Market Analysis

Bull Market Requiem

A bull market requiem:

Following the financial crisis the world needed coordinated structural solutions (and those would be hard requiring tough choices). Instead what the world got was coordinated central bank intervention which shrunk the middle class, made the rich richer and provided the rest with the illusion that things were getting better as pro forma unemployment rates shrunk and housing prices rose again and stock markets jumped from record to record. In the meantime politicians (of both parties) used the easy money illusion to do precisely nothing on the structural front. Instead they added debt and more debt and recent tax cuts just added to the combination of both: Wealth inequality and debt.

The data is very clear. Things are better for the few:

The greatest bull market ever (?) and 90% of income earners have less net worth than before the financial crisis? Given what it took on the intervention and debt fronts this is intellectual bankruptcy. Policy makers have failed the larger population. Full stop.

Income growth? Forget it:

Debt? A disaster zone with no end in sight:

And only getting worse. Much, much worse. Here’s the CBO projecting the coming explosion in debt which doesn’t even presume a coming recession:

This is what policy makers have produced ahead of the next recession:

The construct was ready to fall apart in early 2016. Earnings recession they called it. Bullshit. It was a recession in the making and central bankers knew it and hence we saw the cumulative insanity of over $5 trillion in additional intervention between 2016 and now. People forget: In this short period we witnessed the most aggressive global central bank intervention ever:

And this just the ECB and BOJ. Not to even mention the absurdity of the SNB of tiny Switzerland piling in tens of billions of dollars to buy US techs stocks directly becoming an enormous all long hedge fund in the process.

Add the tax cut nonsense and you had the perfect storm in artificial liquidity and retail fell for it and jumped on the “optimism” train.

Boom. And it all fell apart after January.

Profit growth? Where?

All we’ve had is a recovery following the “earnings recession” which in turn followed over $5 trillion in global intervention. In fact we saw corporate profits actually shrink in Q4 of 2017 printing fewer profits than Q4 of 2014, yet market multiples are higher to the tune of nearly 25%. Multiple expansion at its finest.

Yes we will see a jump in 2018 numbers due to tax cuts and the picture will look even better on an EPS growth basis due to record buybacks. But none of this is related to the underlying fundamental picture. It’s all the result of artificial intervention which is what this “fiscal tax cut stimulus” is. Artificial and purely debt financed with massive deficits. A wealth transfer from the federal balance sheet to the balance sheets of corporations.

Since 2009 central banks and governments have bought the illusion of organic growth with easy money and debt, addressed none of the structural issues, and now they are adding more debt and most families have nothing or little to show for it but more consumer debt and all are praying we will not get inflation or it’s all over as the cost of carry to service the debt would increase dramatically as it is already happening during this early stage of rate hikes:

What, precisely, is the buying outlook for stocks from here? More stimulus? Please. All these markets have ever done is run from one stimulus freak show to the next and now they have nothing, but perhaps still ride the benefit wave of the current artificial stimulus train.

All of which tells me that markets either have topped or will top in 2018 and then we will enter a multi year bear market as the hangover comes when the business cycle ends and the next recession will unveil the truth behind these narratives and that is: Technology has been the greatest deflationary force the world has ever seen and continues to be so and, as a result, growth can only be financed with debt as the larger demographic picture leaves retirement and entitlement structures non financed, unable to meet future obligations. The unwind will challenge all our exiting notions of financial systems, markets and the economy.

2016 was marked by massive QE intervention and a retreat by the Fed to hike 4 times as they had promised in December 2015. 2017 was marked by not only continued record intervention, but also the promise of tax cuts. After tax cuts were passed what did we see? Retail piling in with record ETF inflows while the ECB cut QE in half. The result: A blow-off topping move and then the first initial retreat.

The blow-off topping move in January required a correction as markets were vastly disconnected technically and historically overbought and I kept pointing it out in the run-up:

We’ve now witnessed a first correction and an explosion in previously artificially compressed volatility. April tends to have positive seasonality and if the lessons of previous tops have taught anything it’s this: Tops are processes and there will be plenty of trade opportunities in both directions and perhaps even new highs, although the impetus for those is technically somewhat suspect now.

But the main fact remains and I’ve been pointing it out for a long time: There is ZERO evidence that markets can advance without artificial stimulus in place or another free money carrot dangling in front of them.

Here’s how Europe is doing on half the QE run rate since January 2018: A lower high in January and then down:

Japan? A peak at the beginning of the year and now a close below its 200MA during the first quarter:

I’ll post some technical charts on US markets in the near future, but for now we can observe bearish patterns have taken hold and have played out during the first quarter of 2018. Here’s the $DJIA and the $NDX:

And global markets, as an aggregate, have fallen below their monthly 5EMA and broken their trend with volatility having broken out of its compression pattern:

Markets may rally on coming glowing tax cut related earnings reports all they wish. But these are not rallies born out of organic economic growth or a glowing improving fundamental picture. Know these are likely the final gyrations of artificial liquidity drenched markets undergoing a topping process.

It’s not different this time. It’s worse, much, much worse. After all, we will enter the next recession with the highest debt loads ever, including the corporate sector:

And the awakening to this reality is slowly dawning on market participants as 2019 will have no new artificial stimulus to look forward to. Instead the glorious artificially induced 2018 earnings numbers have to compare to organic incremental growth only. And this is something markets haven’t had to do on their own since 2008.

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25 replies »

  1. Thanks Sven, for this well written summary of the financial and economical troubles that are ahead of us. When will investors finally loose confidence in the central banks and how will they react if this happens? The japanese central bank and government has been stimulating the japanese economy now for many years already and the yen is still seen as a safe haven. What can institutional and private investors do medium and long term to still make a positive return without shorting equities?

  2. Thank you again Sven for your article. Of course your 100% right. The problem is the 100% denial of the ‘investors’ in the US or UK that trees can’t grow into the heaven and far beyond. So I think they are trying to go up to the ATH again, because the feeling still is BTFD in this time of the year. Nevertheless eventually we will reach the 38.2 % retracement at least.

  3. Hi sven
    I am surprised you never use this chart in your demonstration.

    On the market timing, by my view
    There is one big move up left that could bring sp500 well above 3000 and end the global move since 2009…
    Then we ll have a big fall with a nice recession…

    10y yields-2y yields is not flat yet

    Keep up the great work


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