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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…
Pain Is Inevitable; But Suffering Is Optional
Pain Is Inevitable; But Suffering Is Optional
How to avoid becoming collateral damage in the coming crash.
Sometimes you really do find enlightenment at the top of the mountain.
I spent this week hiking in Montana’s Bitterroot mountain range, as a participant in the pilot run of a new personal-growth-through-adventure-travel startup.
In our group was a famous professional cyclist, who had been a superstar on the Tour de France for many years.
He has a fascinating life story, both on and off the bike. His tales of the super-human efforts required to prevail at the most elite level of this punishing sport are mind-blowing.
The relentless and gruelling training covering thousands and thousands of kilometers. The near-starvation state cyclists exist in to maximize their power-to-weight ratio. Endless travel. Horrific crash injuries. Sponsor pressures. The money and politics driving the sport. Overbearing regulators. Cut-throat teammates. And of course, the pervasive doping.
When we asked him how he managed to persevere at the top of such a demanding sport for so long, despite the huge toll it took on his health and his marriage, he thought for a moment then said: “I suppose I’m just really good at suffering”.
It’s clear that, in addition to some truly amazing experiences, his cycling days have left him with a legacy of damage that he’s still working through.
As he shared this with us, one participant wisely advised him to remember: Pain is inevitable. Suffering is optional.
Yes, he’ll still need to deal with the aftereffects of his racing years. But it’s up to him how much power he wants to give them over his happiness and life path from here.
From Mountains To Markets
I’m struck by how relevant the above advice is to investors right now.
It’s becoming increasingly clear that the end of the ten-year bull market has arrived.
…click on the above link to read the rest of the article…
Event Risk
Event Risk
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.
…click on the above link to read the rest of the article…
The Fed Is the Bubble
The Fed Is the Bubble
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:
2019
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:
DEUTSCHE: “There are 5 different ways this expansion could end”
1) A sudden blowup in credit markets
2) The US consumer gets tired
3) The US trade war intensifies, in particular with Europe
4) Fed credibility is severely damaged
5) China gets a current account deficit pic.twitter.com/059hmNSU60
Whether they will cut rates at this meeting or not is speculative, but fact is global growth is slowing still and 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…
Get Real
Get Real
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 negative the 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…
Combustion
Combustion
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:
…click on the above link to read the rest of the article…
The Reckoning
The Reckoning
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.
…click on the above link to read the rest of the article…
The CONfidence Game
The CONfidence Game
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.
The underlying premise of it all:
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.
Highway to the Danger Zone
Highway to the Danger Zone
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”.
…click on the above link to read the rest of the article…
Rant Alert
Rant Alert
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.
…click on the above link to read the rest of the article…
An Obituary: Fred Credibility
An Obituary: Fred Credibility
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:
…click on the above link to read the rest of the article…
Screwed
Screwed
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.”
…click on the above link to read the rest of the article…
The Hidden Revelation
The Hidden Revelation
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:
…click on the above link to read the rest of the article…
