Well, they’ve done it again. The Fed has once again managed to erase the larger market pain. This time it was not the standard correction that was erased, this time they erased a market crash as $NDX is trading at all time human history highs.
I, for one, have to say I am surprised how effective central banks have been in squeezing markets higher again. I thought after 10 years of this monetary nonsense they would finally lose effectiveness in their ability to manipulate markets. Clearly I was wrong. But then I also didn’t see $3 trillion in Fed balance sheet expansion coming in a matter of a few months.
So one has to clearly acknowledge central banks continue to hold complete control over these markets. But it comes at a price that will remain ignored for now, but nevertheless I’m aiming to highlight some of the issues I see.
In my view central banks, in their quest to conduct a successful rescue operation, are killing the patient in the process. And nobody holds them to account, except some perplexed voices like myself are trying to at least raise the issues. (See also Stock Market Straight Talk)
And it’s not over of course. The ECB will announce more stimulus and there are more fiscal stimulus efforts coming as well and in process they are literally manufacturing the largest market bubble ever.
Bottomline: The distortions have become more extreme than expected.
And these distortions can be seen and measured in a number of ways.
First off the most obvious but also most ignored: Valuations are SCREAMING danger:
Yesterday we closed at 145.6% market cap to GDP, today markets are trading at 146%.
These are not only historically extreme valuations they are also entirely incompatible with any valuation history in context of the economic backdrop we have: 20% unemployment, massively regressive earnings, you name it.
Some will justify the highest valuations with a coming “V” shape recovery. Even if you get a “V” you have to assume new record high valuations from here.
But there is no “V”. The CBO came out out with a projection yesterday suggesting it may take a decade to recover from all this:
The only V is in the stock market driven by artificial liquidity and it’s dividing the haves and have nots ever farther apart.
And the layoff announcements keep coming. See this tweet thread for some of the ones I’ve been tracking:
Every company right now is busy figuring out how to do more with less.
And once they figure who the less is those jobs are not coming back.— Sven Henrich (@NorthmanTrader) May 11, 2020
And they keep mounting and they are sizable.
Which brings me back to a larger point I’ve been making for a while: Wealth inequality
How societies get destroyed.
The top 1%’s share of total assets has never been higher at nearly 30% while the bottom 50% barely own 5.8% in aggregate.
Chart prior to Covid.
And now many of the ones in the bottom 50% have lost their jobs. pic.twitter.com/JBtNz2cl38— Sven Henrich (@NorthmanTrader) June 2, 2020
2020 has seen the largest expansion in wealth inequality yet. Jay Powell may deny all he wants that the Fed’s policies are contributing to wealth inequality, but that’s just a lie.
“Powell Says Fed Policies ‘Absolutely’ Don’t Add to Inequality”
That is such a bold face lie & willful denial.
The Fed will never admit this because to do so would reveal their entire policy construct to be an absolute shambles.
Despicable.https://t.co/rM3UvJfM3X
— Sven Henrich (@NorthmanTrader) May 30, 2020
If he hasn’t noticed, but America is Breaking Bad.
While the current protests in America were triggered by a specific event, the horrid killing of George Floyd, the protests represent something deeper: Anger and anxiety and a sense of injustice in general.
In past recessions everybody got hurt to some extent, even the top 1% at least in the form of dropping asset prices. Not this time, stocks are saved, jobs are not. And as the top 1% own the majority of stocks and the bottom 50% own virtual no stocks the correlation with the wealth inequality curve only appears to escape Jay Powell.
Now it is the bottom 50% which has predominantly lost their jobs and thanks to the Fed’s monstrous interventions the top 1% can take comfort that their asset values have been largely protected. An as perverse distortion as we’ve ever seen.
While the Fed continues to deny the obvious market participants of course know better.
As Mohammed El-Erian recently wrote:
“By contributing to higher wealth inequality and dragging the Fed deeper into “quasi fiscal” funding operations, the central bank also risks its credibility and political autonomy.”
From my perch of course they Fed has no credibility and Powell’s denial of negative rates as a policy tool is already challenged by one of the Fed’s own economists knowing there is no V coming:
And here we go.
The jawboning begins. https://t.co/Zadows5dTE— Sven Henrich (@NorthmanTrader) June 2, 2020
So the jury is out, but I for one would not be surprised to see the Fed eventually implement negative rates. Especially if markets were to drop hard again.
As it stands we’re staring at the biggest and fastest stock market recovery in history, especially considering the context of the economic and valuation backdrop.
Sustainable? I suppose it’s in the eye of the beholder.
We can observe that the infamous megaphone pattern has once again been reached:
But the squeeze may not be over yet as we can note on the futures contract that trend line is a bit higher still, along with the .786 fib:
My view here: This liquidity, FOMO, TINA rally, whatever you want to call it, is not sustainable. It has no foundation in earnings, growth or future expected growth. It is Fed manufactured and yes I believe what I say:
The Fed is creating the largest asset bubble ever.
— Sven Henrich (@NorthmanTrader) June 2, 2020
If vertical equity prices were the intended or unintended consequences they are not producing growth or a V shaped recovery. There will be a recovery yes, but to a smaller normal. But in process the Fed has vastly disconnected asset prices from the economy and only multiple expansion can keep investors on the safe side. To me this action is not sustainable, the disconnect and distortion too large setting markets up for a nasty reversion to come.
And that reversion itself will then cause a massive dampening in sentiment. In short: They have set markets and the economy up for a deepening of the malaise as the liquidity is going to all the wrong places but the real economy.
And the protests on the streets of America they are the real economy and the voices we’re hearing are saying: We can’t breathe. And the message they are sending is: America is Breaking Bad.
But the Fed’s strategy appears to be to deny it all and to repeat the same policies that have brought us to this point, but with even more intensity. And that intensity has paid off. For the top 1%. Congratulations.
This rally is crystal blue meth. Consider with caution.
All content is provided as information only and should not be taken as investment or trading advice. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise. For further details please refer to the disclaimer.
Categories: Market Analysis, Opinion
JP looks like he has been on the crystal blue meth. A couple of years ago before winding back the balance sheet he had darker hair and skin tone. Now grey, puckered and skin leathering up. Must be the job.
Hi Sven, thanks for your very welcome opinion always.
One thing I see is that China & Europe printing their whatever quantity of money to pay bills or debts, the USD will become worthless for them, and its the end game for the USD as a world´s reserve currency.
So I think that Powell is really a no brain here, and a traitor to the US he represents.
Excellent post Sven! These markets are definitely not sustainable. We are currently 85% in cash with only 15% invested in this market with no plans to ever invest any more than our current 15% allocation. We’ve made our money over a lifetime now. We have all we need. Investing with our 15% allocation rule in quality stocks, ETF’s and REIT’s for dividend income only. It’s “risk off” for this household going forward. Time to spend more time on the ranch. Trees, land, grass, nature, fire-pits, walkways, decks and BBQ’s! Have a good summer Sven!
Would like to see some in-depth on the real ramifications. I see a zombication occuring – where senseless risk, lack of productivity, and financial engineering is rewarded, while honest, productive sweat equity is penalized. I see a sort Oligarchic Socialism taking hold that will require increasing police and mind-numbing propaganda to keep the masses buying into their own zombification. Problem is I suppose, the boiling frog theory. We sit like zombified frogs as the water temperature is day by day made increasingly hotter – never receiving the shock that prompts us to leap out of the cauldron.
I have and still agree with your assessments, however when you are in a situation where your opponent/referee can change the rules to always put you at a disadvantage …. at some point you just walk away or follow their lead
Agreed. This is the conundrum.
Well said.
Plethora of monetary packages, and obscure as to when a capitulation might be. Each day brings more beleaguered news, to which only adds to the inequality in the market. All bullS**t.
The modern trick is, to print as much digital money as you need. Billions, trillions and next: quadrillions. Btw, the word “million” was erased in 2007.
Don’t forget that JP is a member of the 1% and I personally believe that he is front-running all of the FED intervention. He knows in advance what he will say tomorrow. He probably has several secret brokerage accounts under alias names in other countries. Of course he has a zillion shares of AAPL and MSFT and other Fab 5 stocks in those accounts. He wants to become a member of the .1% like his pal, Warren Buffet, that recently put him on a pedestal for creating the liquidity to dump the Berkshire airline stock holdings. Am I being satirical? Well, yes I am (influenced by Sven). But, I refuse to capitulate and go long because when this bubble pops there will be no bid. I think it will be much deeper and steeper than the last one.
How are you going to compete with Central banks, Algorithms, and Dark Pools? You have to follow the money….Powell will have his day…
Thank you for the article Sven. been looking forward to it for a while. Best.
“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”
If you watched the tape it was fairly obvious that once we returned to 2950 we would be heading much higher. Same thing happened after the 1929 crash. The way I see it, everyone is hedged at this point, so why bother selling. Particularly when you can dump your stock on millions of new home bound day traders with freshly minted stimulus checks.
This is now a bad news is good news market. The market is expecting much much more stimulus. So Fridays jobs report is almost irrelevant to the market. If it’s bad, then the market will rally on the expectation of more stimulus. I suppose the same might be true of the Chinese trade war, but that might get nasty fast, and target American companies. If bond yields continue to rise, then stocks could hit new highs by the end of the month. All this makes perfect sense if you’re a true believer of the Fed’s market magic. People are buying junk debt and junk stocks, according to plan.
But I would think the trade war could easily knee-cap the market any day now. It’s been awful quiet, too quiet.
American Lives Matter.
Not just Black lives.Although they have had the worst and are a beacon of what is extending beyond race.
Most Americans are suffering and getting poorer and more disenfranchised under the American Monarchy. American Nobles – from all political parties, Wall Street, Hedge Funds in their pandemic boltholes, Silcon Valley, sports teams, Hollywood, and all that other crap – are suppressing all. Everybody. Indeed, White is the new black.
The Fed has destroyed the economy, not a bloody bug.
Sven,
I have to admit that at this point, I am not intelligent enough to understand why how the markets can continue to go up much further, as the amount of global QE is leveling off and by far not all of that money is going 100% into stocks, as some is needed to keep companies and people from going broke, etc. It is all beyond logic no matter how creative I brainstorm the situation, thus I have reduced my own holdings to only 10% long today, as another 10-20% gain from here is beyond my ability to comprehend and thus I would most likey not sell at the next “final” top before some unintended and unexpected black swan sweeps in and tanks the markets 10-30% in a few short days when I am not paying attention. I salute anyone who can handle this market from this point to where ever it is headed.
Good luck in all your investments!
P.S. Good to see you read the reader posts as two of my previous forum post links have been tweeted and written about in this article. Feels like I am helping in some small way, if that makes sense. I actually feel guilty making so much money in these markets doing nothing productive except for hitting a few keys every day on my trading screens in my fantasy world, as I watch my neighbors, friends, and even family stuggle to survive in the real world. What is happening globally is so illogical that I am not even sure what is real anymore. For example, is money real? It seems to me that money is simply a hope and a dream, the same hope and dream that small children have in regards to the tooth fairy. I am so confused with our new bizarro world, and I find that your articles ground me back into a much needed reality that somehow logic will matter at some point in time, be it 1 day or 100 years from now. I mean think about it, if we could just print money all the time, we could have easily colonized the moon and Mars by now. If infinite money was logical, than we would have a cure for cancer as we could just print $100 trillion and solve cancer in a few short years. Obviously “free money” isn’t free and someday will come at a “price”, and will not work forever…yet it is beyond my comprehension when it will stop working. Therefore, I’m 90% out (10% “in” just for FOMO sake) as when I mentally zoom out far enough to ponder the entire concept, I see nothing more than a gigantic globalized snake slowly eating it’s own tail…
“While the current protests in America were triggered by a specific event, the horrid killing of George Floyd, the protests represent something deeper: Anger and anxiety and a sense of injustice in general.”
Yes, anger and hate against white people coupled with envy and greed of what white people have. We left the cities for the suburbs to separate ourselves from their violence. I care not if they burn their own communities down just don’t come to my neighborhood.
For some black/white facts, see below.
https://www.city-journal.org/terrifying-collapse-of-the-rule-of-law
Would someone call the top today just like Mark Haines called the bottom in 2009?
Would someone call the top like Mark Haines called the bottom back in 2009?
I suspect the “Fed 500” will get unlimited Jay-Pow juice until at least the November elections. As BMO stated today, “This is Jay’s Market”. I suspect this could continue for many years, perhaps $5-$10 trillion per year for a decade or longer. Personally, I could care less about FOMO, the real issue is TINA for yield or decent ROI of any kind beyond the stock markets, and they are all moving in tandem globally which makes me think that central banks are all buying each others risk assets.
I am trying to “Tap out” of my last business, having run three in my lifetime. Unfortunately the corporation I own at this moment produces commodities, and as you can see anyone in the business of producing “real materials” to the world have been simply punked compared to those who provide “techy stuff” (see chart link below). I feel foolish for having not sold my business already, and put the proceeds into the financial markets. And I am not alone, as most of my business friends have been ready to fold for the last 10 years as we watch the markets go up 8-12 %yearly as we work 70 hour weeks making a 2-6% ROI. I wonder how many small to mid-sized business owners feel the same??? Most of us are in our 30s and 40s, and simply are tired of being productive without enough ROI to keep ahead of the monetary curve. The fed may have solved the 7 to 10 year boom-bust cycle for Wall Street with unlimited free money in 2020, but unfortunately for those of us producing real things, the boom-bust business cycle still exists. The Fed has changed the rules of the game, and now I need to wisely liquidate my business in order to play by Jay’s new rules, basically Jay’s Wall Steet is not the economy anymore, instead it is a guaranteed wealth generation tool for the top 1% of risk asset owners, and a distraction for everyone else who are bored trading $3,000 accounts on RobinHood. I am going to lose a sustantial amount of money this year via my commodity company, yet if I would have liquidated my corporate assets, I would have made over seven figures in the market this year alone, and at least twice each and every year over the last 10 years. I was a fool to play by the old rules for so long, yet after watching with my own eyes the Nasdaq recover in 50 days versus the average 1018 days via the past fed rules, I am now a true believer Jay-Pow omnipotent powers. Long live King Powell…
Nasdaq versus commodities chart:
https://www.zerohedge.com/s3/files/inline-images/nasdaq%20commodities.jpg?itok=-X3dc2Fr
Truth is that millions of us with 401K portfolios are thrilled to see the markets go higher!
Thanks for your insights Sven.
It’s about time for you to finally come to grips with reality and admit the FED rules the day.
These markets are going higher !! – ‘extreme’ valuations are simply failed interpretations of Technical Analysis – as good as it may be.
Historical reference is irrelevant.
Those are not Law of Physics, just ratios that can change to no end considering the FED’s liquidity.
“Socialized Capitalism” for Wall Street, unemployment for workers…per Bloomberg:
https://www.bloomberg.com/news/articles/2020-06-05/fed-vow-boosts-debt-binge-while-borrowers-cut-thousands-of-jobs?srnd=premium
Toyota borrowed $4 billion from investors on March 27. Three days later, the Japan-based car company said it would continue paying dividends to shareholders. Eight days after that it said it would drop roughly 5,000 contract workers who helped staff its plants in North America. Scott Vazin, a Toyota spokesperson, declined to comment.
In a March 24 letter, 200 academics, led by Stanford University Graduate School of Business Professor Jonathan Berk, called lending programs aimed at corporations “a huge mistake.” Better to focus help directly on people living paycheck to paycheck who lost their jobs, it said.
“Bailing out investors who chose to take high-risk investments because they wanted the high returns undermines capitalism and makes it an unfair game,” Berk said in an interview. “If you don’t have a level playing field in capitalism, it doesn’t work.”
Sven, you missed the biggest and fastest market rally on history by still standing still on your “Doom & Gloom” thesis. GET OVER IT! Put on your bull cap, I mean it.
The top is in!
Being a contrarian. Sven loves to push that we are over valued. I agree. However, on zero hedge there is an article with a tweet from Holger Zschaepitz that points out that the money supply has increased much faster than the SP500. So if the SP500 is tracking the money supply it has the ways to go to the upside.
Holger Zschaepitz
@Schuldensuehner
A chart for the bulls: Measured by M2 money supply, S&P 500’s mkt cap is way below the highs, so ratio leaves further upside for valuation.
2:48 AM · May 28, 2020·TweetDeck
Thanks for your analysis and straight talk, Sven. Take heart, your work is highly valued.
While money is being made, it’s unfortunately predictable for pros to ignore warnings of risk.
Lehman Bros asked their Risk Officer to leave the room in the lead-up to 2007. (A Colossal Failure of Common Sense, 2010)
It’s common for complacent investors not to question success when new highs are reached. (A close friend of mine, just this week)
Take care!