Put this in the category of trying to keep things real:
Congrats. Mission accomplished. As of last night we’re in the market period with the longest time period without even a 3% pullback. 242 days. And I presume it’s continuing today. Next on the watch list: The number of days without a 5% pullback:
For reference: Usually markets get a 5% pullback every 92 days on average. It’s called a normal market rhythm of price discovery.
What makes this time so unique is that volatility has been absolutely crushed.
The honest answer that bulls continually ignore in their rationalization is the impact of artificial intervention:
Don’t even bring up the earnings argument. GAAP earnings are the same they were in 2014/2015 yet prices are 25% higher. Indeed 5 out 11 S&P sectors are currently running NEGATIVE earnings growth this quarter versus last year. Financials down over 10%. Where are their stocks compared to last year? Much higher. It’s called multiple expansion due to every dip being bought and no corrections permitted.
How do we know?
Insane sums of money thrown directly into stocks every month courtesy the BOJ. Why the sudden plunge in October?
Well because stocks are going up every single day:
Retail is back baby and they’re buying, which means the BOJ does not have to. Why? Because they step in as soon as there is a down action:
“The central bank has been buying Japanese equity ETFs since 2010, but had been increasing its purchases as part of a package of unprecedented stimulus under Governor Haruhiko Kuroda, aimed at revitalizing the economy. The BOJ aims to buy so that its holdings of ETFs increase by about 6 trillion yen a year, and has tended to purchase on days stocks fell in the morning session.”
So don’t think for a second any of this price action is organic.
It’s the largest market intervention in history that began as an emergency measure in 2009 and has continued to this day.
But the Fed has started reducing liquidity right? Bullshit. Financial conditions are as loose as they have been during this cycle:
And the S&P keeps chasing ever rising M1 money supply like a fly a pile of dung:
The Fed has NOT left the building. Far from it.
EVERYTHING central banks do is targeted to prevent market sell-offs. Every communication, every transcript, every press conference, every speech is designed to keep markets from getting upset.
And now they are handwringing about raising rates “too soon”:
Please. Don’t upset markets. Don’t even use the wrong word. Oh my God. Don’t use the wrong word. You know, like “tapering”:
This is how fragile it all really is. The sheer terror of seeing a market sell-off, perhaps one they can’t stop. Don’t forget they were all in panic mode and went into liquidity overdrive in February 2016.
As a result markets are on to printing one way prices for years, quarters, months, weeks and days on end and yet they can’t even use the word taper.
$NDX up 9 years in a row.
$DJIA up 9 quarters in a row.
Global stocks are up 12 months in a row:
But don’t use the word “taper”.
I could go on, but you get my drift. None of this is ‘normal”. Central banks have made emergency intervention the new normal, an ongoing fact of life and, as a result, have created the largest market distortion in history. Not as a measure of strength but as a measure of weakness.
To be fair, the power central banks have shown over equity markets is awe-inspiring. Since the February 2016 fear bottom we’ve seen over $3 trillion in QE intervention heading toward $4 trillion.
By March of next year this liquidity wave is supposed to peak out of necessity:
Markets have zero track record of operating in a lower intervention environment with less loose financial conditions. Zero track record. We know that because we are here on the heels of peak intervention and the loosest financial conditions. 8 years after the financial crisis.
So this week we’ll get to watch Draghi dance again. My expectation is he’ll be his usual dovish self when push comes to shove. Don’t upset markets. And if he indicates taper it will be masked in the most dovish way possible. Don’t upset markets.
Central bankers have morphed into full time market level managers. In process they never admit their actions have negative effects, they will never cop to the consequences and they will never admit to the bubble they themselves have created. But watch them now try to push the responsibility toward “fiscal reforms”.
It is expected that Donald Trump will announce his chosen lackey in the next week. I say lackey because he will need another easy money guy to run his tax cut through. Deficits will be enormous despite protestations to the contrary. And they need low rates to fund it all.
And so do consumers because they are utterly screwed as personal debt levels are at record highs.
Ray Dalio had a big post on it yesterday. THIS is reality:
“the wealth of the top one-tenth of 1% of the population is about equal to that of the bottom 90% of the population, which is the same sort of wealth gap that existed during the 1935-40 period. “
Institutionalized poverty and wealth dynasties. That’s what we have and personally I don’t see how any of this will lead to a broad based sustainable growth picture.
Bottomline: Organic price discovery is much, much lower and what we are witnessing is the most artificially inflated asset bubble of all time. And the big question is: How will equity prices handle a different emerging reality? Less looser financial conditions with less intervention?
We don’t know yet as we haven’t seen it.
But with all waves know they tend to come crashing down:
Central banks will do their utmost best to prevent any serious downside from developing. Yet from the looks of charts, sentiment, and assets allocations things have never been better before. Well for the top tenth of the 1% that is.
Central banks remain scared of pulling back stimulus. And investors should probably ask themselves: Why is that?
Categories: NT Blog