We can’t print ourselves out of this crisis again, but that isn’t stopping the Federal Reserve from trying. Thursday’s intervention program, the latest in a string of panic moves to keep the financial system afloat, constitutes a complete takeover attempt of the market ecosphere, only the buying of stocks directly is last missing piece of eventual complete central bank control of equity markets. But seizing control of the bond market is the nearest equivalent step.
Not only that, the Fed is buying junk corporate debt propping up companies that should be let to fail as Chamath Palihapitiya pointed out poignantly this week. But not this Fed, no, with its actions it is again setting up the economy for yet another slower growth recovery, financed by even more debt.
QE doesn’t produce growth, that is the established track record:
Nobody wants to talk about the consequences to come following this crisis, but that doesn’t mean the consequences won’t be a real and present reality.
No, the Fed, while trying to save the world, is once again engaged in vastly distorting asset prices from the fundamental reality of the economy. It is in essence again laying the foundation for the next bubble, while the bursting of this bubble has yet to be fully priced in.
Even the Wall Street Editorial Board has made it perfectly clear what this is all about:
The @WSJ Editorial Board tells you what the new price distortion is all about: Save Wall Street and the top 1% and hope for trickle down economics later:https://t.co/kkd5YSSic1 pic.twitter.com/4XUC9sLPmY
— Sven Henrich (@NorthmanTrader) April 11, 2020
Asset price inflation to save markets in the hopes of trickle down growth to come.
The message the Fed is again is sending is to invite reckless behavior on the side of investors, the same reckless, TINA, fueled behavior that got us the bubble blow-off top in February.
The Fed’s actions are driving and creating these asset bubbles:
The Fed’s message to the market today:
If you are careless and invest in high risk debt we will bail you out.
If you are prudent and hedged in any way given the risk environment we’re in we will destroy your hedges.
The Fed is encouraging risky behavior and punishing prudence.
— Sven Henrich (@NorthmanTrader) April 9, 2020
And so, in the midst of the greatest economic crisis of our times investors are once again led to believe to chase asset price now back to 128% market cap to GDP:
Please. As of Thursday’s market close market valuations are back far above the historic norm on a GDP basis, a GDP basis that will be shrinking hard now which will lift these valuation ratios even higher. Based on what? Massive earnings growth? Give me a break. Past recessions brought valuations into the 50%-75% range, currently we are 20% above the peak of 2007, not the bottom, but the peak.
Look, I have zero problems with the recent rally. I’ve been clear on the technicals, the need for a technical rebalancing of a market that went through an extreme shock, and a realignment. Heck, I’ve even been pointing out the bullish patterns in the charts this last week for $SPX and $RUT and made the case for higher prices to come.
And some of these higher prices may still come. But make no mistake here, these prices are entirely inconsistent with the fundamental earnings and growth picture. $NDX is now down only 5.66% on the year, and back at December 2019 levels when $NDX made all time highs driven by a handful of stocks and fueled by the Fed’s ill conceived liquidity programs then. They didn’t just start printing yesterday, they started printing last year. Have things improved since then? Of course not, they have collapsed. There is no fundamental justification to see prices back at these levels.
The reasons we are here now is partially technical based and partially driven by insane liquidity thrown at these markets in the form of stimulus and Fed intervention. 2008 was child’s play compared to what is happening now and is still to come:
But be clear: NONE of this is producing economic growth, it’s propping up zombie companies, it’s exacerbating valuations driven by a Fed that never is willing to let the system sort itself out and of course it is again skewing the wealth inequality equation. None of these trillions are going to the American workforce who is suffering greatly as a result of this shock trigger and the excess that has been created in the favor of the top 1% over the past 10 years.
This shock will not magically cleans itself out of the system. Spending behaviors and financial realities will be much different than coming out of this crisis compared to just a few months ago. Yes you will have a catch up in spending once the crisis is over but $1,200 in rescue funds is not making up for the lost wages, incomes and financial well being of American families. Not even close. Spending will be curtailed especially as there remains lots of uncertainty going forward.
No, this renewed rescue attempt is again missing the mark:
Wealth inequality is accelerating even further.
The lower income brackets are getting laid off and their livelihoods destroyed and the majority of rescue packages and bailouts are geared toward stockholders and the investor class.
Business as usual.
— Sven Henrich (@NorthmanTrader) April 10, 2020
And suddenly we find ourselves at a critical juncture of control. Valuations once again driven above the fundamental reality of the economy, fueled by ungodly sums of liquidity and technical chart patterns that leave room for more upside in markets but also distinct bearish patterns in charts that suggest the possibility of an entirely different out come in the weeks and months ahead: The possibility that this rally here is simply a bear market rally and that the Fed’s efforts will be greatly challenged by fundamental reality, a reality that suggests that valuations are way too high still and that the real cleanse in markets still has to filter through markets no matter how much the Fed tries to prop asset prices up in its latest attempt of saving capital markets.
The message: This takeover of capital markets may fail. But whatever happens be aware there is no way for the Fed to come out. They will never able to extract themselves from this monstrosity no matter how confident Jay Powell may claim it is only temporary. We’ve heard this lie too many times. We heard it in 2009, we’ve heard it on the road to QE2 and QE3, we’ve heard it during during balance sheet roll-off on autopilot in 2018, we heard it last year during repo. All lies. The truth is the Fed’s only weapon in preventing reality from taking hold is to ever farther disconnect asset prices from fundamental reality and they are trying again, never learning their lessons and never taking responsibility or accepting accountability.
Don’t get me wrong: Yes, the Fed should intervene in this crisis, they are supposed to, that was their original charter, to be the lender of last resort. But now they are the lender of permanent resort, never able to extract themselves. And by doing so they are hurting the economy, making it weaker cycle after cycle, settling it with ever more debt, encouraging ever more risky behavior as a result of TINA, all of which creates ever greater financial bubbles, ever slower recoveries and ever more wealth inequality.
Coronavirus is the virus that infects our bodies, but the Fed is the financial virus that has infected our entire financial and economic system. And there is no cure, except for the Fed to lose control and the consequences to be revealed to the population at large which is largely unaware of the Fed’s role in creating a zombie economy. Only then can structural changes be made that can set us on the path of improvement and eventual higher organic growth to come to fruition. But first the pain must be endured. The Fed is selling a fantasy that is doesn’t.
But while this battle is unfolding investors and traders can follow technicals and they continue to matter greatly even in this Fed driven environment.
This week’s technical market assessment:
Please be sure to watch it in HD for clarity.
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