State of Denial

Once again investors are made to believe that nothing matters. Only 2 trading days after Friday’s sell off $NDX made new all time history highs. Only 3 days after Friday’s sell-off $SPX made a new all time closing high. Only 4 days after Friday’s sell off $DJIA, $SPX and $NDX make new all time human history highs in premarket. Four days, four up gaps, all unfilled at the time of this writing. The market of the overnight gap ups.

Why? Because the economic impact of the coronavirus is over or contained? Of course not, it’s far from any of that. Shutdowns persist, warnings of individual companies are mounting i.e. $TSLA, tumbling a day after the technical warning issued,  global economic growth estimates are coming down and with them invariably take downs in earnings estimates.

What do markets do? Make new all time highs, back on the multiple expansion game from 2019 when no slowdown in earnings mattered as the liquidity injections from our central bank overlords overrode everything.

This week the PBOC injected liquidity, the Fed kept flushing repo liquidity into the system, and of course a continued buying of treasure bills.

And so markets continue on their path of never pricing in any bad news and continue to disconnect farther and farther from the underlying size of the global economy no matter the ongoing data:

German factory orders:

Baltic Dry Index:

But there are no bubbles central bankers tell us. Don’t insult our intelligence I say. Especially since they perfectly well know that policies and words are closely followed by markets and are market impacting:

Yet in the same breadth they tell us their polices are not to blame for the distortions created in markets.

Here’s ECB president Lagarde today in full denial mode:

Don’t blame our negative interest rate policies for housing price increases or bank profitability issues.

And besides there is no housing bubble when ordinary people struggle keeping up with ever rising house prices:

But there is no inflation they same in the same breath.

Any wonder there are trust issues:

We don’t believe you.

And central banks in denial about the distortions they have created and continue to create is not a recipe for long term success.

Fact is they remain trapped and beholden to a market whose entire valuation scheme and price discovery mechanism remains entirely dependent on ongoing central bank intervention.

It’s a historic absurdity we are witness to and an ultimate tragedy unfolding before our eyes.

Central banks are in denial about the existence of the financial bubbles and distortions they themselves have created.
For to admit them would be to take responsibility and acknowledge that asset prices are sky high overvalued which in itself could lead to a risk off event as the admission of bubbles would lead to a loss in confidence, confidence which must always be maintained.

Central banks are residing in glass tower la la land. There is no trust, no transparency, no accountability. Only denial.

And so we see a market running on nothing but optimism despite continued disappointment about the reality on the ground:

Lions and tigers and bears. Oh my!

Overnight futures ramped on the news that China proactively cut tariffs. You think that’s a sign of China thinking the economic impact of the virus is contained and happy days a here again?

I wonder:

Look, this tariff reduction was already agreed to. This in itself is not a rationale for further multiple expansion in markets, especially as one of the reasons for last year’s multiple expansion was based on supposed phase one terms which are now being walked back due to the coronavirus.

So you see there’s a circular drain that’s flushing down justifications for support of ever widening multiple expansion in lieu of growth projections again coming down.

Central banks are wanting you believe their policies cause no asset price distortions, don’t cause bubbles and will surely tell you they are not to blame when this bubble, that they deny to exist, eventually pops.

Central banks may have entered the state of denial, doesn’t mean investors have to. The economic impact of the coronavirus is real, but sentiment is managed with new highs in equity prices. For now. While the virus will at some point be properly contained as of now there is no verified cure and no clear visibility as of yet when the economic impacts will be alleviated, the longer it drags on the more profound the effects. The death toll has not anywhere near reached the annual deaths tolls from the common flue, but the impact is already lager then SARS and nobody knows as of this moment how far this will ultimately go, not the WHO, not China and certainly not central banks.

Reality is markets are getting ever more stretched and investors keep piling into tech even as $NDX is screaming a major warning signal.

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Categories: Opinion

8 replies »

    • Sven ….. Do you believe the economic data China provides ? Then why are you believing they would quarantine a city of 11 million a couple of weeks ago for less than a couple of hundred deaths ? The Chinese say its under 600 deaths to date. They shut down 80% of all production. 90% of all export production. Hyundi had to stop production due to lack of Chinese parts needed. Airlines have cut flights and Cathy Pacific asked thousands of workers to take 3 weeks unpaid leave. China has shown they are setting up beds in a stadium. Building hospitals in record time …. Etc, for 600 deaths ?

  1. So when do you think the bubble will pop? Is there time to buy a bit more and grab another slice of free Fed money before moving back to cash?

  2. Sure..markets are stretched..but the cash injections continue from all over the globe…the logic in me says ..be carefull, cautious..then the reality says how long can this continue without consequences..and there lies the million dollar question..how long..forever..dunno…I don’t think anyone really does know. Ive heard MMs say this can continue for a very long time…especially here in the U.S ..we have the worlds reserve currency…good old USD. The new normal is here.

  3. central bankers don’t see any bubbles….because they have created the bubbles…and now we are in the biggest ever.

  4. Traders deal with things as they are, they don’t take sides. Making money is the only objective.

    Simple rules.

    Don’t pick tops and bottoms.
    Don’t trade cycles
    Stop trading if at any time you don’t understand the market.
    Always use a hedge.

    • Dan..of course I assume you are speaking as a trader..many regular everyday people cant or don’t have the opportunity to trade. People who add to their investments on a regular basis, these are the people will at some point will feel the pain unless the current helicopter $s continue..when it stops if it ever does will be brutal. Just like the housing crises who went to jail or held responsible, rating agencies, bankers, politicians …ahhh… no one. The average joe took the brunt that’s who..same ole same ole..rinse and repeat

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