Yesterday’s news of Bernie Madoff passing away in prison at 82 serves as a reminder of false belief systems. You know what got him caught? Not forensic accounting, not regulators, not investors, not the Fed or the SEC. But the world’s greatest cleansing process: The tide going out otherwise known as markets going down. His Ponzi scheme may have never been exposed were it not for markets collapsing and his new cash inflows stopping which exposed the facade of his fraud. But people had believed. They had believed that magical returns can come out of nothing. And as long as people believed they kept sending him money.
Belief is a powerful force and humanity through the eons has structured societies around belief system that were completely false, but as long as enough people believe something it is perceived to be true no matter how false the premise may be.
And that’s what happens in every bubble. The majority subscribes to fantastical growth and return narratives and they abandon all caution, sense, or discipline and when they get rewarded by their actions rooted in their belief system they feel validated.
Bernie Madoff’s investors felt validated in their belief system because markets kept going up. Subprime investors felt validated in their belief system because prices kept going up. Tech investors in 1999/2000 felt validated in their belief system because prices kept going up. Yet it was all nonsense.
During bubbles the belief in any valuation being justified is absolute no matter the underlying picture:
Documenting reality: 202.1% market cap vs GDP pic.twitter.com/64RB99gQZj
— Sven Henrich (@NorthmanTrader) April 14, 2021
Investors increasingly look beyond of what is toward what could be and what could be can be packaged in any sort of fantastical narrative of about the future.
Morgan Stanley outlined this formula in a recent report:
“Corporate value = steady-state value + present value of growth opportunities (PVGO)”
With belief anything is possible and justifiable whether it is ultimately real or not.
Hence everybody and everything is a winner in our new make belief world:
95.59% of $SPX components above their 200MA is now apparently a life time buying opportunity.
There is no discipline in this market, just throw money at a ticker and you’ll make money. The new capitalism. Nobody loses.
In what would be in any other time reckless behavior is nevertheless rewarded. Hence even fund managers don’t even need to stick to a diligent process of accumulating a position over time. Take Cathie Wood as an example, she piled in $250M into $COIN on the first day of the IPO.
I don’t know what her entry price was, but let me go out on a limb here and say that she didn’t catch the precise bottom for now:
Some people bought the open and some bought all the way down into the low $300s. But hey, it’s a happy bull market and valuations and discipline don’t matter. Things will just levitate things higher so why bother with discipline. Indeed, just see the headline that she bought and the stock gapped up as a result before reverting back to red as everything is cult driven these days. Elon Musk just needs to tweet a meme of a dog and Dogecoin goes up. Heck everything goes up and the supply of the everything wins supply increases. Crypto limited supply? On Investing you can track 5,000 crypto currencies.
All it takes is absolute belief in the Fed and the liquidity equation to keep things going. Trust in central bankers. The same central bankers that have led investors astray many times before. Was the Fed able to prevent a 35% crash last year despite having cut rates 3 times already and having expanded their balance sheet by nearly $500B already in the led up to the crash? No. But it’s long forgotten already because they just added ungodly liquidity since then and everybody was again saved.
In 2007 Ben Bernanke believed that subprime was contained and wouldn’t hurt the economy when it obviously wasn’t and it did collapse the economy and the global financial crisis unfolded.
He was so fundamentally wrong with dire consequences for millions he should have been fired. Instead he was the labeled the hero for printing the world out of the crisis:
Indeed the global financial crisis exposed false beliefs on many levels. Everybody was wrong, everybody had faith and had fully embraced the housing bubble except the few highlighted in the Big Short.
We see all the same now and all information that is contrary to the prevalent belief system is dismissed. 202% market cap to GDP? Who cares. 95.59% of S&P components above their 200MA? Life time buying opportunity. Global markets outside their quarterly Bollinger bands? Get me in now:
I could list many examples, but you get my drift. People are engaging in investing behavior that would be severely punished in any other time in history but because they aren’t the belief becomes self fulfilling.
This is the environment the Fed has unleashed with its reckless insistence to keep printing. What crisis? We are looking at big recovery growth everywhere. Stimulus is flooding through the system. The virus is getting under control with vaccines that are rolled out aggressively. Consumers are flush with cash and ready to spend as today’s 9.8% retail number highlights.
And don’t get me started on buyback announcements by the likes of Bank of America which announced a $25B buyback today:
If companies can blow tens of billions on buybacks again they don’t need Fed support pretending that the economy is an existential crisis.
How about end QE before bringing buybacks back?
We’re either in a crisis or we’re not.
If we’re not then stop printing.
— Sven Henrich (@NorthmanTrader) April 15, 2021
The largest growth curve in 50 years. Companies buying back their shares again with billions of dollars. So why insist on printing? Why give speeches every single day as Fed speakers are doing to ensure there is no doubt that they will keep printing?
Because they have to enforce the belief system for any chink in the armor of confidence would expose the construct for what it is: A false belief system. Most of these companies with excessive valuations will never produce the type of growth to justify them. This sugar high economy we are exclusively financing with record debt and monetary expansion is not organic at all.
Any of the numbers we see this year won’t be repeated in the years to come. A world entirely reliant on printing and stimulus will revert into an environment of relative tightening and “present value of growth opportunities (PVGO)” will find themselves confronted with reality and that is: The structural economy with declining birth rates and a shrinking work force can’t grow into the numbers valuations are presuming:
So what happens after the free money party? pic.twitter.com/cWEK5Wc6Wx
— Sven Henrich (@NorthmanTrader) April 14, 2021
So ignore tax hikes all you want, ignore debt all you want, ignore valuations all you want, but ignore them at your peril. A reckoning is coming.
But perhaps not today, this week, next month or next quarter although there are warning signs brewing (All things being equal, Risk Free). After all the belief in the fantastical is unshaken and prices keep going higher.
Fraudsters and shysters like Bernie Madoff live off prices going up as they successfully sell narratives people want to believe in. Why? Because it works, people want to get rich, and they want to get rich easy. And that’s what the Fed has accomplished, it makes people belief they can get rich easy.
And people want to believe. They want to believe in the impossible and unlikely for it would benefit them. It all comes down to this: We want something for free. Nothing is more appealing than the belief in easy money and easy riches. And we want to believe that underlying output is not needed. All is needed is an expanding Fed balance sheet and it justifies any future valuation.
In my opinion, when the final chapter of this era is written the conclusion will be that the notion that all these interventions, distortions, valuation explosions and runaway debt obligations can somehow build a long term healthy economy that can sustain itself on its own will have turned out to be a fantasy.
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.
This is 1929 all over again…When the exits begin filling, few will get out in time.
My profound appreciation for your acute objective perspective on the intricacies of markets and at 200% of GDP it’s unprecedented and the severe consequences are inevitable. However, who is buying 30 treasury at these levels ? Stupid Money ?
Until the music stops…. print more you rat Jerome Powell, print more for me!!!!
Beautifully written and spot on. As my Mother taught me, “Only a fool has to learn from their own mistakes, wise men watch and learn from others”. Yet just like clockwork there is a new generation lined up to do just that on the latest get rich quick scheme. What’s mind-blowing is that everything is a get rich scheme all at the same time. Crypto, real estate, small caps, large caps, commodities, FX, social media influencer, PPP loans, it just doesn’t end right now.
iagree.. so where do you put your money in this environment?
Treasury bills only money market fund
One of your best articles, Sven. Appreciate you! -JimC-TX
When this will be over, nobody will think about how it started. Mainly because people will have serious problem to deal with.
In the meanwhile the scumbags in charge will give you somebody to blame and they will start another rigged game. And nothing will change.
People not only want to be rich, but when they’re poor, they look at those who got rich quickly and believe that “they have done everything right”.
And when now and then there is a bust, the new rigged game starts with the support of new enthusiast adepts, who want to repeat the same path and even “beat the records” (no matter if it is a race to the top or to the bottom… some people want just win).
Under this assumption, “a long term healthy economy that can sustain itself on its own” is another belief. You can bet it won’t be so.
That said, it is my opinion FED acts illegally and way beyond its own powers.
EVEN IF they would think to be right, that they are doing something “useful” for the country, there are things they cannot do, there are things you don’t want they do.
These 10 years are a BAD, absolutely BAD signal even if for some misterious reason the outcome will be good for the people or the country (and I don’t see how this could be). ‘
If you allow that a group of people, which you would call a “class”, in this case the upmost class, takes possession of institutions, you directly legitimate a “class war”.
And so it’s only a matter of “winners and losers”.
People who point the finger on “socialism” should wake up: the FED is directly promoting and propping socialism, as natural consequence of the “absolute power” they think they are entitled. This time they are only serving the Rich (and some option-traders a la Pelosi).
It’s an entire failure which is bringing the whole country to bankrupt, economical, political and moral bankrupt. How much high should the SP500 go to make it worth?
What’s the price of your country ?!?
I can’t believe that NOBODY in the Congress, in the Justice administration, in the institutions (generally speaking) raises one hand to say: “Hey folks, WTF are these guys doing actually? It’s time to stop them, isn’t it?”
Ron Paul did, but nobody listened, except a few of us Paultards. They just gave him a demeaning name and moved on. Agree that nothing will change, but we have entered the next level of corporatism. See the recent comments from Jamie Demon on what corporations should do regarding state level politics.
I suggest you look you the Planks of Communism. A central bank is plank Number 5. Capitalism ? You have never seen or experienced it.
Well written Sven. Massive economic destruction is just around the corner. It will begin without any major warnings and will slowly evaporate trillions upon trillions in paper wealth across all asset classes for years to come. After that the poverty and bankruptcies will be everywhere. The expanding blow-up will take us to about the year 2030 before we all hit a bottom. Dark times are ahead for everyone.
Unfortunately I agree with Terry. A few wise, old-school, investors suggest we could go several years with flat to negative S&P returns. Unthinkable to the new Robinhood generation who expect 10% monthly returns. This will be a severe and painful lesson in mean reversion.
“ what wiseman do early fools do late “ But the fact is there’s oceans and oceans and oceans 🌊 and oceans 🌊 and oceans 🌊 and oceans 🌊 and oceans 🌊 and oceans and oceans 🌊 and oceans and oceans of money to pump in the markets indefinitely…irregardless because you can’t fight the ( monopolies) central bankers but Bitcoin offers exponential potential
Just an FYI that irregardless is not a word 😉
I would venture that ALL belief systems are false – by definition! I’ll not expand my argument to that, however, and stick to the current belief that liquidity will keep flowing and hence stocks will continue to rise. This doesn’t just require liquidity to continue, it requires it to increase; that, of necessity, cannot be so for too long. Even if that could be so the ever increasing liquidity would lead to the debasement of currency and financialised assets relative to real things – so stocks may increase relative to currency but not relative to other measures. We have seen the former (liquidity increasing) for a while now but not seen any real cost for this show up beyond the asset bubbles and inequality it has created. A logical consequence is an increase in real interest rates, and I doubt many developed economies could cope with interest rates a mere 2 to 3% higher than presently.
That said, false beliefs are truculent beasts, so markets will continue upwards until they are proven false by data sufficiently convincing for enough true believers to renounce this religion. Then their hell will be let loose. Once that truly occurs it is hard to imagine a less than 50% retracement. Meanwhile, play on but with a close eye on the nearest door.
The elite realized a hundred years ago that factories and assembly lines are going lead to economic contraction as people spend less and less time working for the things they need. Their brilliant solution has worked magically for over 100 years: make them want to work for things they don’t need. Today’s money printing by the elite is just an extension of this strategy: it gets harder and harder to make people work for things they don’t need; we need less people to work, but keep up the same level of consumption to maintain the status quo. Our heroes at the Fed are once again doing a brilliant job. Eventually, the world will be mostly automated. Food and shelter will be free. Most people will binge-watch Netflix and let leave the important decision-making to the elite. In this future, the fools will be those who believed their whole life that it was necessary to work hard to earn your keep, when all you had to do was sit back and watch your investments go up and up. The question too few people are asking today is why should you work if all it accomplishes is that you’ll be able to afford a few more cars or yachts? Today, extremely rational people will decide to quit working and saving for the future because there exists no way to save for the future that makes sense from a risk-reward perspective: if you stay safe and put your money in cash, then the bubble might continue and you lose most of your savings, but if you buy speculative assets and the bubble pops you might lose most of your savings, too. If enough people refuse to work, the government is forced into giving out UBI as the path of least resistance. So really, the problem is not the Fed or the politicians and it’s also not the specuvestor class that is trying to predict which assets will get a bid next (if you already have the savings, it’s only rational to do your best to preserve it), it’s the people who are going to work and saving it for the future. Assets derive their value from the people’s willingness to perform labor in exchange for them. If you believe assets are overvalued, there’s a remedy for that: it’s called refusing to go to work until you make double, triple, etc. to compensate you for the lack of fairly valued assets.
There will of course be more panics followed by even more euphoria, but you and I both know that eventually every FOMC meeting will be reduced to how many $Trillions of S&P, Dow and QQQ they bought over the last quarter.
Dear Sven, we simply live in Disneyland….and the football is great example:
Lionel Messi & FC Barcelona going bankrupt?
The football world is the prime example of the delusional world we are living in….a world based on endless money printing and endless debt accumulation….and not many are realising how ABSURD it all is.