In rare moments markets face major event risk, in even rarer moments the event risk is well advertised in advance and the risk implies massive potential moves in either direction. Markets are faced with such a moment right now: The outcome of the China negotiations.
Ever since Donald Trump tweeted out new tariff threats last Sunday markets have experienced their most serious rout in 2019 with $VIX exploding higher right in front of the advertised decision day tomorrow.
In process markets have broken their 2019 up trends (see also Shattered) and indices such as $SPX have rejected new all time highs. The decision outcome tomorrow is likely binary, Trump either follows through on the threat or he won’t. If he follows through China may retaliate and the trade talks long serving as a rallying cry for markets under the banner of “trade optimism” may very well escalate into serious tensions that could either delay any trade resolution for months or even cause them to fall apart with potential very significant consequences.
Of course the tariff threat may just be bluster and/or effective depending on your point of view, in which case we may see a massive rally, even to new highs. Even today we see a quick lift in markets off of Trump’s most recent comments that a trade deal is still possible and he has thought of an alternative and has received a “beautiful letter”. It’s literally a ping pong game, but it’s also a technical one.
Without going into the political or strategic or the myriad of possibilities (including a kick the can scenario) but let’s just look at the potential sizes of the bullish and bearish outcomes.
The bullish: Tensions get reduced and/or a trade deal actually comes to fruition or an “alternative” kick the can scenario brings hope again.
Result: Massive relief rally that can actually produce new highs.
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Occam’s Razor: The simplest explanation is often the best explanation. In this case: The Fed panicked in December and by caving to markets reignited the bubble in a major way and now they are losing control as they are trapped and twisted in their own narratives. No rate hikes until 2020 but markets are printing new all time highs less than 4 months following Powell’s famous balance sheet flexibility cave on January 4th, just a couple weeks after President Trump told him “to stop the 50Bs” on twitter.
And markets have done nothing but gone up since then:
But this appears to be only act one of the drama. Now a mere weeks after a constant drum roll by Kudlow and Trump demanding the Fed to cut rates by 50bp the Fed may actually do just that according to Nomura.
Such a move would surely end whatever may be left of the Fed’s “independence” credibility which one can critically question already following the December cave. Loss of credibility being ironically one of the key risk factors Deutsche sees as a threat to the expansion:
Whether they will cut rates at this meeting or not is speculative, but fact is global growth is slowing stilland markets are pricing in a rate cut:
The Fed has already made itself the market’s play thing and hence can’t ill afford to disappoint markets this year and consequently the Fed faces a perhaps impossible choice this week:
Cut rates here by 50bp could only exacerbate the bubble and set markets onto their combustion path following a total credibility loss.
…click on the above link to read the rest of the article…
The final phase of a bull cycle is the most deceiving. It is the time when things are at their best, optimism runs wild, equities can do no wrong and any warning signs are dismissed as equity price action valiantly defies the reality that is to come.
It is also a time when complacency makes a comeback as big rallies emerge following initial larger corrections. 2018 was a year of big corrections. 10% in February, 20% in Q4. Now a 25% rally. Not signs of a stable bull market. It is precisely the aggressive counter rallies near the end of cycles that can be the most awe-inspiring and reason defying, yet they can also be the most dangerous while being the best opportunities to sell at the same time.
Let’s get real: The liquidity machine can hide reality only for so long and that is: Things keep slowing down. Cycles don’t turn on a dime, they take time and that is what we are seeing unfold and the signs are plentiful. From Japanese industrial production going negativethe past 3 months to home sales in the Hamptons slowing to the slowest level in 7 years. I’m using these couple rather random examples to illustrate a point: The slowdown is as broad as it global:
Oh yes, even Friday’s Q1 GDP report reeked of deceit and the headline is hiding theslowdown in plain sight:
“The economy isn’t doing nearly as well as that 3.2% annual growth rate for gross domestic product reported Friday by the Commerce Department.
The heart of the real economy — private-sector consumption and investment — slowed sharply in the first quarter to a 1.3% annual rate, the slowest growth in nearly six years.
…click on the above link to read the rest of the article…
This is all going to end badly, even some ardent bulls will freely admit this, the question is the how, when and the where. Frankly it’s a tragedy that’s unfolding and discerning eyes can see it. Since the December lows markets have taken the scripted route higher salivating at the prospect of dovish central bankers once again levitating asset prices higher. A Pavlovian response learned over the past 10 years. Record buybacks keep flushing through markets and cheap money days are here again as yields have dropped markedly since their peak last fall.
But investors may sooner or later learn the hard way that this sudden capitulation by central bankers is not a positive sign, but rather a sign of desperation.
Fact is central banks are hopelessly trapped:
10 years after the financial crisis is there any conceivable scenario under which central banks will ever normalize balance sheets to pre-crisis levels? Anyone?
Implications: 1. The Fed stopping here is an admission of failure 2. Full normalization would crash global equities 3. Central banks are trapped & are forced to remain accommodative 4. Central bank policy is still in crisis mode 5. It’s all a propped up shell game
The capitulation is as complete as it is global and 10 years after the financial crisis there is not a single central bank that has an exit plan. As today’s Fed minutes again highlighted: No rate hikes in 2019 while the tech sector is making a new all time human history high this week. What an absurdity. A slowing economy ignored by markets as cheap money once again dominates everything.
So great is the fear of falling markets and a slowing economy that the grand central bank experiment has ended in utter failure. But at least the Fed tried for a little bit before capitulating. The enormity of the central bank failure is perhaps best encapsulated by the state of the ECB under Mario Draghi:
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The big macro wheels are turning and everybody better pay very close attention. The Reckoning is coming. Best hope for a substantive China trade deal and a last minute save on Brexit to perhaps delay the inevitable: The Coming Recession.
This week’s full frontal capitulation by the Fed has not only removed a key buying carrot, but also has brought about the inversion of the yield curve, a classic confirming warning sign that a recession is coming. The key question of course: The when and the how. Bulls will want to hope the recession is at least another year or two away to engage participants in a final game of musical chairs before the rug gets pulled. Bears will point to structural forces and factors that suggest that a recession may come a lot sooner than anyone expects.
In this edition of the Weekly Market Brief I’ll outline some key macro risk factors and dissect some key technical developments I think everyone should be aware of.
Before I do that a quick announcement: After considering all the feedback I’ve received (thanks by the way) I’ve decided to continue to provide a video component as part of the Weekly Market Briefs whenever possible. They truly help provide context and color to the charts. If you want get notifications of the videos you can subscribe via my channel here: NT YouTube Channel.
Now onto markets:
Let’s me get something straight here: Bulls continue to be wrong on the macro and bears continue to be right.
Fact: All the glorious projections made by bulls about growth and earnings continue to get overrun by the deteriorating macro reality. The same folks that didn’t forecast the 2015/2016 earnings recession also didn’t predict the 2019 earnings recession (or the 2018 20% market drubbing for that matter) and are once again clinging to dovish central banks to bail them out.
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I worry about America. When I was young, despite all its problems, America was greater than life, always beaming with optimism with a vision of a better future always ahead. Now that I’m getting older I’m very much unsure. Maybe I now know so much more than when I was younger, that is highly likely, but I’m not blind to seeing the changes over the past few decades.
When does a civilization recognize that it is in decline? When does it realize that its best days are behind it? It’s probably a much easier question to answer for historians with the benefit of a historical record and viewed through the lens of time, but much harder, if not impossible, for witnesses in the midst of history unfolding.
I ask these questions because it is hard not to worry about the state of the US or Western democracies in general these days. From my perch we are witnessing the end of trust, trust in government, trust in fairness, trust in each other. It’s not something that’s suddenly evolved, it’s been coming for a long time, but perhaps we’re just approaching peak realization. 50% of eligible voters already don’t vote in US presidential elections, they have no sense of stake or trust in the outcome. Nepotism and corruption appear rife in aspects of government and general success in life. I could list a myriad of examples, you can as well. The recent corruption scandal in college admissions being the latest example of many confirming an already prevailing sense that the world is rigged. Politics are getting ever more polarized and a common reality seems increasingly out of reach.
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The global economic landscape remains weak yet there appears to be no concern on the side of bulls and investors alike, so firm is the belief that the earnings recession that is unfolding is temporary, so firm is the belief that dovish central bankers can once again prevent any downside.
I get it, it has worked for 10 years and it’s worked again seemingly since the December lows. Why pretend it is anything but central banks?
After all Jay Powell is rapidly proving to be the market’s biggest thrust driver to the upside in 2019:
From my variant perch it’s a sign of deep underlying weakness. There is no bull market without central bank intervention or jawboning. Plain and simple.
Praet: As a central bank, we can create money to buy assets #AskECB
There. They print money and buy assets and in process they distort the entire global price discovery process. Why? Because they have to in order to keep confidence up.
The world is one sell-off away from a global recession because market performance translates directly into consumer confidence and spending. Don’t believe me? Check this out:
In Q4 household financial assets dropped hard for the first time in a long time.
Why? Because markets dropped hard. What else dropped? Retail sales dropped 1.6% in December the biggest decline since September 2009.
Coincidence? You tell me:
Is it the economy that’s leading the horse here? Or is it the other way around? Q1 GDP is much worse than Q4 yet retail spending is higher in January. The case can be made that it is market performance and related confidence that leads spending. No accident then that retail sales bounced back a bit in January, after all we saw a massive rally following the big global central bank flip flop.
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On Thursday markets nearly broke their uptrend from the December lows, but once again a magic Friday overnight gap up driven by renewed hopes for an imminent China-US trade deal and supported by 9 Fed speakers trampling all over themselves to out dove each other alongside a flood of buyback money accelerated markets to a new weekly closing high. I say again because markets have become as boring as predictable: 9 weeks of consecutive gains, 9 risk free Fridays associated with a persistent crush of volatility and a virtual non existence of 2 way price discovery.
It is the trifecta of dovish central banks, hopes for a China trade deal, and a massive acceleration in buybacks that keep pushing markets higher on an ever narrowing highway to the danger zone and investors are throwing caution to the wind despite a continued deterioration in the global macro economic data.
From my perch nothing’s changed in the larger outlook and the rally is to be viewed with extreme caution and I recognize that I’m probably one of last people still out there raising any concerns.
Wall Street is now massively bullish with nearly half of analysts calling for new highs into the 2950-3250 $SPX range later into this year. And, frankly, as long as the trifecta maintains control over price who is to argue otherwise?
After all, market performance has been a key driver of the Fed’s decision to reverse policy, not only hinted at in the Fed minutes, but explicitly outlined by Fed governor Bullard this week:
“We did get a bad reaction in financial markets. I think the market started to think we were too hawkish, might cause a recession…I think all of this weighed on the committee and got people to change their thinking….the normalization process in the United States is coming to an end”.
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Warning. Rant Alert: The global central bank easy money experiment has failed and it is past time that central bankers stopped bullshitting us and just admitted it. Europe is about to enter a recession and rates are still negative, the US Fed just tried to reduce its balance sheet with the greatest economic backwind in years (tax cuts, record buybacks, 3% GDP growth) and still they failed miserably, forced once again to halt all rate hike efforts. After 10 years of being non stop “accommodative” the Fed tried for 3 months to not be accommodative and it blew up in their face as the bottom dropped out of markets.
Only emergency liquidity calls from Cabo by Treasury Secretary Mnuchin and a complete 180 degree reversal by the Fed stopped the bleeding. Again.
And so once again the Fed is asking us to play chase the dot plot. Always dangling higher rate forecast targets that never come to fruition:
Not playing anymore. For 10 years we’ve watched the dot plot being moved further and further into the future only to see it all flat line again now with a renewed halt in rate hikes and an end to reducing the balance sheet. The conclusion is pretty clear:
The Fed is trapped, the ECB is trapped, the BOJ is trapped all doomed to intervene forever and ever amen always afraid to see markets go through a process of repricing and squeezing out the artificial asset inflation that 10 years of permanent intervention have wrought.
All are too afraid of the next recession and aim to avoid it at all costs. And who can blame them? The prospect of entering a global recession without enough ammunition to deal with it is a frightening prospect.
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As with many terminal patients the initial hope is that aggressive treatment would work and cure the patient. But when the one time emergency round of drugs didn’t cure the patient additional drugs were needed and turned the patient into a hopeless junkie. After multiple injections a sense of dread was making the rounds. QE1 did not cure the patient, QE 2 and 3 were required with a little twist here and there thrown in. But the Fed doctors kept promising all would be well and the addiction could be stopped and the patient returned to normal.
And so it looks promising for a while. There was that scary flare up in 2016 when the patient regressed and the normalization had to be put on hold, but then a miracle drug came along called Tax Cut and suddenly it seemed as if the removal of drugs from the system could be accelerated.
So jubilant and optimistic were the Fed doctors that they promised further rounds of withdrawal and kept pointing to their dot plot of normalization.
Yet here we are, a mere 3 months later and the Fed doctors are at a loss again. Unable and unwilling to admit to the patient the true nature of the disease the Fed doctors once again decided to stop all withdrawal of the drugs, worse, they indicated they may have to administer new drugs to come. The patient begged for more drugs and the Fed doctors absolved themselves of their hippocratic oath and capitulated once again to the patient’s scream for another high, a scream only drowned out by the dying sigh of the Fed’s credibility, the initial casualty in this war on monetary drug dependency.
For it is true, the Fed doctors failed to wean off the patient:
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James Madison:“We are free today substantially but the day will come when our Republic will be an impossibility. It will be an impossibility because wealth will be concentrated in the hands of a few.”
The tax cut has now been shown the very scam I outlined it to be in 2017. Debt is soaring and so are debt financing obligations. The CBO estimated that the US will have to add $12 trillion in debt over the next 10 years. As growth estimates for GDP keep being revised downward into 2019 and 2020 there is zero evidence that the tax cut has added anything but a 2 quarter temporary bump to GDP, but the financial consequences will linger for years to come. The promises of resulting investments were of course lies:
“The Trump administration’s $1.5 trillion cut tax package appeared to have no major impact on businesses’ capital investment or hiring plans, according to a survey released a year after the biggest overhaul of the U.S. tax code in more than 30 years.
The National Association of Business Economics’ (NABE) quarterly business conditions poll published on Monday found that while some companies reported accelerating investments because of lower corporate taxes, 84 percent of respondents said they had not changed plans. That compares to 81 percent in the previous survey published in October.
The White House had predicted that the massive fiscal stimulus package, marked by the reduction in the corporate tax rate to 21 percent from 35 percent, would boost business spending and job growth. The tax cuts came into effect in January 2018.”
So horrific is the debt explosion that“deficits continue to blow out,” said Brian Edmonds, head of interest-rates trading at Cantor Fitzgerald in New York. “We are going to see more and more supply.”
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The current government shutdown (the longest in history) comes with a hidden revelation: Millions of Americans are financially unprepared for the next economic downturn. Worse, they are highly vulnerable with few protections.
10 years after the financial crisis the economic recovery has left millions behind with little to no savings and the government shutdown serves as a preview for what will happen once unemployment rises.
Within just a few weeks into the government shutdown people are struggling to cope. We hear of stories of people turning to food banks to feed their families during the shutdown. We hear stories of people who are in dire straights because they can’t get loans and of people who can’t pay their mortgages as payments come due. That’s not even a month into the shutdown.
Why do a few weeks of no pay turn into a crisis for many families? Simple: Nearly 80% of Americans live paycheck to paycheck. That’s a problem when you have little to no savings. In fact it’s akin to playing financial Russian roulette.
And the problem is terrifyingly pervasive. According to a recent GoBankingRates surveyonly 21% of Americans have more than $10,000 in savings with nearly 60% having less than $1,000 in savings:
This savings free game of complacency works as long as people have a steady paycheck coming in and as long as rates stay low. But they are not staying low even though the Fed may stay patient again this year as they have proclaimed in recent days.
As a matter of fact the cost of carrying debt, especially the revolving credit card type have exploded higher since the Fed started slowing raising rates. Think I’m exaggerating? How about this: Interest rates on credit cards by commercial banks are now as high as they were in 2000:
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Market action is heavily dominated by algorithmic trading and programs. Nothing new about that and it’s a reality of the market environment. In December algos were blamed for the steep sell-off, nobody is blaming them during the massive bounce off of the December lows. Funny that.
Irony aside knowing where these algos live and where they change direction is a critical edge to decipher in today’s markets. One of the key tools we use to keep a tap on them are trend lines and in this brief video (recorded January 8) I highlight some of the fascinating ping pong action we’ve come to observe and respect in markets.
Note: News cycles and events may be triggers, but trend lines often give you a destination and potential key turning points of support and resistance. And finding these ahead of time can provide a significant edge.
For years critics of central bank policy have been dismissed as negative nellies, but the ugly truth is staring us all in the face: Market advances remain a game of artificial liquidity and central bank jawboning and not organic growth and now the jig is up. As I’ve been saying for a long time: There is zero evidence that markets can make or sustain new highs without some sort of intervention on the side of central banks. None. Zero. Zilch.
And don’t think this is hyperbole on my part, I will present the evidence of course.
In March 2009 markets bottomed on the expansion of QE1 which was introduced following the initial QE1 announcement in November 2008. Every major correction since then has been met with major central bank intervention. QE2, Twist, QE3 and so on.
When market tumbled in 2015 and 2016 global central banks embarked on the largest combined intervention effort in history to the tune of over $5 trillion between 2016 and 2017 giving us a grand total of over $15 trillion in central bank balance sheet courtesy FOMC, ECB and BOJ:
When did global central bank balance sheets peak? Early 2018. When did global markets peak? January 2018.
And don’t think the Fed was not still active in the jawboning business despite QE3 ending. After all their official language remained “accommodative” and their hike schedule was the slowest in history, cautious and tinkering not to upset markets.
With tax cuts coming into the US economy in early 2018 along with record buybacks markets at first ignored the beginning of QT (quantitative tightening), but then it all changed.
And guess what changed? 2 things.
In September 2018, for the first time in 10 years, the FOMC removed one little word from its policy stance: “accommodative” and The Fed increased its QT program. When did US markets peak? September 2018.
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We’re in one of the longest economic expansion cycles in history and nobody’s happy. It’s mind blowing. You’d think 2018 would have people dancing in the streets. 3.7% unemployment, record stock market prices. Well the ladder until recently that is.
So let me rephrase:
What happens if you have record buybacks, record dividends, and record earnings but 89% of assets yield a negative return in US dollar terms?
No really that’s just what happened:
The short answer is: Nobody knows because it has never happened before.
According to $DB:“A whopping 89 percent of assets have handed investors losses in U.S. dollar terms, more than any previous year going back more than a century”.
Mind Blowing.
No wonder The Fed Crying has Begun. Bulls are now dependent on a big year end rally to turn the ship around. And a technical case for that can certainly be made. But they only have a few weeks left in the year and they better hurry otherwise they owe everyone a big apology and can kiss their year end bonuses goodbye.
But that’s markets in 2018. It’s not reflective of what has happened to the middle class over the last 20 years.
