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Truth
Truth
Every once in a while the truth shines through and we got a few doses of it today. Recently critics who suggested that the Fed’s QE policies artificially elevate asset prices were dismissed as QE conspiracists, but the truth is that central bank policies are directly responsible for the asset price levitations since early 2019 and well before then of course as well.
Loose money policies by central banks are goosing up asset prices. I’ve said it for a long time, others have as well despite constant pushback by apologists and deniers: No, no, asset prices are a reflection of a growing economy and earnings or so we were told.
All of this was revealed to be hogwash last year when asset prices soared to new record highs on flat to negative earnings growth and this farce continues to this day as the coronavirus is the new trigger for reductions in growth estimates yet asset prices continue to ascent to record highs following the Fed’s record liquidity injections:
But now the truth is officially out and can no longer be denied.
Here’s new ECB president Largard stating it plainly:
Kudos to @Lagarde for stating the obvious:
“European Central Bank President Christine Lagarde said her institution’s loose monetary policy is hitting savers and stoking asset prices”https://www.bloomberg.com/news/articles/2020-02-11/lagarde-says-ecb-low-rate-side-effects-puts-onus-on-governments?sref=q1j4E2z1 …
Lagarde Says ECB Policy Side Effects Put Onus on Governments
European Central Bank President Christine Lagarde said her institution’s loose monetary policy is hitting savers and stoking asset prices, as she called on governments to do more to boost the economy.bloomberg.com
But it’s not only Lagarde.
Even President Trump implicitly lays it all out as he’s apparently watching every tick on the $DJIA:
…click on the above link to read the rest of the article…
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…
Narrow
Narrow
New highs again for tech as $NDX keeps relentlessly crawling higher, now 16.2% extended above its 200MA. As outlined yesterday’s it’s a key warning signal.
This latest rally has produced another warning signal and that is the leadership in $NDX is narrowing dramatically. Narrowing leadership has spelled trouble for $NDX in the past, especially as it is building tightening and steep price channels and/or wedge patterns.
Now we can observe this again, specifically in new highs versus new lows:
Note during the summer rally of 2018 $NDX built a tightening wedge patter and new highs versus new lows started showing ever more pronounced weakening. Indeed the final highs in October 2018 came on virtually flat new highs versus lows. Markets broke down shortly after that.
Similar weakening patterns can be observed in the 2019 rallies before they produced short term corrections.
Since October (thanks Fed) $NDX has embarked on its steepest and most narrow channel in many years. Last week’s coronavirus scare landed $NDX on the support trend line, this week’s coronavirus optimism rally has brought $NDX back to its upper channel trend line. Algo ping pong?
Be that as it may but note the dramatically lower expansion in new lows versus new lows on this latest rally versus the previous January rally.
What’s driving it? Simple: Many components in $NDX are much weaker than record prices on the index indicate. And we can also see this in the number of components above their 50MA. Much weaker on the latest rally to new highs:
…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.
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…
Trapped
Trapped
What? You thought a 850+ point drop in the $DJIA would result in a down week? No Sir. The unholy alliance has struck again. Massive jawboning by multiple administration officials about how well the China trade deal was going, a favorable jobs report and above all, the US Federal Reserve, all contributed to a furious rally to make markets green for the week on (when else?) magic risk free Friday.
What was the tell? The same tell it’s been every week since the beginning of October. When the Fed’s balance sheet rises so does the market. One down week in the Fed’s balance sheet coincided with the only down week in markets since then.
Before you know it you have a trend (via zerohedge):
This is how predictable our markets have become. Tell me the size of Fed’s balance sheet next week and I’ll tell you what markets will do next week. Is it really this farcical? It appears so.
By that measure of course we can presume markets will just keep rising until next June as the Fed has indicated “not QE” will continue until then and their daily repo operations are now the ones on autopilot.
Investors are rightfully cheering gains having now realized that nothing matters but the Fed.
But be careful in cheering too much. All this action hides a rather very uncomfortable fact, a fact that may eventually see the air come out of this ballon faster than it is going in.
And that fact is that the Fed, and all other central banks, are trapped. Trapped in a coming disaster of their own making.
And be clear: As we saw this week again, the air can come out quickly. After all 90% of November gains simply disappeared in a matter of a couple of days. The subsequent furious comeback leaving a rather unusual weekly candle on $SPX (I’ll discuss this separately in an upcoming technical update).
…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…
End Game
End Game
Well, here we are. All roads have led to here. The combustion case outlined in April, the technical target zone outlined in January of 2018. Trade wars, 20% correction in between, Fed capitulation in response, slowing growth data, inverted yield curves, political volatility, deficit and debt expansion, buybacks. All the big themes that have dominated the landscape in recent memory, they all have led us to here: Record market highs and high complacency into a historic Fed meeting where once again a new easing cycle begins.
Like flies drawn to a light investors have ignored everything that may be construed as negative as the market’s primary price discovery mechanism, central banks, are once again embarking on a global easing cycle from the lowest bound tightening cycle ever. By far. Many central banks such as the BOJ and ECB have never normalized, the Fed barely raising rates before capitulating once again to macro and market reality:
What’s the end game here? I have to ask given the larger backdrop:
Central banks 2009-2018:
We will print $20 trillion & cut rates to nothing & that will reach our inflation goals.
Central banks 2019: Ok, none of that worked so let’s print more & cut rates again. Trust us we know what we’re doing.
What has all this produced? For one the slowest recovery on record, but also the longest expansion. But this expansion has come at a very steep price as artificial low rates have led to massive record debt expansion, $250 trillion in global debt:
The world is sitting on over $13 trillion in negative yielding debt, corporate debt ballooned to all time highs is keeping zombie companies afloat, the desperate search for yield is forcing pension funds into riskier assets, 100 year bonds, BBB rated credit is the largest component of debt markets, everything is distorted and the desperate search for yield has produced another market bubble.
…click on the above link to read the rest of the article…
Battle for Control
Battle for Control
Markets are engaged in a clear battle for control: An active Fed eager to extend the business cycle using asset price inflation as its primary means to generate further debt financed growth on the one hand and deteriorating fundamentals and technicals gnawing at an artificial market construct on the other.
Let’s call a spade a spade: Markets would not be anywhere near new highs were it not for a Fed flip flopping and racing from dovish media event to dovish media event. I’ve been very vocal in my criticisms of their efforts and sense they are playing a dangerous game here. Hence I don’t want to belabor the point here today. But as a follow up: Friday’s desperate efforts on the side of the Fed to backtrack market expectations for a 50bp rate cut at the coming July meeting, which they themselves caused on Thursday with multiple Fed speakers, has revealed again the Fed’s singular role it has to devolved into: The market’s primary price discovery mechanism. As markets dropped below $SPX 3,000 this week dovish Fed speakers caused a renewed rally above 3,000 and as soon as they tried to walk it back with a conspicuous WSJ Journal article on Friday markets again soon rolled over.
That’s the circus atmosphere they have created and appear to be supportive of. The Fed is very aware of its role in all of this and it’s shameful. Like Alan Greenspan or not, but at least he was a cryptic speaker that left markets guessing and played his cards close to the vest. But over the years the Fed has devolved itself into this clown show we have now, a day to day manager of markets. And markets have learned to react to every single pronouncement and utterance.
…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…
