“It doesn’t mean that the market’s going to go down tomorrow, but it does mean that the odds are not, in my opinion, in the investor’s favor.” – Howard Marks Oaktree Capital.

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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