Opinion

The Tight Rope Market

None of us can know where markets would be trading without the Fed’s constant massive liquidity injections, but now that the bubble recognition has gone mainstream (Bloomberg, FT) and acknowledged by at least one Fed president (Kaplan) I think it’s fair to say: Lower, much lower.

But while investors continue to dance on the liquidity driven momentum rally right into major resistance currently ignored data keeps suggesting that risk is much higher than anyone is willing to acknowledge. Indeed these data points suggest investors may be walking a precarious tight rope without even realizing it.

I do my best to keep pointing out these data points, but so far admittedly in vain:

Since the Fed is currently hosting the most expensive frat party of all time it’s no wonder that investors are currently ignoring everything else consequences be damned.

I’ll let the reader be the judge, but below are a few charts I think are worth documenting as they highlight what investors are entirely ignoring at this stage.

And no I’m not talking about valuations. I’ve already made that point in the Ghosts of 2000, valuations are at records highs on many measures and that goes without saying. Valuations are high during any bubble, but rather there are underlying data trends that often precede coming recessions.

What recession? Everybody has declared recession risk to have faded. Why? Because stock prices have rallied to new all time highs? When has that ever be an indication that there is no recession risk ahead? Markets made new all time highs in the Fall of 2007. The recession started in December of 2007. Markets rallied to new all time highs in 2000. Did that mean there was no recession in 2001/2002? Of course now.

If anything high optimism is always a concern as it historically it is followed by, well, less optimism:

Yield curves have un-inverted and everybody declares recession risk to be over. Why?

The steepening has traditionally been the red flag ahead of a recession. Along with a slew of other data points that everybody is again ignoring.

In order for markets to grow into excessive valuations you need growth to follow suit. In order to see growth to emerge you need to see an expansion investment and credit.

Commercial and industrial loan growth shows none of that, it continues to decline:

Often associated with coming recessions it signals that companies are not as confident as markets who are hoping for a 2016 repeat. But then we didnt have a yield curve inversion and then steepening.

In context then it’s perhaps noteworthy that suddenly job openings have dropped hard, the most in this cycle:

This cycle remains very much long in the tooth and slowing employment growth is always a red flag at the end of a cycle. Where are the great new hiring plans?

May I remind everyone there’s a US election coming and this one may have consequences. I can’t predict elections, but depending on outcome it may bring about a  change in tax outlook.

Corporations surely must know that they were handed an unprecedented gift during the Trump presidency that may not last forever:

Uncertainty breeds risk and corporations may well hold off on big expansionary plans until after the election, especially considering that there a few signs that industrial production growth is picking up at this stage:

In fact, despite being awash in cash and in a tax nirvana corporations appear to dial it back on the buyback bonanza front:

As they do when they sense growth issues ahead (see 2007 into 2008).

On that note, here’s a little watched indicator, heavy weight truck sales:

Oddly enough that one dropped hard in front of the last 2 recessions following an aggressive ramp up. And it just did as well.

These data points are by far an exhaustive list, but they show a confluent picture of data points that suggest recession risk is not off the table. If anything they show factors that are entirely consistent with previous business cycles coming to an end.

And if this rally is all Fed driven, then it’s the Fed that will have brought about the final spurt of excess that will lead to an ugly reversion that could bring about the very recession it was so scared of in the first place.

It’s not like financial asset valuations versus the the underlying size of the economy are historically outsized or anything:

The New York Fed Nowcast keeps showing less than 2% GDP growth for Q4 2019 and Q1 2020. 1.2% and 1.7% respectively.

That’s the growth we get with a $400B expansion in the Fed’s balance sheet, 3 rate cuts and a trillion dollar deficit?

It’s almost as if the Fed’s power to stimulate growth is waning:

I submit investors, drunk at the latest Fed party, are walking a very tight rope. Who’s the designated driver once the party ends?


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Categories: Opinion

16 replies »

    • Sven is correct…but he is not the only one that sees how absurd it has become….and that eventually it will end in total chaos. In fact, I wonder if Sven realises how apocalyptic the result will be. This is simply the end of the (debt) system we have been living in since WW 1…..

  1. The primary fuel that drives this market higher (Energy if it were a physical system) is dollars. In this case dollars injected into the markets by the Fed. Until that stops there are no limits to stock prices as investors are using their dollars to buy stocks based on expectations of future Fed liquidity (more rate cuts) but also US economic fundamentals which show the economy as O.K, with a possibility of remaining O.K for the near future.

    So you must see a major change in the Fed or macroeconomics to derail this rally. Any weakness in the macro environment will likely be met with ‘real QE4’ plus repo QE to keep investors happy but also keep our army of US based junk rated companies buying back their own stock. This shows there is only one aggregate variable here, the macroeconomy. You cannot use stock P/Es to dictate how you trade.

    I highly suggest you all prepare for substantial upside in the coming months. S&P 3600 by summer, then 4000 by years end (given a Trump win) . These are unprecedented times.. I suggest those who insist on giving equities ‘firm rules to live by’, purchase gold or silver. Those are real and will likely ascend alongside equities as the 60:40 portfolio distribution keeps bonds prices rising alongside equities.

    • yes, the madness might get even more absurd….I hope you realise this is TULIP land….and I hope you know what eventually to the “TULIP” BUbble.

      • Money stops burning and becomes a useless fuel when it becomes soggy.

        The Dollar is being turned into a worthless currency by endless printing.

        I’d rather have the Reserve Bank of Zimbabwe running the show than the present bunch of clowns at the Fed, in the White House and in Congress. At least Zimbabwe has learned its lesson, whilst we carry on with the 2007 crisis unsolved and permanently papered over by more and more soggy money.

      • There’s one other possibility you have failed to consider: a loss of confidence. As Anonymous comments, the Tulip bubble was bought about by a lack of confidence, not a lack of liquidity.

  2. Sven – It would be a less partisan commentary if you noted, rather than just criticizing Trump’s spending record, how much moreso Democrats are calling for increased spending. Even when Republicans had a majority in Congress, the Democrat’s ability to obstruct spending cuts was intact, using the filibuster and forcing a government shutdown. If you think the US is looking at massive deficits now, just keeping praying that a Democrat wins the election. Then you’ll be able to see how much further government debt can skyrocket.

  3. The irony is the top 1% would love to push the SP500 up another 8% this year to 3600, and perhaps even another 20% to 4000. The hope is that the dumb money comes in and allows them to cash out. For the typical investor who has about $60,000 in the market, what will you do with your extra 8% ($4,800), or even an extra 20% ($12,000)?
    Are you going to take a one week vacation? Skip the vacation instead, and now you just made 10% on your ‘409k”.

    Now for the top 1% holding $5 million in their fun money trading accounts, 20% is $1 million in profit (only if they cash out, else it is monopoly money). Now you see why the top 1% is pumping the stock market, trying to get all the dumb money to hold the bag? Right now they need you to BUY, BUY, BUY…. but once we drop 50-65% back down to SP500 1400 to 1800 range, they will be telling you to SELL, SELL, SELL at the bottom as they load back up for another fed induced ten year market rally. Third 50% pump and dump in twenty years? That would be impressive!

    So hows your 409k? Only up 50%? So a $30,000 (50%) gain will buy what, half a new truck? See the point, does it really matter to anyone but the top 1%??? FOMO is a mind trick used to get the weak minded into buying at exactly the wrong moment in time. I am guessing we melt up until retail goes all in, yet that for some reason did not occur in 2019, so the top 1% are getting a little nervous. Retail really needs to jump in soon as it is becoming exponentially more difficult to manipulate the markets higher at these astronomical levels. So please, retail investors, do your part and save the hedge funds, as the fed all by itself can not save them forever…

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