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Instability

Instability

In every century the same thing happens at one point or another. Society loses the plot and gets caught up in a mania, a grandiose exercise in self delusion. It can be political, it can be religious, and yes it can be economic. Sometimes these manias are confined to regions or small groups of people, sometimes they are vast in reach and impact and have global consequences. We can all think of examples. Religious? How about witch burnings? Politics? How about Nazism? Economics? How about all the manias that had fervent believers and adherents that with the hindsight of time were completely insane? The South Sea Bubble, the Tulip mania, the 1929 mania, etc. All of these bringing about vast social instability versus the previous status quo with often disastrous consequences.

And whatever we got going here is now approaching a similar frantic delusion that appears to infect everyone.

All of these manic periods have something in common: Believing in something absolutely even though it is either completely wrong or unrealistic. Seeing reality becoming untethered.

I’ve long argued that central banks aiming to be a stabilizing force are actually bringing about societal instability. Occupy Wall Street, Black Lives Matter, the storming of the Capitol, angry Trump voters, angry Democrat voters and yes even Gamestop reddit buyers may all have different causes and triggers and motivations, but they actually have one thing in common: They are angry, angry at a system that has screwed them over, a sense of deep pervasive injustice and inequality, a fissure that keeps widening with every central bank intervention program.

…click on the above link to read the rest of the article…

To The Breaking Point

To The Breaking Point

If you thought fundamentals, valuations and earnings growth matter the joke is on you.

In 2020 central banks have managed to do the unthinkable: Not only once again save investors from any damage in markets, but they intervened to such a degree that negative earnings growth is now the stuff of new record highs as well.

After all, never before have we seen indices vertically catapult to new record highs 2 years in a row on the cumulative reality of no earnings growth (2019) and negative earnings growth in 2020 with a multiple expansion of a near 50% in just 12 months with an unemployment rate of near 7% to boot.

As it’s all unprecedented it becomes a question of sustainability:

To get a visual appreciation of the vertical nature of the price action check a chart of small caps, up 17.5% on the year with negative earnings growth yet going vertical to new all time highs:

The chart apparently as vertical as the Citi Euphoria index:

If you are looking for precedence you will come up short as the vertical extension on some of these charts have no precedence.

Case in point, take a look at $RUT on a monthly basis:

The 10 MA oscillator has moved past the only to 2 previous all time extreme readings in the 15 range, now sitting above 21. Note the 2 previous occasions of extreme extensions above 15 resulted in an eventual reversal to and below the monthly 10MA.

Not only is the price action far extended, but price is entirely outside the monthly Bollinger band. As I outlined at the December 2018 bottom and again at the March 2020 bottom, markets don’t like technical imbalances, they lead to reversion and this market here is showing a historic imbalance as prices have been crashing to the upside.

…click on the above link to read the rest of the article…

Unspoken Truth

Unspoken Truth

We all know it yet the unspoken truth deserves to be said out aloud.

You all heard the phrases ‘Don’t fight the Fed’, and ‘ there is no alternative’. Can we be clear what these phrases really mean? They mean people are buying assets at prices they otherwise wouldn’t because a central planning committee is putting in market conditions that changes their market behavior.

People are paying forward multiples that are higher than they would if they earned higher interest income. The ‘desperate search for yield’ they call it. Think of it as a forced auction. You must pay, and you must pay more because you can’t bid on anything else and neither can anyone else hence there are now bidders for ever less available product (i.e. think shrinking share floats) driving prices wildly higher. And as central banks have become permanently dovish over the past decade Fed meetings are the principal impetus for rallies. Indeed most gains in markets come around days that have Fed Day written on them, a well established history going back decades now.

A fact the Fed itself is very well aware of:

“In a 2011 paper, New York Fed economists showed that from 1994 to 2011 almost all the S&P 500’s returns came in the 3 days around an FOMC decision. Over this period the index rose by 270%, and most of those gains happened the before, the day of, and the day after a Fed meeting.”

So Pavlovian has the response become that shorts automatically cover ahead of Fed meetings and investors buy ahead of Fed meetings expecting a positive response. The Fed is the market as it’s driving its entire behavior. The “Fed put” they call it. Another phrase that explicitly acknowledges that investors are orienting their risk profile behavior on what this unelected committee does.

…click on the above link to read the rest of the article…

Super Bull

Super Bull

You know where I stand: Markets have been bloated to high heaven via unlimited and unprecedented liquidity injections creating the illusion of a bull market when there is none. Yes indices such as $SPX and $NDX show incredible strength driven by a few single stocks, but as we discussed the rest of the market is far from bullish.

Equal weight keeps lagging:

while virtually all market gains are driven by a handful of stocks:

In fact the broader markets has gone nowhere since mid April:

But still the few stocks are running overall market valuations to never before seen highs:

pushing P/E levels into ever higher extremes:

Who needs earnings growth when all you need is multiple expansion?

Hard to justify valuations with traditional metrics in this environment. You know metrics such as earnings, growth, etc. So best not do it according to none other than Fed hired Blackrock:

‘BlackRock Inc.’s senior quant has bad news for the likes of Bill Gross and Cliff Asness wagering on a comeback for value stocks. In the worldview of Jeff Shen, money managers need new investing methods because there’s no way to tell if betting on ostensibly cheap companies will work again. In fact, comparing share prices to fundamentals like corporate profits or book value is essentially futile in complex markets.

To fix misfiring quant strategies, the co-chief of the $106 billion systematic active equity group has a newfangled suggestion: Investors should scour alternative data for trading signals and end their obsession with valuation metrics.”

Yea, it’s hard to justify valuations in a bubble so best just make things up. It’s different this time. Don’t you know?

…click on the above link to read the rest of the article…

Crash #2?

Crash #2?

President Trump is mocking Warren Buffett for having sold his airline stocks, Druckenmiller crying on TV about having been humbled by the market while every Robinhood retail trader piling into ever more into calls is laughing all the way to the bank. The professionals gobsmacked at the complete upside down events in markets compared to any other time in recorded history given the economic backdrop while retail is giddy jumping into any ticker symbol that’s moving valuations be damned, hey let’s even chase bankrupt companies, why not?


Sven Henrich✔@NorthmanTrader

This market is so bullish even bankrupt companies are rallying.

$HTZ

View image on Twitter

Anything goes in the market.

I myself, have been surprised by the recent vertical strength that keeps running from gap to gap to gap.

Sometimes you just have to laugh:


Sven Henrich✔@NorthmanTrader

$NYSE chart art.

View image on Twitter

On the day of the lows I talked about an awe-inspiring rally coming. Consider me sufficiently awe inspired.

And now the same folks that told people to buy stocks in January and February right before the crash are back out and telling people to buy stocks again except this time at much higher multiples and valuations.

My variant take here which may well turn out to be very wrong: The Fed is setting markets up for another crash. Why? Because they’ve set in motion a stock market mania we have not seen since the 2000 tech bubble. But this time while we’re still in a recession.

And it is a mania and it’s important to recognize this. And like all manias it’ll end badly. The amount of “ever’s” keep building up.

We have the highest market valuations ever (market cap to GDP) 151% on Friday’s close with old GDP data hence the real figure is higher. This chart from the beginning of June:

…click on the above link to read the rest of the article…

Straight Talk

Straight Talk

We live through very unique times, not only because of the shock of the coronavirus that recently hit the world unexpectedly, but also because of large complex structural issues that have been building for decades.

A popular mantra says the stock market is not the economy and the economy is not the stock market referring to the often seen disconnect between market prices and events taking place in the economy. The most recent example has been Wall Street rallying with each disastrous jobs report hitting the news wires. Even this last Friday markets rallied again unperturbed by the latest unemployment report showing the most severe collapse in employment in our recent history. Depression like figures, yet the Nasdaq is green on the year, the S&P 500 largely off the lows with many again predicting new highs to come. Why? Because of unprecedented liquidity flooding markets as a result of monetary intervention making the disconnect between Wall Street and Main Street even wider. We can pretend the stock market is not the economy, but there is no stock market without an economy yet we are witnessing an unprecedented disconnect between the two that has been building for years.

Can this disconnect be sustained? Are investors too optimistic about the current rally? What are the implications going forward?

These are complex issues everyone is confronted with and there are no easy answers. What an intellectually challenging and energizing time to be alive!

I am grabbling with these issues as much as you are, we all are. And for that reason the idea for an ongoing webinar arose, to find a format to discuss these issues in more depth and make the debate more accessible and personal.

…click on the above link to read the rest of the article…

Takeover

Takeover

We can’t print ourselves out of this crisis again, but that isn’t stopping the Federal Reserve from trying. Thursday’s intervention program, the latest in a string of panic moves to keep the financial system afloat, constitutes a complete takeover attempt of the market ecosphere, only the buying of stocks directly is last missing piece of eventual complete central bank control of equity markets. But seizing control of the bond market is the nearest equivalent step.

Not only that, the Fed is buying junk corporate debt propping up companies that should be let to fail as Chamath Palihapitiya pointed out poignantly this week. But not this Fed, no, with its actions it is again setting up the economy for yet another slower growth recovery, financed by even more debt.

QE doesn’t produce growth, that is the established track record:

Nobody wants to talk about the consequences to come following this crisis, but that doesn’t mean the consequences won’t be a real and present reality.

No, the Fed, while trying to save the world, is once again engaged in vastly distorting asset prices from the fundamental reality of the economy. It is in essence again laying the foundation for the next bubble, while the bursting of this bubble has yet to be fully priced in.

Even the Wall Street Editorial Board has made it perfectly clear what this is all about:


The @WSJ Editorial Board tells you what the new price distortion is all about: Save Wall Street and the top 1% and hope for trickle down economics later:https://www.wsj.com/articles/the-feds-main-street-mistake-11586474912 …

View image on Twitter

Asset price inflation to save markets in the hopes of trickle down growth to come.

Absurd.

The message the Fed is again is sending is to invite reckless behavior on the side of investors, the same reckless, TINA, fueled behavior that got us the bubble blow-off top in February.

…click on the above link to read the rest of the article…

Nobody Knows Anything

Nobody Knows Anything

The more I read and observe the clearer the message: Nobody knows anything. And by that I mean nobody truly knows how any of this will turn out and I think this point needs to be driven home more clearly.

Tons of projections of this, that and the other. Just stop. I happen to think there are times to simply step back and not make grand predictions. For us that’s ok because we focus primarily on market technicals and that’s an ever evolving picture that offers us pivot points to decide when and where to get engaged in.

But on the macro? Give me a break. Nobody knows anything. Everybody is just guessing.

Exhibit A: GDP forecast for Q2:

Ok great. How’s that helping anyone in trying to value companies, cash flow, revenues, earnings? It doesn’t. -9% is a completely different planet than -40% and so is everything in between.

How does one qualify central bank and stimulus intervention? It changes every single day. Today the Fed cranked out an international repo program. Global central banks unite I guess. Also today Donald Trump tweeted about a $2 trillion infrastructure program. Who knows if it will happen. The Fed already increased its balance sheet by $1.3 trillion since the same time last year and may well be heading toward $9  or $10 trillion balance sheet position within a year. Last week they added $600B, basically all of QE2 in a week.

These are insane numbers thrown around, all on top of the $2.2 trillion stimulus package just passed. What’s the deficit going to be? I guess it depends on whether GDP drops by 40% or 9%.

Give me a break. How do you make any forecasts that have a predictive meaning whatsoever in this environment? Other than a lucky guess, the answer is nobody. Why? Because nobody knows anything.

…click on the above link to read the rest of the article…

Answers

Answers

The year is 2020. A new virus is spreading across the planet like a wildfire. More lethal than the flu, highly contagious with no cure. Stocks markets collapse, global economies are shutting down with billions of people quarantined to their homes and millions losing their jobs overnight. What do you do? What DO you do?

While it sounds like the script of a bad disaster movie, it is nevertheless the world we suddenly find ourselves in. If you’d outlined this script to anyone just a couple of months ago nobody would’ve believed you.

But here we are and everyone has to adapt and get on with it.

Everyone searches for answers. Is it a short term thing and a big recovery is just around the corner with the help of unprecedented monetary and fiscal stimulus, or will the monetary and structural consequences be so severe that a larger recession, depression even, is inevitable?

The Big Battle is unfolding right in front of us.

Markets, following the biggest crash off of all time highs since 1929, also just managed the sharpest rally since 1933. A bear market rally similar to many seen during the 2008 crisis?

Or a V shaped bottom similar to December 2018?

A retest of the lows for a “W” bottom, or the beginnings of a much more sinister stair step descent to new lows? Lots of questions, but few answers amid evolving data points that do not offer clarity where the current shock will settle.

Fact is the long term monetary and fiscal consequences of the current interventions will reverberate for years to come. Fact is also the global recession that was already at risk of playing out in 2019, but was delayed by aggressive global central bank action, but has now come to fruition anyways. Sparked by a trigger that has rendered all these policy actions of the past year ineffective and meaningless.

…click on the above link to read the rest of the article…

U.S. Mint Silver Eagle Sales Surge First Three Days In March Due To Global Contagion

U.S. Mint Silver Eagle Sales Surge First Three Days In March Due To Global Contagion

When investors become increasingly concerned about the financial system, they rush into physical precious metals.  And, this is precisely what we see taking place at the U.S. Mint as sales of Silver Eagles surged in the first three days of March versus the entire month of February.  The U.S. Mint hasn’t seen this type of buying for several years.

For the past three years, annual Silver Eagle sales fell below 20 million, reaching a low in 2019.  However, that may all change this year as the global contagion spreads, motivating investors to shed paper assets and move into physical precious metals. For sure, investors should be worried when the Fed starts to do “LIQUIDITY BOMBS” via its Repo Operations as stated by Sven Heinrich, the Northman Trader:

While the Primary Dealers submitted requests for $111.478 billion this morning, the Fed accepted $100 billion.  Add that to the single-day Repo of another $100 billion yesterday, which I wrote about in my article; FED REPO INJECTIONS HIT RECORD LEVEL: Global Contagion Negatively Impacting Financial Markets.  The Fed Repo Operations yesterday purchased $100 billion (overnight) and a $20 billion (two-week period) for a total of $120 billion.

On top of the record Fed Repo Operations, then there was the “EMERGENCY” 50 basis point rate cut yesterday that should have pushed the markets up considerably.  However, the Dow Jones Index fell nearly 800 points by the end of trading… a very bad sign indeed.  While the Dow has recovered this morning, I believe this is only a temporary situation as the global contagion continues to spread negatively impacting the world’s supply chain.  Let’s face it; the worst is yet to come.

…click on the above link to read the rest of the article…

2020 Crash

2020 Crash

Complacency came before the fall. All of 2019 market participants ignored the non existent earnings growth. Too strong was the now pavlovian reflex to chase easy central bank money. Too trusting in central banks to again produce a reflation scenario that would make all the troubles go away.

Everything was ignored and markets and stocks were relentless chased higher into some of the highest market valuations ever. Even the coronavirus was ignored. A dip to buy in January they said. AAPL warning? Let’s ignore it and buy AAPL to new all time highs again.

Nothing mattered until it did.

Then markets crashed last week. Perhaps not in percentage terms, but in terms of vertical velocity to the downside it was unmatched in history. The fastest 15% correction off of all time highs ever and by far.

Worse, months of buyers of stocks and markets at high valuations suddenly found themselves trapped as the bottom fell out inside of a few days:

$NYSE, the broader index dropping below the January 2018 highs and closing below the summer 2019 lows now showing an index that has gone nowhere in 2 years and the recent highs being a complete mirage.

The big message: It was not different this time. Bears were right. Full stop.

$DJIA fell all the way to the June 2019 low taking out 9 months of buying:

Don’t anybody tell me everybody sold the top. No, lots of buyers are trapped at much higher prices and are now again dependent on central banks coming to the rescue.

…click on the above link to read the rest of the article…

The Turn?

The Turn?

Did markets just hit a key wall and are ready for a much overdue turn? That’s the question we want to explore from a technical perspective following the sudden reversal action on Thursday and Friday as action at a key technical juncture may suggest a shift in character.

Let me make perhaps a bit of a controversial statement: It’s not the coronavirus that’s the biggest threat to the global economy, it’s the potential of a massive market selloff that would shake confidence at a critical juncture in the business cycle while the reflation trade everybody was positioning for looks increasingly fragile.

Yes, the virus, hopefully ultimately temporary, clearly has a short term effect, but rather the broader risk is the excess created by ultra-loose monetary policies that has pushed investors recklessly into asset prices at high valuations while leaving central bankers short of ammunition to deal with a real crisis. There was no real crisis last year, a slowdown yes, but central bankers weren’t even willing to risk that, instead they went all in on the slowdown. It is this lack of backbone and co-dependency on markets that has left the world with less stimulus options for when they may be really needed. Reckless.

I repeat what I’ve said before: I hope the coronavirus is not the trigger that gets associated with an eventual end to this bull market. For one, it’s the worst reason as people are dying from it, and second, it would be paraded as an excuse for the proponents of cheap money and debt spending to not learn their lesson again. They’ll just blame the virus and not the monetary monstrosity that has been created and then proceed to do it all over again, or even more so than before.

…click on the above link to read the rest of the article…

1937

1937

We’ve talked about the year 2000 comparison (Party like it’s 1999). In 2020 markets went onto a similar structural tear just having rammed relentlessly higher. In 2000 markets famously topped in March following the Fed’s Y2K inspired liquidity injections in 1999 as markets had vastly disconnected from fundamental reality. Now that the truth is out we also know that markets are now vastly disconnected from fundamentals.

And the 2000 comparisons still hold water on a number of measures, price to sales, price to ebitda, market cap to GDP and of course relative weightings in favor of the few as the rally continues to narrow.

The top 2 stocks now have gone complete vertical especially as it relates to their weighting in the S&P:

This chart from Carter Worth on Fast Money last night and even he pointed out how in the lead up to the 2000 top there was some back and forth, but not here, just completely uninterrupted vertical.

One of the 2 stocks being Microsoft, a stock that now has nearly doubled since 2019 with a market cap expansion of over $700 billion for a total market cap of over $1.4 trillion. Historic.

And add the top 4 and their market caps you get this same vertical picture:

Everything screams reversion and correction, but nothing. The market just keeps going up and they keep buying the big cap tech stocks. Risk free. Or so it seems.

And given the large weightings of these few stocks $NDX just keeps ramping up vertically as well, also far outside the monthly Bollinger band:

…click on the above link to read the rest of the article…

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…

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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