SuttonWatch.Net: The Most Ominous Threat to the Bull Market in U.S. & Global Equity Prices

The most ominous threat to equity prices is clearly the newly implemented program of "quantitative tightening" by the U.S. Federal Reserve and the multiple interest rate hikes now being projected by the FOMC over the next several quarters!

In last week's "Tipping Point" column in this space, 15 threats to the bull market in U.S. and global equity prices were detailed. However, one particular threat is the single most dangerous for investors in U.S. and global equity prices.

U.S. Federal Reserve officials have been consistent and almost adamant in their hawkish rhetoric (especially) over the last several months. Chair Yellen has led the charge in favor of another interest rate hike in December 2017 and as many as three more in 2018. More importantly, in my view, is the NEW policy of "quantitative tightening" which involves the "slow" but steady liquidation of the Fed's bloated $4.5 trillion balance sheet.

While I am unsure why financial market participants are NOT taking the Fed's hawkish monetary policy rhetoric more seriously, let's take a quick look at the Fed's recent ACTIONS to see if the Fed is actually implementing its well telegraphed warnings. Fortunately, all we need to do is analyze the Fed's regular Thursday weekly release of the "Factors Affecting Reserve Balances" report. Believe it or not, this is a fairly easy read for almost any trader or investor who has been around the block for a while. On the very first page of this weekly report, there is a summary line item entitled "Total factors supplying reserve funds". This is the key line to see the net change in the Fed's balance sheet on a week to week basis.

In the latest release dated Thursday, November 9, 2017, the Fed liquidated $2.627 billion in assets (net) from its balance sheet as compared to the previous week. While there was a $1.576 billion increase in "Other Federal Reserve Assets", mostly accrued interest on its massive $4.5 trillion portfolio, the most fascinating number on this week's Fed release is the $4.375 billion liquidation of Treasury securities (Notes & Bonds)! Just maybe, and I'm just spit-balling here, this past week's collapse in U.S. debt prices (Treasury notes & bonds, Corporate investment grade bonds, and Corporate High Yield bonds) had something to do with the Fed's "slow", but determined liquidation of its balance sheet! On the previous week's Fed release dated Thursday, November 1, it shows that $1.75 billion in Treasury notes and bonds were liquidated AND also $4.57 billion in Mortgage-backed securities were liquidated! In the week ended October 26th, the Fed liquidated $4.78 billion in Mortgage-backed securities!!

Yes, watch what the Fed SAYS and watch what it actually DOES! Quantitative Tightening is happening NOW! It's REAL and it's the most dangerous threat to U.S. and global equity prices!!

Bottom line: Storm clouds are everywhere now! Investors would do well to head for the sidelines by raising significant cash and/or by hedging equity portfolios with a mountain of downside protection! The price of downside protection is now the cheapest in the history of modern-day financial markets!!

Here are several charts of key debt prices and key interest rates: