Another overnight coronavirus related scare as China had to greatly up its estimates of the infected, yet no worries, the market remains as much on autopilot as the Fed remains in denial about how their actions drive market behavior.

Call it denial, call it willful ignorance, call it outright lying as you choose.

Yesterday Jay Powell’s big whopper of course was this:

“There is nothing about this economy that is out of kilter or imbalanced”. Newsflash: No economy that is in fine shape and balanced would need this type of intervention:

But it does, and we continue to see these type of interventions to keep overnight rates from flying higher, which is exactly the sort of thing that would crush this high debt economy so dependent on low rates. And the continuous ascent in equity prices remains on a corollary path.

Then of course there is the whopper propagated by Fed types and apologists who claim Repo has no impact on assets prices. Nobody believes these blatant attempts of defending an indefensible claim.

Why? Because people are not stupid and we can see what happens when overnight REPO hits markets prior to US market open:

Every repo operation sees a run out higher out of the gate, more often than not with an overnight up gap and ramp, and if things just happen to gap down as today for example, just flip on the switch:

Overnight coronavirus scare? No problem. $78B repo and off to the races higher we go to new highs again.

To get a sense of the lack of trust just look at the responses to Neel Kashkari’s (Fed governor) tweet yesterday:

Not a word of support, he’s just getting hammered. Nobody believes him or Dudley. It’s a farce.

And the same in the responses from my tweet, even Guy Adami literally calling it “bullshit”:

Nobody believes these blatant attempts of defending an indefensible claim.

Why? Because people are not stupid.

And indeed, one can note a negative  reaction today as the Fed announced it will be reducing repo operations:

But of course they remain larger and active.

I maintain the entire rally has been a Fed induced perversion. I mean just look at it:

Cautious stair step process on the attempt to normalize, and then a vertical chase back in on the way up.

And yes, it has impacted investor behavior and we can see it. A FOMO effect was created and people piling into tech like never before:

The Fed caused this and I regard it as a tragedy as they have created this massive asset bubble and now they are too arrogant to admit it and Powell is out there promising more and more intervention and calling it all wonderful and sustainable and how nothing in the economy is unbalanced. Empty suit policy I called it yesterday.

Just give me a break. No credibility, no trust, everything is distorted.

And so the market is on autopilot into the stratosphere with $NDX being over 400 points above its monthly Bollinger Band:

If you don’t like a linear chart feel free to do it in log, but it’s still the same: Over 400 points outside the upper Bollinger band. That type of extension has never lasted and has never been sustainable. Repo and treasury bill buying is causing participants to engage in risky buying behavior, not pricing in any risk where risk keeps building.

That works until it doesn’t, but in case of an emergency you don’t want to find out that the real pilot in the cockpit may be a dummy, oblivious to everything around him. And a Fed in denial of what they have unleashed here, denying that there are any imbalances, denying that repo has an impact on asset prices and investor behavior, such a Fed may be too deaf, dumb and blind to steer markets through the emergency that they themselves will have created by setting up asset prices for an ugly reversion to the mean.

Given the ever exacerbated state of technical extensions and valuations this market is becoming ever more dangerous in terms of downside risk. But for now it remains on autopilot. Yet so ingrained is now the one way ramp mentality that when this market finally does drop nobody will believe it.

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Categories: Opinion

16 replies »

  1. I’ve had 2 people ask me this past week how to use their 401k money to buy TSLA (neither has savings outside their 401k)….yup… this is all normal and very sustainable….

    • When the Fed cuts routine REPO significantly, lol. It was only a 10pt SPX drop in the 20 minutes after the less than 20% REPO reduction but that seems about as anecdotal as Antarctica registering its highest recorded temperature is to global warming. (You do realise that’s happening, I hope).

      My guess is the threat of a 50% cut in REPOs would freak the market back to last September’s levels; they are, after all, addicts now.

      Barring that, maybe 1,000 US deaths from COVID19.

    • Absolutely NO ONE knows when it will go down and be sure the FED will keep things going higher or sideways at worse. This Market is a GIFT to the millions of workers who have 401K and personally I am thankful for the FED for their action. – Ranting about the FED’s action or following doom-and-gloom analysis never made anyone money. Staying with a trend is where you make the buck and the trend is up. That’s all there is to it.

      • I guess all those folks are going to be diligent enough to sell before the next Bear takes 40% of their gains or have we all decided that we will never have a bear market again?

  2. I had a dream of a little toy person pumping a pump to bar wayyy up, and then it all came crashing down right back where it started and even slightly below.. and it was done on purpose because the toy was person was smiling when it came crashing back down. Not sure in this case where the starting line is.. but that’s where it’s headed likely.. Gonna fall like a stalled airplane when it does, that’s my opinion anyway. We will see.. watch out for Fridays!

    • Overvaluation is the biggest reason.. whenever true sense kicks in, we don’t know,.. it could be in a month or maybe more.

    • Many, many more reasons than there are for the markets to keep going up or even staying at present levels. However, markets are choosing to ignore those. For now.

      To whit: in response to a further 4,823 new cases and 116 new deaths in Hubei just reported for Feb 13th, SPX futures briefly dropped 4pts and then regained 2pts. Reality doesn’t matter.

      Until it does.

      As to when that might be, you should trust your own guess rather than mine.

  3. Seems like your the only one making the case on the BS that the Fed is pulling. At what point will the people wake up. This market needs a wake up call… when is next question.

  4. Running an economy by money printing and debt is decadence – besides abolishing free speech and rampant violence and corruption. The hallmarks of the zionist empire. Thank you, Mr. Henrich.

  5. There are many pundits who make note of the Fed activity…and no one knows when it will end…or if it will ever end…The real question should surround who is receiving the RePo money and what their trading is the day after…otherwise known as front-running ….


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