Reality Check

Some quick takes here on events of the day:

The lunatics are running the asylum and they pretend to be the sane ones.

The Fed is not letting up on their liquidity machine and be clear: Every single outlook they’ve issued since inception of the program has been false. First it was temporary, then it got bigger, then it was there to meet year end requirements, and now already they’re moving the ball again.

And so here we get to see the Fed two step in one set of headlines:

“Fed’s Clarida says economy in good place, does see inflation rising to 2%. Clarida says Fed’s repo operations could continue at least through April.”

An economy that’s in a good place does not need hundreds of billion of dollars in central bank balance sheet expansion and certainly not $70B, $80B, $90B, $100B of repo every day or whatever the run rate is on any given day.

Reality is the Fed is forced to do repo or overnight rates go out of control, and if that were to last for more than a few days the economy would suddenly not be in a “good place”. The house is not on fire as long as I keep dousing it with water. But it’s in a good place.

And of course the big lie is that they have it all under control. If they had it under control they wouldn’t have to keep moving the goalpost:

No, the Fed’s  liquidity injections are blowing the biggest asset bubble ever. But it’s not only the Fed doing the pumping here, this is multi front pump operation.

The pumper  in chief today:

Sure, you can laugh it off as a typo, although I don’t know how you miss-type 401k as 409K as the 1 and the 9 are on opposite ends of the keyboard.

But that’s not even the issue with this tweet. It’s the glaring hype and pump.

Raoul Pal had a good take on it:

FOMO by executive order I called it.

But of course the entire premise of the tweet is false on top of that. 401k’s are not up 50%.

Fact is, over the past 2 years here’s your larger index performance since the January 2018 highs:

Unless your 401k is in a few select stocks and $NDX exclusively you’re not anywhere near 50%, or 70%, 80%, 90%. Complete misleading hype and misinformation. Not even the almighty $NDX is up 50% since then. And the 2019 performance is completely meaningless. People did not liquidate their 401k’s at the September 2018 highs and then bought back in at the December 2018 lows, that’s not how this works. So there was a 20% drawdown first.

But I guess we have an election to win and anything is fair game. Just get people to chase a bubble.

And speaking of election: Next week we got the “historic signing’ of a phase one trade deal with China. Also complete hype.

Not only has no one seen what’s in it, but President Xi is not only not showing up, his name won’t even be on the document:

If you think that sounds like the makings of the biggest deal ever I have some 409K’s to sell you.

Reality check: The Chinese are covering their butts. So when you see the headlines next week keep a keen eye on any supposed details if they are even made public.

No, it’s all a big pump scheme on markets and it’s perpetuating a massive asset bubble:

Not only are a few stocks controlling much of the market cap equation that keeps getting larger and larger, now we hear via Bloomberg that only a handful of asset managers control ever more ownership of key stocks:

Index funds controlling corporate America, just like the founders had intended.

I jest of course, but you get the message: Everybody is long, the few are getting ever larger and the Fed and Trump are both doing their parts in disconnecting asset prices ever further from underlying economic reality. We’re building an inverted pyramid here with the majority of the weight on top of the pyramid and everybody sitting up there enjoying the view but with no exit plan on how to get back down.

The economy is in a good place. Now try it without repo and balance sheet expansion. Just try it. I dare ya.

My word here: Stay cautious and critical. This is an environment of hype and non sustainability. But for now the mantra appears the same as in every bubble: Buy until you die.

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Categories: Opinion

10 replies »

  1. Totally agree. However, no one is willing to sell or short this market while it keeps barrelling higher, which it will probably continue to do until the Fed stops pumping liquidity in and / or some exogenous shock wakes enough sheeple to the downside risks.

    Prior to Not QE I expected a wake up to trigger a drop to 2400-ish on S&P500, now I think below 2000 is more plausible. Methinks there’s a quite vicious set of feedback loops setting up: reduced profits (already), liquidity freeze (already, transfused by Fed), market confidence, buyback freeze, ETF panic exit, consumer confidence…

    Just one grain of sand too many and.. POOF! Bonds will be proven right again.

  2. Who will hold the Fed accountable? Jamie Dimun? Every senior on fixed income should be shouting at the top of their lungs…

  3. Sven, Thank You for the U Tube video’s you put out weekly. My head has been hurting listening to ALL the jokers telling everyone SP 4000 or 6000. Every word you speak is the truth about this market. I ask myself every morning, when the Hell is this Market going to Drop ???. As of this point i only read your stuff and shut the TV off. The Federal Reserve is a disgrace…. Please keep up the great work you are doing. Remember some people listen.

  4. Excellent!!! In a much smaller way, I have watched this so many times throughout the years. When cattle are cheap and you can actually make money, the sale barn is empty and the masses keep their hands hidden deep in their pockets. Let cattle go to insane bubble highs and the sale barn is full with every cowboy hat wearing moron with his wife right by his side coaxing him to bid one more time. Then one day, it all falls like a rock and Tex has take the back roads into town hoping no one sees he is driving his Dad’s old pickup and no shirt on his back.

  5. You can add to the list of market proppers: the analysts. Just about every day it seems multiple analysts come out and raise their price targets on the high flyers like AMD, MU, and MSFT.

    I think it was Cowan that riased MU from $50 to $70 a few days ago. The stock was up 50% to $53 from $35 a year ago and they give it a 40% increase in the price target.

    MU’s recent quarterly results announced Dec 18 (Q1 vs. prior year Q1): EPS down 84% and sales down 35%. (Plus I’m guessing that immediately after the disastrous quarter they only got upgrades.)

    MSFT got a bump from Wedbush today to $195 from $185. And on and on. Definitely feels like early 2000 at this point.

  6. Market goes down a couple of days because of Iran tensions, but rises for a week or more because tensions have subsided, same with the China deal, 42 times or more it rose and yet nothingburger signed.

  7. I assume that technical analysis works when the market goes up as well as down.
    So what kind of upside targets on the S&P should we expect? 3500? 6000?
    Since earnings don’t matter any more, only technical analysis should matter.
    It’s obvious this market will party to at least april.

  8. Melania must have been complaining that the kitchen staff had used up all the Formula 409 cleaner. It just stuck in his head.


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