Well, they’ve done it again. By “they” I of course mean the US Federal Reserve and all the other central banks combined. Synchronized global easing it is called and the once again giant inflows of artificial liquidity are dominating the price action in markets irrespective what’s going on with earnings or growth. The stock market is not the economy, the economy is not the stock market. The stock market is liquidity and the stock market is the primary tool with which central banks want to control the trajectory of the economy. It’s the unspoken but increasingly recognized truth.
The Fed still insists on hiding behind statements such as ‘the economy is in a good place’ while Q4 GDP growth has dropped to 0.3% to 0.4% according to the Atlanta Fed and New York Fed, but hey, they got to keep confidence up.
Fact is everything has changed in October when the Fed announce it’s “not QE” program which in fact is recognized by markets as QE and so the Fed, unable to ever meet its inflation targets, focuses on asset price inflation and very much succeeding in the one area of the economy they claim to have no role in.
Here’s Citi: “Despite the Fed’s protestations that its adjustment to bank reserves is not QE, its turnaround this year has helped drive global central bank securities purchases from 10-year lows to decade-average levels…central banks’ inability to create inflation has caused them to underestimate the extent to which they are driving up asset prices. Yet this misunderstanding makes them all the more likely to carry on.”
Whether this ‘misunderstanding’ is willful ignorance or blatant method I’ll leave for the reader to decide. But carry on they will, here via Bank of America: “Powell 2019 rate cuts & QE a success…Fed now on hold but QE remains supportive for risk (Fed + ECB will buy $420 billion in assets over next 6 months).”
So this liquidity machine will not stop and may well continue to squeeze markets higher toward a massive blow-off topping move. But it may not and rather end in ac valley of tears and I’ll discuss technicals further below.
But what a success QE has been so far: 6 weeks straight up in markets, all intra-day price discovery has seized as all price gains are driven by up gaps and open ramps jamming prices squarely against the upper bound of the 10 year trend:
No earnings growth required:
Funny how the majority of Wall Street had $SPX 2,900-3,000 targets for 2019 based on much higher earnings estimates, but now we’re trading above 3,100 on 3 quarters of negative earnings growth with this quarter flat to negative as well.
— Sven Henrich (@NorthmanTrader) November 15, 2019
And yes, all this price levitation has an impact of market valuations as the Fed’s liquidity machine is driving stock market valuations to historic highs into stretched territory far above the size of the economy:
What’s the all this produce? Well, $6 trillion in market cap expansion in 2019 versus a slowing economy with most gains going to the top 10%, a point not lost to observers on fintwit:
The top 10% own 90% of stocks.
Fed cuts rates & adds massive liquidity.
Stocks rally 30% as a result.
Fed: Wealth inequality keeps widening and we just don’t know why.
— Sven Henrich (@NorthmanTrader) November 16, 2019
As the thread below the tweet above highlights growth remains subservient to debt expansion as debt keeps growing faster than the economy. After all GDP has increased by $7 trillion since 2007, but public debt has increased by $14 trillion. Corporate debt is twice as high as in 2007 and now we’re back to trillion deficits with no end in sight other than the curve steepening for years to come:
And guess who’s on the hook for all that debt? The bottom 90%. Yes, it is the blatant absurd system we have. The top 10% reaping all the benefits of all this monetary policy enabled debt expansion while the bottom 90% get to foot the bill. And people wonder why there’s so much populist discontentment with unemployment at 3.6%. Hence no accident that so many billionaires are worried about political backlash.
So the Fed has cut rates 3 times this year and is rapidly expanding its balance sheet to the tune of over $280B since September and wealth inequality has been made greater again.
Well done. I continue to question the efficacy of all this as wealth inequality and debt burdens keep widening and the Fed with its policy actions continues to contribute to both. Will they accept responsibility or culpability? Of course not.
That’s the job of Congress Powell sheepishly says as if Congress will do anything about it other than thanking Powell for making its members more wealthy. No really, this actual exchange took place during this week’s congressional hearing:
Congressman to Powell: I’ve looked at my Schwab account. Thanks for being here brother.
— Sven Henrich (@NorthmanTrader) November 14, 2019
But there is awareness and Jay Powell let it slip this week. “The day of reckoning”. These were his words not mine. Aware that this debt expansion over economic growth is unsustainable Powell made reference to the day of reckoning while maintaining his prime directive of maintaining confidence:
“We have such strengths, and I think possibly the day of reckoning could be quite far off.”
That from the man who claimed more rate hikes were coming in 2019 and QT roll-off was on autopilot just 12 months ago. The same man who had to totally flip flop on policy and is now in massive liquidity intervention mode. Let me submit that Powell does not know when the day of reckoning is coming, but he knows it’s coming. He’s trying to prevent it by kicking the can, but is contributing to its prerequisite conditions by enabling ever more debt expansion above economic growth and exacerbating wealth inequality in the process, the same wealth inequality which is driving political discontent across the globe gnawing at the fabrics of political stability across the globe.
I submit it’s a dangerous path to nowhere as central banks and politicians keep feeding off each other in an never ending circle of debt expansion, wealth inequality and ever lower structural growth from cycle to cycle that is held up by exacerbating asset bubbles which are denied to exist when they are self evident in the data.
Systemic risk increasing in a world where $VIX short positioning is again at a new record high:
…and market cap concentration in a few heavily owned stocks outweigh everything around them:
Just 2 stocks, $MSFT & $AAPL, have now a combined market cap larger than the Russell 2000 and the entire German stock market.
Charts h/t @carlquintanilla @Schuldensuehner pic.twitter.com/aTI8NfpZAC
— Sven Henrich (@NorthmanTrader) November 17, 2019
This market now looks to break above its 10 year trend, but is facing a number of key structural and technical issues that leave it extremely vulnerable to a reversal of size.
I’ll close today with 2 videos, not to overwhelm you with content, but there are important issues to discuss and be aware of.
First’s here’s a just made public in depth interview I filmed with RealVision on October 9, 2019 in London where I had a chance to discuss some of the key current market issues and it gives you a more personalized FaceTime experience of how I view/analyze markets:
And finally, here’s an updated technical view of markets now that markets have broken to new highs:
Markets are now at a critical juncture: A massive melt-up or a reversion of size to come, all in context of a Day of Reckoning looming over all of us at some point in the future with no policy leadership anywhere in sight to address the underlying causes and issues. Rather we are subject to institutional leaderships both hapless and eager to further advance the contributing factors that will bring about the very reckoning they talk about, but do nothing about.
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Categories: Market Analysis, Weekly Market Brief
Very insightful article, thank you Sven.
Debt and climate, twin trends that no one wants to address because it’s so much easier to lick the can. Younger people should be up in arms over how their futures are being trashed. Perhaps, as you say, their sense of being cheated explains the protests sweeping the globe.
Exactly! The system only stil works for the 1% while our beautiful planet gets destroyed for their obsession of “growth/profits at any cost”
not surprised at all by this…
Might I suggest a reason why Amazon has started to break down since July? You might also check charts on eBay for comparison. For a very long time, one advantage to buying off of these sites is the lack of sales tax that had to be paid. Since July, states have been levying sales taxes payable against purchases from the large internet retailers. In a place like NY, that might have reduced effective online prices by as much as 9%. That artificial advantage for online is now gone in many states, and it continues to disappear as more states pass laws to tax the online giants.
I wonder if a large part of the market cap of both isn’t just a capitalization of the value of their end-run around sales taxes. That excess market cap is now being reverted.
“Central banks’ inability to create inflation has caused them to underestimate the extent to which they are driving up asset prices.”
Just a seemingly naive question: Why shouldn’t they push it until inflation starts to go up. The asset prices being up is not hurting directly anyone, except enlarging the poor-rich-trench. This is a big society problem, and it is in the responsibility of the central banks to consider this, too, but apart from that, are there any real bad consequences of the QE except creating inflation? I think not, but if I am wrong, please tell me what I miss…
It’s “melting up” already, Sven. Sometimes you just have to admit you’re wrong. And continually saying “Or it might go the other way” doesn’t give you a loophole where you can deny what you’re really clearly saying, the text in the article shows you still think the market “isn’t doing what it should”. Pesky market.
Just read on twitter a chap asked Sven when his he made his bull call….because he’s been following him religiously since 2015, can’t recall any such call being made, and has missed the bull market as a result. No response from Sven to the question. He has his subscription revenue to keep him going….
Insightful to the point we have seen this madness before and a correction looms the likes of which never seen before.
Excellent essay Sven. You articulate very clearly the absurdity of our times. We have poor leadership and through their actions find ourselves in uncharted territory. In uncharted territory no one knows what could happen. The naive and simpletons like to believe that “the graph will continue to go ever higher”… what could possibly go wrong? We are now on a path to eternal prosperity. (sarcasm intended)
The guillotine was invented for a reason…
Wall Street, Washington and Silicone Valley may well be where they are first resurrected!