BarroMetrics Views: A Warning: US Stocks Topped?
Figure 1 shows the warning: The St Louis Fed Asset Monetary Base has broken below the previous low point. In the past, if we saw two consecutive closed below a significant low, it would suggest that the deposits, currently with the St Louis Fed, will flow into Main Street. (The next reading is due around Nov 4.)
Should that happens, we can expect to see inflationary pressures rise about three months after the flow began. So, inflationary pressures should be seen, say about February/March 2017. This date accords with my work: we’ll see a market top in the last quarter of 2016 to the first quarter of 2017.
Where are we then on the rate rise scenario?
We can expect to see a rate rise in December in 2016 with a FED promise of “measured rises in the future – depending on data.”
The markets seem to have taken the view that once the rate rise in Dec 2016 is out of the way, there will be only one more rise in 2017, if that. (see for example, “Fed Forecasts See Lower Rate Path In 2017, 2018.”
An unexpected increase in inflation projections will cause the US stock market to tumble and USD to start a strong rally because the projections will suggest a more rapid rate rise.
The questions raised will be:
- What will the FED do if US stocks head south?
- And, will its action, given the deficit, be able to stop the bear market from gathering a head of steam.
FIGURE 1 ABM