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The Prophet
The Prophet
Oh how I miss George Carlin. Yes he was mainly known as a stand up comedian, but he was more than that, much more. He was a social critic, he challenged that status quo, he dared to go where society wasn’t prepared to go: Look at ourselves critically. He did it with biting humor, masterful oration and a directness digging into core truths that were not only uncomfortable at times, but needed to be heard and said.
His voice has fallen silent as he passed away a few years ago and I’m sorry to say: We don’t have anyone like George today. I didn’t agree with everything George said and I don’t need to, nor does anybody else, but his talent was to make us think and to view the world with a different perspective and yes he was a prophet.
He saw long ago where this was all heading. The political charades and manufactured dramas that are sold to the public as choice, the illusion of choice as the agendas have long been in play.
“What do they want?” he asked. “More for themselves and less for everybody else.”
He spoke of the owners of this country, the owners that control everything, the media, what to believe what to think, and the great business and lobbying interests that spend billions of dollars lobbying for ever more benefits for themselves.
And lobby they do:
And boy did they succeed. Under the mantle of populism and draining the swamp they got themselves the biggest tax cuts in corporate history, a historic killing:
Wall Street celebrated and celebrates to this day.
Wealth inequality skyrocketing for years and now trillion dollar deficits as far as the eye can see and debt through the roof:
…click on the above link to read the rest of the article…
State of Denial
State of Denial
Once again investors are made to believe that nothing matters. Only 2 trading days after Friday’s sell off $NDX made new all time history highs. Only 3 days after Friday’s sell-off $SPX made a new all time closing high. Only 4 days after Friday’s sell off $DJIA, $SPX and $NDX make new all time human history highs in premarket. Fours day, four up gaps, all unfilled at the time of this writing. The market of the overnight gap ups.
Why? Because the economic impact of the coronavirus is over or contained? Of course not, it’s far from any of that. Shutdowns persist, warnings of individual companies are mounting i.e. $TSLA, tumbling a day after the technical warning issued, global economic growth estimates are coming down and with them invariably take downs in earnings estimates.
What do markets do? Make new all time highs, back on the multiple expansion game from 2019 when no slowdown in earnings mattered as the liquidity injections from our central bank overlords overrode everything.
This week the PBOC injected liquidity, the Fed kept flushing repo liquidity into the system, and of course a continued buying of treasure bills.
And so markets continue on their path of never pricing in any bad news and continue to disconnect farther and farther from the underlying size of the global economy no matter the ongoing data:
Baltic Dry Index:
But there are no bubbles central bankers tell us. Don’t insult our intelligence I say. Especially since they perfectly well know that policies and words are closely followed by markets and are market impacting:
Lagarde: Traditionally, as central bankers we have been more comfortable speaking to experts and markets than to the general public. Markets closely follow what we do and what we say, and surveys and studies find that we are well understood by them.
What if
What if
What if bears were right all along? What if it’s not different this time?
What if this Fed liquidity inspired rally produced precisely the kind of exuberant final thrust we often see at the end of business cycles? After all, people were really bullish in 2007, people were really bullish in 2000, both final rallies inspired by easy Fed liquidity. In 2000, the Y2k bug, in 2007 giving us the subprime mortgage crisis.
What if this latest rally has produced exactly the same conditions we’ve seen during prior tops?
Be clear: I’m not calling for a top here, that’s a fool’s errand. After all so far all we’ve seen is a minor pullback off of very overbought conditions. Heck, tech hasn’t even begun to correct yet.
But yields keep dropping like a brick, as does the Baltic Dry index, small caps, transports, the banking sector never confirmed new highs, equal weight indicators suggest a major negative divergence inside a market that appears entirely held up by tech, and perhaps by only 5-10 highly valued stocks that are massively technically extended and control more market cap in a few stocks than ever before. At the same time we have a market more extended above underlying GDP than ever and now suddenly a potential trigger nobody saw coming: The coronavirus.
Look, the track record on viruses and diseases over the past 20 years has been clear: Any market impact is temporary and/or minimal at best. Look at SARS in 2003, $SPX rallied over 20% in 2003. But the backdrop was different. The US just came out of a recession and markets had bottomed in 2002. Markets in 2003 were at the beginning of a new business cycle.
This cycle here is old, and one could argue was merely saved again by a Fed going into full easing mode in 2019.
…click on the above link to read the rest of the article…
Hubris
Hubris
One day this bull market will end and the age of the central banking enabled debt bubble will be exposed for the hubris that it is and all the sins of “potential side effects” that central bankers warn about but never do anything about will come back to haunt all of us. It’ll be the age of the great unwind. Nobody will tell us in the moment when it peaks and I suspect it will not start with a bang, rather a whimper, but only end with a bang.
And this great unwind will not last a month or a year, but many years as all the excesses will have to work themselves through the system and all the systematic buy programs will turn into systematic sell programs that will be just as relentless on the way down as they were on the way up.
They very notion of the permanent can kicking we are witnessing now will reveal itself to have been a fantasy. People forget that 2019 and into 2020 came about because of systemic failure of epic proportions. The single one time central bankers tried to tighten blew up in their faces. And the Fed’s forced re-expansion of their balance sheet has now bestowed this blow-off top that has pushed asset prices the farthest distance above the underlying size of the economy that we’ve ever seen. A perversion of the financial system that has created wealth for the few not seen since the 1920s.
I can’t know when this process begins. Nobody can. For all I know it begins today. Or it could be months from now. The price action will tell us. Economically, technically, structurally it’s all set up for it.
…click on the above link to read the rest of the article…
He Knows
He Knows
Last week we found out that Dallas Fed president Kaplan knows that the Fed is creating excess and imbalances in stocks. Yes, bloating the Fed’s balance sheet by over $400B in four months has a massive impact on stock markets. And billions of repo liquidity unleashed each day can be seen impacting the daily action as well (see: Repo Lightning).
So what’s Jerome Powell have to say about all this? Silence. Not a word. Of course he doesn’t have to because the crack reporters never confront him on the issue in his post Fed meeting press conferences. Bubble away accountability free. Why bother asking the hard questions? That may just get you disinvited from the next press conference. Too strong of an assessment? I let you be the judge, but why are the hard questions not asked when it matters?
But actually we don’t need to wait for the answer from a press conference. Why? Because we already know the answer and the answer is: He knows.
Powell knows exactly the behavior he’s instilling in investors, the artificial levitation of asset prices and the disconnects and dangers that is poses.
All one has to do is dig in the Fed minutes from October 2012. Pages 192-194. It’s all there:
“I have concerns about more purchases. As others have pointed out, the dealer community is now assuming close to a $4 trillion balance sheet and purchases through the first quarter of 2014. I admit that is a much stronger reaction than I anticipated, and I am uncomfortable with it for a couple of reasons.
First, the question, why stop at $4 trillion? The market in most cases will cheer us for doing more. It will never be enough for the market. Our models will always tell us that we are helping the economy, and I will probably always feel that those benefits are overestimated.
…click on the above link to read the rest of the article…
Mind the Gap
Mind the Gap
Amid all the ferocious market rallying there’s a gap building and nobody seems to notice, and nobody seems to care. I say: Mind the gap.
The banking index, much like the rest of the market, has been rallying furiously ever since the Fed began expanding its balance sheet on an accelerated pace since October. $BKX jumped on the liquidity train and broke above its previously well contained 2018-2019 range, except it didn’t make new all time highs yet.
A chart I’ve been highlighting again in my latest weekend update keeps highlighting a glaring gap:
What was a comfortable relationship between the 10 year ($TNX) and the banking index ($BKX) broke down in early 2019 and remains broken to this day.
Despite both yields and the banking index improving in recent months the gap remains and signals something profoundly afoot:
The yield gap remains with $TNX contained in a rising channel not confirming a resurgence of economic growth and strength the larger markets appears to want to price in.
But note something else here. While the main indices, $DJIA, $SPX and $NDX went on to make new all time highs here in early 2020, the $BKX did not. It never made new highs versus 2018 and so far it hasn’t made new highs versus 2019.
Incidentally the same story applies to small caps with heavy exposure to financials:
So it’s not just $BKX dragging its heels.
How big is the gap in performance? It’s quite dramatic actually.
What if I told you $BKX has gone nowhere during the past month while $NDX has tagged on another 7%+ in performance?
…click on the above link to read the rest of the article…
GOLD & SILVER UPDATE: Setting Up For The Next Leg Higher In 2020
GOLD & SILVER UPDATE: Setting Up For The Next Leg Higher In 2020
The Day of Reckoning is coming, and it won’t be pretty for the overall markets. While the Fed liquidity has pushed the major U.S. indexes to new highs, the underlying fundamentals in the economy continue to deteriorate. Without the record amount of Fed QE and Repo Operations, the market and economy would have gone into a tailspin in 2019.
Now, to give credit where credit is due, the term, “The Day of Reckoning” was the title from the Northman Trader’s most recent public article. What I like about Sven Heinrich’s work (the Northman Trader), is his ability to use technical and fundamental analysis to provide “PRICE DISCOVERY” in the markets.
Unfortunately, we don’t have price discovery anymore due to the Fed and Central bank decade-long propping up of the markets. This chart from the Northman Trader shows how the Fed’s interventions have come in to support the markets at key technical levels:
What is quite interesting more recently (2019) is the substantial Fed’s rate cuts, QE, and Repo Operations at a time when there isn’t a downturn in the U.S. economy. When the Fed started QE1 in 2009, the stock market had crashed to a low, and the economy was in a severe recession. The Fed continued to support the economy and markets with QE2, TWIST, and QE3 into 2013. Again, these Fed interventions took place during a struggling economy.
Today, the Fed is pulling out all the FIREPOWER when the markets are at new highs, and the economy is still rolling along nicely. This is a recipe for DISASTER at some point. Furthermore, the energy market that is one of the driving forces of the U.S. economy is in serious trouble.
…click on the above link to read the rest of the article…
Intervention
Intervention
The Fed has gone into full intervention mode. Not only into full intervention mode, but accelerated intervention mode. Not just a little “mid cycle adjustment” but full bore daily interventions to the tune of dozens of billions of dollars every single day. What’s the crisis? After all we live in the age of trillion dollar market cap companies, unemployment at 50 year lows and yet the Fed is acting like the doomsday clock has melted as a result of a nuclear attack.
Think I’m in hyperbole mode here? Far from it.
Unless you think the biggest repo efforts ever by far surpassing the 2008 financial crisis actions are hyperbole:
What is the Fed not telling us?
I’m asking for a friend.
What indeed is the Fed not telling us?
Something’s off here. See it all started as a temporary fix in September when suddenly the overnight target rate jumped sky high and the Fed had to intervene to keep the wheels from coming off. Short term liquidity issues they said. Well those look to have become rather permanent:
And these liquidity injections are absolutely massive. Just yesterday the Fed injected $99.9 billion in temporary liquidity into the financial system and $7.5 billion in permanent reserves as part of its $60 billion per month in treasury bills buying program. The $99.9 billion coming from $64.90 billion in overnight repurchase agreements and $35 billion in repo operations.
All this action is surprising frankly. What stable financial system requires nearly $100B in overnight liquidity injections. The Fed did not see the need for these actions coming. They are reacting to a market that suddenly requires it. Funding issues Jay Powell called it in October. The Fed was totally caught off guard when the overnight financing rate suddenly jumped to over 5% and they’ve been reacting ever since which pretty much describes the Fed in all of 2019.
…click on the above link to read the rest of the article…
Measured Move
Measured Move
Having fun with the endless chop that started in early August? Markets are consolidating inside a well defined price range. 2945 on the top end and 2822 on the bottom end of the range for $SPX. That range was established on August 2 and August 5th. Since then markets have been bouncing inside that range for weeks.
Amazingly accurate how algos have rejected each side, but the upper range in particular. It’s become a running joke on my twitter feed:
✔ · Aug 30, 2019Replying to @NorthmanTrader
How about quintuple tops?
The algos are laughing with us.
Or at us?
All joking aside markets will break out of this range either to the upside or downside and when they do the next move may be of consequence. In technical terms one can expect what is termed a measured move equaling the size of the consolidation range.
Example: 2945 – 2822 = 123 handles.
Add that to the top of the range and the upside range suggests a move toward 3068 on $SPX or 1.3% above the July highs.
The flip side is a measured move to the downside: 2822 – 123 handles = 2699 $SPX, just below the June lows or 11% off of the July highs.
What’s intriguing about either scenario is that either would result in a move landing at a key market pivot:
The downside break would bring $SPX back to its open February gap and fill the June gap in process. This could set up for a nice rally, especially if that move were to set up with the implied $VIX target in its current bull flag constellation.
The upside breakout would bring $SPX right back toward the broken wedge trend line resistance and perhaps produce another unsustained high. Why? Because it would also meet once again the broadening wedge trend line resistance:
…click on the above link to read the rest of the article…
Keep it Simple
Keep it Simple
Markets blow up on Friday on a series of tweets, markets jam higher on the pronouncement of dubious phone calls on Monday. The rapid back and forth has many heads spinning and makes for dramatic headlines as people are searching for explanations. To which I say: Keep it simple, especially in the age of the great confusion.
Background: In 2019 market gains have been driven by pure multiple expansion resting on 2 pillars of support in the face of deteriorating fundamentals: 1. Hope for rate cuts and Fed efficacy 2. Trade optimism. But in process little to no gains are notable since the January 2018 highs, in fact most indexes are down sizably since then.
And when markets are purely reliant on multiple expansion the risk for accidents increases when confidence gets shaken. Friday’s escalation on the trade war front again highlights this point.
And in context of global growth slowing an escalation in the trade war is akin to playing with fire as it risks being a trigger to nudge the world economy into a global recession. After all 9 economies are either in recession or on the verge of going into recession.
This morning I was speaking with Brian Sullivan and he asked me what matters most here, the China trade war, the Fed, or technicals. The short answer is they all matter as it is a battle for control, but how to delineate a complex interplay of conflicting forces into some clarity?
Let me give you my take on all 3 fronts. Before I do, for background here’s the clip from this morning:
China:
Occam’s Razor: The simplest explanation is often the best one and that’s really what’s happening on the China trade war front as far as I’m concerned.
…click on the above link to read the rest of the article…
CONfidence
CONfidence
Markets are subject to a giant con game. The game of CONfidence. Confidence must be maintained under all circumstances or we’re heading into a global recession first and then a US recession to follow.
Consider the macro context here: Nine major economiesare either in recession or on the verge of it. This includes Germany, UK, Italy, Mexico, Brazil, Argentina, Singapore, South Korea, Russia. Everything else is slowing down hard. Yields are plummeting for a reason and once again the world is looking to central banks to bail everyone out and for stimulus programs to be launched to rescue a global economy that hasn’t been able to do without in 10 years. US consumers are holding the US economy up is the consensus as they keep spending for now, but already we saw a dip in confidence. Why? Trade tensions, political tensions, and yes, concerns that the longest business cycle may come to an end. Add scary stock market headlines and before you know it the consumer is holding back.
And hence confidence must be maintained under all circumstances. This has been the game for 10 years and hence any market drops that would add pressure to confidence must be averted. You really think it’s an accident we see intervention always at the point of serious trouble?
Retail sales dropped hard in December as markets plummeted. It’s no coincidence. Hence any prolonged malaise must averted.
As Mohamed El-Erian pointed out so clearly this week:
“We may end up in a situation where people read these alarmist headlines, they get concerned, they stop spending. As they stop spending, companies stop investing. And then we get a major slowdown:”
Alarmist headlines? How about headlines that point out reality? But the larger point is clear: Lose the consumer and a recession is unfolding perhaps more quickly than anyone can imagine. After all nobody on the planet called for a 1.5% US 10 year yield in 2019 or a German 10 year bund at -0.72%.
…click on the above link to read the rest of the article…
The Most Dangerous Game
The Most Dangerous Game
How can I not talk about the Fed? How can I not talk about the daily jawboning? It is all around us. Every. Single. Day.
And it keeps working.
I feel like I’m being reduced to a loon conspiracy theorist documenting the very reality of it. But I’m not. From my perch I’m doing a public service doing it, because the background motivation for why it is being done reveals a deeper and disturbing truth: They are scared, they are worried and they are desperate to keep the balls in the air.
In my view it’s disingenuous to not acknowledge the real impact central banks have on markets and assess the risk implications.
Yesterday the Fed went full circus. It was stunning to watch and I suspect they made a couple of mistakes by revealing things they shouldn’t have.
Not a surprise Bullard wants to see cuts, but it was Clarida and Williams who dropped the bombs. Wait for bad data? Nah, just cut preemptively. A full abandonment of the ‘data dependency’ charade. To ‘influence markets’. Stated straight up for all to see. They are no longer even pretending.
And a stunning admission from Williams: “When you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress.”
It pays to act when you have limited ammunition. A clear acknowledgement of what I’ve been outlining: The Fed, by not being being able to normalize in this cycle, is scrapping at the bottom.
So they want to intervene before things turn bad and hope this will prevent a recession. How? By blowing the asset bubble even higher.
And it worked again yesterday. Stocks flew higher, especially in after hours.
…click on the above link to read the rest of the article…
The Rise of Insanity
The Rise of Insanity
Everybody is trampling all over themselves to raise bullish targets. $SPX 3,300, $SPX 3,350, $SPX 3500, do I hear Dow 31,500? Yes I am. The big driver of course the Fed and central banks cutting rates again to save the global economy.
And amid all the hype and excitement you see headlines like this:
Bullish U.S. Stock Buyers Are Positioning for a Giant Windfall
- Equity options strategy could deliver a 13-fold return…
- …If the S&P 500 gains another 11% by the end of this year
The free money excitement is great.
But I have a question:
I also have an answer and it’s an unpleasant one. Because by bailing out markets and economies at every sign of trouble over the past 10 years central banks have given politicians license to do nothing. And nothing is what you get as political discourse fragments and majority solutions are impossible to come by.
But not only are majority solution impossible to get nobody even wants to even talk about them. Why? Because they involve pain. Voters don’t want to hear pain. Hence all you hear is free money. Tax cuts in 2016. Now we hear free college, health care and debt forgiveness for 2020 and who knows maybe more tax cuts.
Nobody wants to campaign on pain. I get it. But does anyone really think solving the structural problems that are behind slowing growth after 10 years of monetary stimulus are easily solvable?
Heck, they may not be solvable at all, hence it’s easier to create a political climate of hate, division, distraction and outrage.
Everybody talks about the outrage of the day, it’s a hyped up atmosphere by design. Because the architects of the conversation know the truth, and that is: As long as people are distracted by outrage, fear, anger and emotion they will not think about how the system is actually utterly screwed.
…click on the above link to read the rest of the article…
Distortion
Distortion
This week we entered the Sell Zone as I called it last weekend. Overnight today $ES hit nearly 3004 and is currently 23 handles lower on the news that the latest NFP report beat while unemployment ticked slightly higher. Whether the sell is now in full swing or more highs are still to come is an open question, after all it’s like arguing with drunks at the bar, you never know what they’ll do next and how far they take the binge. But note what we’re witnessing here is historic but not unprecedented.
The most deceitful time in a cycle is the end of a cycle. Unemployment is low & stock markets keep making new highs despite underlying signals showing reasons for concern which are largely ignored by investors, namely bond yields sinking, yield curves inverting, growth slowing, participation waning, internals weakening. And when that happens new highs may prove to be a great selling opportunity.
I submit we may be seeing all these things now, but perhaps even in a more deceiving manner than ever before.
Why? Because of central banks are desperately trying to extend the business cycle and are thereby distorting markets.
Let’s take note of some facts:
Stock indexes are not making new highs because of revenue and earnings growth. Quite the opposite, earnings growth is negative. The global growth picture is regressive. PMIs have overtly dropped into contraction territory, even in the US key indicators are showing negative growth, durable goods, construction spending, you name it and even employment growth is slowing which is typically what happens at the end of a cycle.
These data trends are reflective of the warning signs coming from the bond market. The German 10 year is -0.4%, The US 10 year has dropped to 1.95%, a full 40% collapse since the November highs (not a single economist had predicted that, they were all above 2.5%-3.5%) and we have inverted yield curves with $13 trillion in global negative yielding debt floating about.
…click on the above link to read the rest of the article…
It IS Different This Time
It IS Different This Time
They’re right. It IS different this time. It’s worse. Much, much worse. What is? Everything. In terms of preparedness for the next recession that is. Debt is higher than ever, be it corporate debt, government debt, central banks balance sheets, available ammunition to deal with a new recession, wealth inequality, the social divisions and political extremes, and now trillion dollar deficits, everything points to a much more fragile system. Oh yes on paper low rates keep it all afloat, but the context is as ugly as it gets.
Here we are, the great collapse unfolding in front of us. With yesterday’s Fed meeting we witnessed a confirmed breakdown in central bank narratives over last the year, an utter capitulation to market realities that are forcing central banks to commence the new easing cycle. No, this is not a temporary little rate cut event they are promising, it’s a new cycle. The Fed yesterday offered a 3 rate cut outlook, precisely what markets had been pricing in. The Fed bowing before market demands. Give us drugs. Yes, whatever you want, you got it.
The response: An overnight collapse in yields to now below 2% on the 10 year, the lowest reading since the US election in 2016.
It was all bullshit:
The glorious growth stories everybody told, the tax cuts that were supposed to bring greatness, all nonsense. Instead we’re now stuck with trillion dollar deficits, collapsing yields, and a renewed TINA effect as money doesn’t know where to go but stocks, chasing whatever they need to chase.
Or, if you don’t want to chase, you can lend money and pay people to borrow from you. It’s all the rage:
Over $12 trillion of negative yielding debt floating about there. Quite the recovery.
But be clear the bond market is screaming recession is coming, none of this is fundamental based:
…click on the above link to read the rest of the article…
