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Fed Creates Optical Illusion of Economy’s Strength

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In his Daily Market Notes report to investors, while commenting on the strength of the economy, Louis Navellier wrote:

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The Strength Of The Economy

I think the strength of the economy in this case is an optical illusion created by the Fed and its extreme intervention in financial markets. “We support asset prices in order to support the economy” is how Chairman Jerome Powell often puts it, but in his gargantuan and unenviable task – to save the financial system from unravelling – he has distorted market signals to the point of making them irrelevant.

Nobody ever suggested that the job of the Fed Chairman would be easy, but we are in truly uncharted territory when it comes to Fed interventions. I am not suggesting that the U.S. economy has not improved because of rising vaccinations and reopening, but the level of its improvement cannot be observed in previously valuable market indicators as junk bond spreads. That is how the investing world has changed.

Junk bonds, for the first time, saw their yields fall below the level of inflation. That had never happened before the decision of the Federal Reserve to intervene as aggressively as it has since early 2020.

My guess is Delta will become a problem globally and will hit the stock market in some way as it delays the reopening trade and recovery, but it won’t ultimately derail it. We can’t look for clues in the junk bond market, since the Fed has rendered its signals irrelevant, at least for the time being.