The Bull Cliff

Are central banks, in their desperate quest to intervene big time pig time all the time to extend the business cycle at all costs, setting up bulls for a dive off of the proverbial cliff?

Consider: We’re in the longest post war economic expansion, unemployment is at 3.6%, wages grew at 3.2% last year, well above the Fed’s inflation measures, markets keep racing toward new highs every week and yet the Fed is running the loosest financial conditions in history:

At the same time all the interventions have failed to produce any significant improvement in inflation expectations, the big gap between fundamentals and asset prices:

Liz Ann Sonders is the chief investment strategist at Charles Schwab and she freely acknowledges that the Fed’s 2019 rate cuts & liquidity injections helped lift stock prices.

And so does the IMF:

“One important driving force boosting asset prices was the synchronized monetary policy easing throughout 2019”

And so does the entire investment community that is chasing stocks:

FOMO. The Fed has our backs. They intervene all the time and prevent all damage.The Fed and other central banks have created a Pavlovian reflex effect. Everybody wants to buy the dip, no matter what’s going on in the world:

Central banks have become the primary driver of asset prices and investor behavior to drive asset prices. Yet central bankers bold face deny and lie about the impacts their policies have on asset prices.

Yesterday it was Lagarde projecting denial:

Lagarde: “I wouldn’t draw the conclusion that our current monetary policy has actually been the main factor in the rise of housing prices, has actually been the main factor in the declining profitability of some banks”.

The week before it was Jay Powell: “It’s very hard to say with any precision at any time what is affecting markets.”

A bold face cop out or better yet: A bold face lie, as he knows better.

And so investors keep piling money into this historically priced market:

With $NDX far outside the monthly Bollinger band and exhibiting behavior similar to the run up toward the 2007 top:

Investors may have not noticed in the frenzy to buy every dip that central bankers may lead them off a cliff, but corporate insiders know an opportunity to lighten the load when they see one:

Markets have ignored all downside revisions to growth so far.

Whether the coronavirus will have a lasting impact on growth is unknown at this stage, but as I wrote in my CNN opinion piece yesterday the world is different now compared to SARS in 2003:

“China is now the second-largest global economy. And what happens to its economy has global repercussions.
Before the outbreak, China reported its weakest annual growth in 29 years, in part due to its trade war with the United States, mounting debt, slowing birth rates, aging population and deflation. China cannot afford another major setback like the coronavirus.
Yet, with a number of businesses including Nike, Adidas, Starbucks and Apple, temporarily closing stores due to empty streets and close to two dozen airlines cutting off service to the mainland as a result of the coronavirus, it appears China’s economy is being dealt another blow.”

And it’s not only China. Outside the US the largest global economies are still very much in trouble:

Japan in a recession. China slowing big time, and here’s Germany’s industrial production data before the virus breakout:

But keep chasing stocks because of the Pavlovian effect the Fed and other central banks have created. Central banks have the printing press. No doubt. But that’s all they have. They have no special insight into the economy. They could never normalize their policies despite years of promises that they would. They’ve failed to realize the growth targets they have projected for years. And now they’re running the most irresponsible loose money policy in history at a time when they should be raising rates leaving themselves with little ammunition to combat a real downturn.

If you want the Fed on your side to combat a recession do you want the Fed to show up empty handed for the fight or be armed to the teeth with a full set of ammunition?

Central banks can deny all they want that they are not responsible for asset price inflation, but everybody knows better. The denials are not only hollow they are straight out lies.

And having created the Pavlovian effect we now see in the investment community they are leading investors to abandon all sense of risk when risks are mounting ever more around us as valuations and earnings multiples keep expanding as a result of monetary policy. And hence it may be said that central bankers may be leading investors off the cliff.

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Categories: Opinion

13 replies »

  1. I love your work and your principals Sven but an alternative conception of central bank actions says that they aren’t empty handed. They can hand out money, forever. Another $15TN, no sweat. $100TN if needed. The game isn’t firstly about rates it’s about liquidity.

    • $100TN if needed?
      What about inflation.. not a concern?
      So the average person has to spend $1 million USD to buy a loaf of bread?
      I’m not an economist, but my instincts tell me reckless printing of fiat money actually has negative consequences.
      Printing $100TN is not a viable solution.

  2. You are so right this is totally insane.The market should have crashed years ago. I got out in 2012 because I got burned in 2000 and 2008 and thought no way a third time. Every day I am made fun of by my friends for missing out. It is very depressing. What is even more depressing is that when this sucker finally goes down central banks will buy massive amounts of assets in the name of national security. I have been accumulating physical gold maybe just maybe I will have the last laugh??

    • you are not alone!! I started shorting the market in 2015…..I lost a fortune….never thought in my wildest dreams it could become so absurd. Today’s market is much more insane than in 2000…These days, the dumber you are, the more money you make.

  3. FED can keep liquidity flowing as long as they want. Instead of second guessing when they would stop, why not join in and make some money?

    • Yes Anonymous..I have a few what I refer to special situation stocks..Ive been hedging since last year with poor results. Gl…wondering when if ever the helicopter $s will be considered a negative
      I am at heart a fundamentalist with our investment dollars…not in the equation current

  4. Great post Sven
    I think it’s obvious they won’t slow down so makes me wonder how long theh can feed the bull market

  5. Market makes new highs this week, employment better than expected, YET Kudlow comes out this morning and says Fed should lower interest rates. Insanity for sure. What do they all know (that is BAD) that they are covering up. Be very suspicious.

    • The current madness will end in a total tragedy for society…. History is very clear: “money printing” always eventually ends in a total disaster. Always. If “money printing” is the miracle solution for wealth creation….why do people then work? Let’s give everybody a couple of million so that we can all live in Disneyland.

  6. Silly billies… reality doesn’t matter
    Until it does

    Or: it’s not the fall that kills you, it’s meeting the ground.

  7. Excellent work, Sven. Albeit, difficult truths to accept, this is the reality the powers-that-be have created. I ‘enjoy’ and continue to learn from reading your pieces.


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