The Central Banks Have Gone All In!

We were very close to a complete crash only a few weeks ago.  The PTB saw this and they freaked out.  What we have now is a coordinated baton passing from Fed QE to other CB QE.  So far stocks have rallied in response.  The question that should be on all of our minds:  Will this enough to keep the party going on for longer or is this a bull trap?  The dollar is the reserve currency of the world and QE has a much more dramatic effect on liquidity than these other actions that have been announced.  The ECB has legality issues and there seems to be a split on QE there. Draghi needs to deliver soon as jawboning will loose its effect.  China’s recent actions are not meant to provide stimulus but to prevent a credit meltdown in their economy.  My guess is that these actions won’t have much of an impact on liquidity and the markets should peak out soon. Remember the Fed started easing aggressively in 2007 and 2008 and they could not prevent what unfolded.  What the CB’s are doing is preventing the damn from bursting for now but is will burst eventually.  Deflation is coming and they can not prevent it.

So far bond yields and high yield spreads have not confirmed this rally.  Additionally we have commodities crashing and the dollar continuing to rise.  Global growth is slowing and eventually the earnings of US companies will be affected.  Liquidity in both equities and fixed income is abysmal.  Investor sentiment has gone back to wildly bullish again.  I don’t know how much longer the party can go on for but I do know that each round of free money is having less and less of an effect.  If it did commodities and junk bonds would be confirming this reflation.  If these divergences can be reversed I will join the party.  However, the sheer panic in these CB announcements should be an alarm bell that we are coming to the end game.  The end game is a crash of epic proportions.

Bottom line: I underestimated this action by the other CB’s.  I have been wrong so far.  I am now flat on the year.  I am still mostly cash with some put options and some stock shorts.  My best guess is that we are near a short term top and I might add some tactical sniper shorts. It remains to be seen if we test the October lows this year or if we get a shallow correction.  I am looking to go long TLT in a big way soon.