It was a good trading week as it provided some glimpses of volatility and some tradable up and down action. Yet it was hard not to find the news out of Iraq to be completely depressing. Just the mere thought of the thousands who gave their lives over the past several decades and the ungodly sums of money spent for nothing. The US government hates the regime that’s in place and the extremists are running over vast sections of the country bringing with them instability and an uncertain future. Nothing new in the Middle East.
Let’s summarize: A global coalition decided they needed to intervene in Iraq, they spent hundreds of billions of dollars for years on end all the while promising stability, security and a better future. The result: None of the above and the promises ended up in vapor with the incurred debt still hanging over American taxpayers. The lack of accountability is shameful, but don’t expect it from the American political system. They all voted for it after all and the propaganda of justification has revealed itself to be all nonsense.
If this narrative sounds familiar it is as the promises by global central banks are based on a very similar false premise:
With QE the central banks are promising that unprecedented balance sheet expansion and debt spending will eliminate long term structural business cycles and magically produce growth.
Both narratives are equally false yet have been strongly defended over many years. A strong defense of a false premise does not make it true in the aggregate. However there are indeed population segments for which the premise holds true, therefore providing fuel for a continued effort to defend it.
As an example: I had one gentlemen tell me on twitter this week how he has benefited from the low interest rates: By refinancing his house, his student debt and buy a car on a cheap loan. Yes there are people that are benefitting from low interest rates (if you can call getting yourself levered up a benefit). Yet it’s a benefit without accounting for the consequence nor the pain felt by others. Cheap money doesn’t just hang on trees and besides the debt burdens they have been hurting people who are very much dependent on interest income. Just because you don’t see the pain of others it does not imply it doesn’t exist.
Indeed the same argument can be made with Iraq. The military industrial complex made a killing on Iraq, no doubt. There are winners with both premises and statistics have made it very clear that the top 1% or even better the top 0.1% made out like bandits during the times of QE.
The key question in both narratives is this: Does society at large benefit? The dead in Iraq can’t speak up and the living seem to experience some real angst these days, but I’m sure there are winners, especially those tied to the oil business, yet I doubt that that’s the majority.
My criticism of the QE premise is simply the result and the consequence that nobody is willing to quantify. As with Iraq the result simply underwhelms versus the promised results and the numbers are nothing but frightening. Cognitive dissonance is predicated on ignoring fundamental reality. And the charts outline a very clear picture: We would be in a deep recession were it not for a continued flush of debt financed spending. GDP was negative in the 1st quarter despite continued debt spending and QE, but even all positive projections for the rest of the year would be negative if people, the government and the Fed were to not spend on pump. The charts speak the truth:
And so it is plain to see. For years GDP has been subsidized by debt. Central banks made it all possible, the corporate buybacks, the US government being able to keep interest payments on debt in check, students loading up on loans, people buying cars on pump and subprime is back too. A debt bonanza, yet organic growth remains a mystical dream always just around the corner. Just like peace in Iraq.
So this is the true premise people are buying into when they are buying the $SPX at 1950. And what is the underlying fantasy that comes with the premise: We have changed economics. There will never be corrections again, tiny pullbacks perhaps, but no risk. It has become a self fulfilling prophecy.
And, to be fair, this notion has some data to support it. Just looking at the new highs and lows over the past 20 years one could clearly make the case that the time for lows is over:
Even previous market bubbles have had corrective moments that resulted in some sort of negative HL action. Since QE infinity: No more. None.
This unprecedented run explains the record levitation the $SPY has enjoyed being disconnected from its 200MA. Not since November 20, 2012 have we seen a visit making this debt financed rally the longest ever in terms of this MA disconnect:
Yet, as with the Iraq war, the public’s view is shifting and the lack of participation in this rally is becoming very noticeable. While the media and airwaves continue to be filled with defenses of the happy narrative the negative divergences continue to mount:
And while negative divergences haven’t mattered they raise the specter of a harsh reversal coming to a rally near you soon. Super Mario’s announcement of negative rates has failed to produce a sustained DAX move above 10,000 and for the first time the transports are showing signs of weakness:
The trannies’ now historic disconnect from their monthly 5 EMA makes the case for an imminent reconnect. Given the Russell’s rejection off its right shoulder the timing makes for convenient bedfellows:
This coming week we are then confronted with three wildcards:
1. The FOMC meeting which will be closely observed in regards to language of rate rises. The BOE’s Carney surprised people with his accelerated rate hike talk and makes one wonder if markets are way behind the curve on this issue. As various FOMC members have been expressing concern about the lack of volatility in markets they may just get their wish this week.
2. Global political uncertainty may provide a curve ball at any moment. US mid term election uncertainty with the Cantor loss, unpredictability in regards to Iraq (nobody talked about Iraq 2 weeks ago), and escalating violence in the Ukraine (49 dead in a transport plane shot down this weekend) provide for a sparkly cocktail of unsavory ingredients.
3. Quad witching OPEX on Friday. On its own quad witching is always entertaining, this week lines up to be one of the most interesting ones in recent memory.
And all this with the $VIX still at a measly 12 and everybody is telling you to buy stocks. It’s the only game in town, don’t take profit or you have to pay taxes, this rally will not correct. Yes that narrative was convincingly sold to the crowd this week. Just don’t forget about the previous narrative as the images below cross your screens. We must spend years, hundreds of billions of dollars and thousands of lives to make Iraq a stable democracy:
Risk is real. Always has and always will. And the debt charts above simply prove that risk has been attempted to be hidden away by those who have a vested interest in their narrative. As with Iraq the narrative can be kept up for years, but in the end, the truth always comes out.
In the meantime we continue to trade the action as we see it. The daily market structure is still dominated by a tight range following the first 60-90 minutes. Given all of the above, however, I suspect the air of tranquility is about to come to an abrupt end.
Categories: Market Analysis