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Registered Investment Adviser Caleb Lawrence

The major averages enter the final hour with small gains following another volatile session on little real news. Since Monday the Standard and Poors 500 Index has lost 144 points or 5.3%, while the NASDAQ is down 338 points or 4.7%. A bruising week to be sure as both averages slipped into the red for the year.

Wholesale inventories advanced .4% in December on broad based gains. Sales moderated to +1.2%, pushing the inventory to sales ratio to 1.22.

At this point the Fed faces a real dilemma. 4 interest rate hikes under its belt and a very, very modest reduction of 30 billion in its 2.454 trillion Dollar balance sheet has caused the markets to hit the panic button. The Trump debt funded tax cut package will require the Treasury to issue some 617 billion in new debt over the next 5-months to fund government operations. At the same time the Treasury plans to reduce the balance sheet by some 420 billion this year. Put these two together and the likely outcome is that interest rates will spike, and the yield curve will go sharply negative precipitating a severe recession in the process as the markets sell off in dramatic fashion and real estate gets crushed just for starters. Given debt levels and existing valuations a magnified repeat of the 2007-2009 crisis is well within the bounds of probability. This marks the 3rd consecutive credit driven bubble that the Fed has created in the last 20-years. The previous two were expensive to clean up and produced substantial economic damage, this one is likely to prove even worse as debt levels and valuations are far higher. The real question is when the Fed is going to learn that an ounce of prevention is both cheaper and more effective than a pound of cure as bubbles such as these ultimately benefit very few while at the same time proving extremely destructive.

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