Market Analysis

Busted

First they dismiss you as a conspiracy theorist then they join you. The secret is out, the Fed is busted: Central banks have distorted asset prices far above the economy.
I’ve been harping about the market cap to GDP ratio for a while and even called the Fed’s asset price distortion operation a direct threat to the economy.

Now it appears the IMF agrees:

This disconnect between markets and the real economy raises the risk of another correction in risk asset prices should investor risk appetite fade, posing a threat to the recovery”

Posing a threat to the recovery. This was precisely my point on CNBC Fast Money last week:

The Fed is the danger. None of what we are seeing here is normal nor healthy as seen in market cap to GDP:

And be clear: Everything is about the Fed. It’s gotten so bad that a broad sense of resignation is making itself felt. Wall Street analysts are reduced to cite nothing but the Fed and further stimulus to justify a buy stocks narrative. Everything is so distorted that the very tenets of capitalism are crumbling.

Tim Seymour acknowledged as much last night: Capitalism is dead:

The very notion of price discovery is reduced to a central bank command order operation. Ever more ready to intervene at an ever more frantic pace, fearful of any downside in markets.

Just take the month of June. Two corrective moves in June and both seeing markets bounce back on what? The Fed coming to the rescue:

I keep asking how desperate they are behind the curtain.

One can’t help but wonder if we are approaching a moment of singularity:

For all the bullish narratives out there nobody can hide from a very self evident fact: Markets peaked on June 8th. It was the same day I asked the Crash 2 question. People mostly think of a crash as a fast event, but that’s not necessarily so. February/March was a crash because it happened so fast. But 2000 was a crash and it took 2 years to play out.

Not everything happens in a day, week or month.

And so I want to highlight some charts that suggest something more sinister may be in play than currently recognized.

Markets did peak on June 8th and the island reversal patterns we discussed in Straight Talk #6 remain in place:

$DJIA:

$NYSE:

$IWM:

All of them peaked on June 8th.

Including $SPX and the $VIX bottomed that day and have broken out since, the pattern busted to the upside:

All except one index who’s new record headlines made these market peaks fade into the background: The almighty Nasdaq managing to hit all time highs on a negative divergence hitting a key trend line before rejecting.

And the market cap concentration of the Nasdaq hiding the most striking fact: Equal weight remains below the December 2018 lows also peaking in June:

Hence I call all this still a bear market.

A bear market that hides in the details hidden beneath and asset prices distorted by the Fed that also can’t hide from this truth:

This market remains about control. It can’t maintain asset price levels this historically disconnected from the economy without artificial intervention expanding. Reduce it by a sliver and asset prices drop.

So far the Fed has succeeded in its mission to save markets from pain commensurate with the crisis unfolding, but it is killing capitalism itself in the process.

Now desperately intervening in one form or another on every down day the Fed soon will run out things to do and buy and market participants having chased nothing but the Fed put have greatly aided and abetted this historic distortion:

I’ve called this a battle for control between fundamental reality on the ground and artificial liquidity injections.

Everything we’re seeing are vertical distortions that are non sustainable:

But worse than vertical they are not changing reality on the ground. They are just masking it.

No bull market without central bank intervention has now been proven beyond a reasonable doubt. The Fed is busted and Wall Street exposed to be nothing but a suckling at the Fed’s liquidity chest.

Rallies still occur when the Fed intervenes. But despite two interventions in June prices now remain below the June 8th peak. The Fed and markets now have to prove they can exceed above these prices or potentially face the point of singularity: No bull market even with central bank intervention. If they can’t, then this bear market will come out of hiding.


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Categories: Market Analysis

22 replies »

  1. Every day we draw closer, I just haven’t figure out when we flip the script yet. Probably still 2-3 months out.

    Keep up the good work sir!

  2. FWIW – I absolutely share your analysis…There is an inevitability about the hubris of distortion that requires the once mighty are de-throned… Its becoming increasingly clear that each “intervention” has less and less impact until as you indicate the day comes when the market doesn’t respond and in the fraction of a second that it takes the market to consider what that means its already fallen significantly…. Markets are bought up, but they “fall down!”

  3. Thank you for your time, passion, work and knowledge … those of us “looking for the truth” reallly appreciate everything you do !!! … atay safe and healthy !!!

  4. Why are corporations like verizon and unilever deciding to cut ads on Facebook now? There’s been hate speech on FB and all other social platforms for years. In a recession, corporations cut advertising and marketing budgets, jobs and capital spending so that they can save their margins and profits. Is it really about hate speech or because we are in a recession and the media doesn’t cover it. Instead they allow the corporations to lie about what’s really going on. i’m not buying it.

    • Watch out for fake Bull narratives…Mark Zuckerberg: “We will start soon labeling some of the content we leave up because it is deemed newsworthy.”
      It won’t matter how FB responds since corporations are cutting ad spend due to a recession and reduced budgets not because of hate speech.

  5. Fed prints trillions. Governments pump trillions. A big german tech company is missing billions and they don’t even realized it. Will be a online-shop owner the first trillionär? So, who says there is no inflation?

  6. I think what most people are missing is that the virus pandemic, no matter how it plays out from here in terms of spreading, mutating, or even being cured with a vaccine, it is having a very large psychological effect on spending habits. Basically consumers are becoming more conservative and spending more on things they need, versus things that are not necessary. Thus, the real economy will not be back to 2019 levels until at least 2023, and perhaps even 2025 or later depending on how the virus plays out over the next five years. Therefore, yes the fed can get the SP500 to 4000 if they print another 7-10 trillion and give it to Wall Street over the next 5 years, yet SP500 at 4000 does means only that the top 10% became more wealthy, and the 90% who do not own much to any stocks will remain in an income and wealth recession. Plus, the bottom 90% have to deal with possibly being sick without having health insurance, as the United States of America is the only developed country in the world in which corporations, and not the government, provides healthcare policies for the population. Just another way to ensure the peasants are dependant on corporations, first by making them debt slaves, then wage slaves, and now healthcare policy slaves. And what does the White House decide to do when 30 million people have lost their jobs and thus their healthcare coverage, with an additional 20 million currently relying on the ObamaCare system? Well in bizarro world USA, the White House would of course try to dismantle ObamaCare during the worst global pandemic in 100 years, and in the process, such court action will also eliminate the pre-existing exemption that states you cannot be denied for having a health issues when attempting to buy coverage. So, if you have even a single days gap between healthcare policies, and you have a “pre-existing disease”, you can be denied by the second insurance company. Welcome to America, get a job at a large coporation or die at the hands of third world healthcare policy, while you go bankrupt.

    https://www.cnbc.com/2020/06/26/trump-administration-urges-supreme-court-to-end-obamacare.html

    Sven, it kind of feels like the current White House is attempting to burn down the house on the way out, which almost ensures a Blue Wave in the Senate now. I avoid politics in my own life as much as possible, yet politics and finance are currently one and the same, and we should all be paying attention as the fed is acting like a political institution. And as such, political institutions throughout history have picked winners and losers via political grift. And at some point, the top 10%will lose control of the narrative and the bottom 90% will gain control of the government and things will change in ways that Wall Steet never imagined. For starters, capitals gains rate could change from a maximum of 33% today to 53% in 2021/2022. Corporate tax rate from 21% to 28%, perhaps even back to 35%. Financial transaction tax, loss of step up basis, giant increased in the estate tax, etc, etc, etc. I could spend all day typing all the changes that have been proposed, so even if only 10% get enacted, 2021 could be a very different environment than exists today. And come December 2020, a lot of smart Wall Street guys are going to figure this out, so invest wisely!

  7. Prophetic. Although Avi (Eliot) says that after a 10 to 15 percent pullback now, we then hit SPX 4000 or higher in a couple of years, before a decade of losses and more than 50% decline. So Eliot is saying ‘one last hurrah’ before reality.

  8. There will be a re-test of the March lows. These markets will be grinding downwards for years. “They” don’t want you to know that the next Great Depression has already started. We are prepping every day here at our ranch for the hard times to come. Society has not hit bottom yet………….not even close. There is much suffering still to come. It will take decades to clear the mess. The younger generation “Millennial’s” their futures are finished. Their kids will be the next generation with hope for the world again.

  9. The truth shall set you free. Once you see and understand the truth, you can act responsibly with full personal sovereignty. Thank you Sven for sharing the truth of these markets with us. We will act accordingly.

  10. You don’t draw up trend lines among the peaks as in the chart of the NASAQ.When the market is moving up, it is trending up. You draw the trend lines among the troughs not the peaks.

  11. I actually sense that more people are becoming aware that the Fed and other central banks are making things worse. The Fed has been applying a plaster to a festering wound for well over a decade. Ultimately the situation gets worse. The wound needs dealing with initially. Yes it’s painful but in the long run a better solution.

  12. Ah… “the point of singularity”. Yes, we’ll probably be there soon enough. Perhaps after the Fed’s next party trick there’ll be a little blip up before the serious hangover sets in. I’ve warned since last October that sooner or later the Fed’s war on reality would fail as their weapons had ever diminishing effect.

    Methinks Mr Market wants to see the rubicon crossed, stawks bought, and the Fed’s creditibilty finally destroyed utterly before this game is done. I think that’s the plan but I’m not sure why it is, seems really daft to me. Though I have no liking for how the Fed behaves I fear what comes thereafter.

    https://en.wikipedia.org/wiki/Crossing_the_Rubicon

  13. “Everything we’re seeing are vertical distortions that are non sustainable:”

    Sure it is. Not to say by historical standards the market isn’t over-valued, so you have to look at current valuations as history in the making. Yes, I think the markets will continue to pull back right now (unless AZN announces positive vaccine developments, in whch case the market will go parabolic), but here’s the market’s dirty little secret – the rise in the US stock market is purely a function of US M2 money supply. It always has been and Powell has the power to print money until the markets rise. Does anyone doubt him at this point?

    I figure we end the year near 3300 on the S&P, regardless of a complete break-down in corporate profits.

    https://tradingeconomics.com/united-states/money-supply-m2

    • I disagree Dan. I’m betting the Fed loses control of the markets this time and the markets get the better of him. Secondly, there has never been a successful Corona virus vaccine ever created. This virus, I’m reading, shares some attributes of HIV. There is even some evidence that Covid-19 is like airborne HIV. The best case scenario is that maybe we will have a cocktail of drugs like they have with HIV to help manage the most severe cases of Covid-19 infection. Maybe? There will most likely never be a vaccine for this virus.

      • The Fed’s end game is dollar devaluation then hyper-inflation to inflate away the federal debt. In such a scenario stocks rally, although they do so within the context of a diminished dollar. The Fed has always levitated the markets by printing, and unless congress stops them, they will continue to do so because it’s what they do. (forget about EPS or PE bullsh*t or efficient markets, M2 money supply is everything with stock prices).

        The Fed has complete control over these markets. Look at today, high yield dropped (JNK), and the market still went up. That tells you the plumbing of the financial system is broken. People are reacting to the wrong signals. Great for stocks, bad for people and the economy in the long run.

        I suggest buying gold (physical+etf) for those who can’t stomach buying stocks. Remember most professional investors are playing with other people’s money.

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