Two weeks ago

Jerome Powell retains his role as Fed Chair and Lael Brainard, a confirmed dove, is tapped for Vice Chair.

Nothing to see?

Not so sure.

Here’s what we were facing a couple of weeks ago when it was announced.

First there’s a record Fed Balance Sheet.

Next, there’s the $1.7 trillion Build Back Better Act bill that passed the House and was being sent to the Senate before the end of the year. But, at least it is mainly growth fiscal, and not just keeping the lights on welfare fiscal.

In terms of funding it, it will be debt, and that will add to an already massive budget deficit of $2.8 trillion. Then there’s the trade deficit of $1.1 trillion (i.e., pretty much a $4 trillion twin deficit).

Then, there’ the Claytons taper that can be reversed at any time if inflation control becomes too costly in light of the raising costs to service $300 trillion in global debt - or if COVID outbreaks warrant.

And then in an attempt to try and arrest inflation by keeping oil prices down, U.S. President Joe Biden backflipped on his clean energy transition goals and authorised the release of a record 50 million barrels of oil from the SPR (i.e., Strategic Petroleum Reserve) to much criticism.

Still nothing to see?

Last Friday, the great leveller decides to rear its ugly spike

And then reports of a new strain/variant of the virus with an apparently different spike which may or may not respond efficaciously to existing vaccine therapies joined the operating theatre, and sent markets into meltdown.

It was a way bigger meltdown than any caused by the Claytons taper and suggests that the ‘slam dunk’ view that there will be (a) a smooth reopening; and (b) a meaningful and long lived taper, is flawed.

The volatility index soared and so too did Zoom, Peloton, Moderna and a few other pandemic stocks.

This week, a toothpick or stake?

Overall, the Aussie market bounced on Monday as though it was a toothpick, but some sectors got whacked and the market was heavily down, early on. The U.S. market did not melt down Monday night our time.

Markets on Tuesday morning (30 November) might have been said to be cautiously optimistic, with the volatility index down somewhat but still hovering around September’s second peak.

Last night the volatility index headed back up.

Today markets are calm but I would say still cautious, with some pandemic stocks receding and hot stocks back on a tear, but still with no clear direction on where the new spike might end.

Sure, it may be a quick smack and recover, or it might be the excuse needed by some to unwind tightly wound positions, where maybe everything that’s needed to go right might not be going so right.

That is, mutating virus, geo-politics and Taiwan, moderating China growth, limited central banking playbook, etc.

News from WHO, Moderna, Pfizer and other big pharma will be instructive over the coming weeks. But don’t think the equities market in particular will be rational. We now have a massive influence from the retail army that did not exist prior to the pandemic, and that means more opportunities for millennial/zoomer friendly stonks, and plenty of short squeeze action as shorts seek to unwind wrong way bets that dare to challenge the army.

And in the meantime, the market, which has learned Obi-Wan’s lesson well, says it’s a toothpick, not a stake.

Stay tuned.

Mike