So Powell finally used the F word: Froth. Being non specific though as one would expect and being super careful as to not overtly link monetary policies to the said froth we can note some faint sense of recognition on the side of central bankers that the liquidity avalanche they have unleashed has resulted in market distortions.
Most notable the Fed’s Kaplan who noted late last week:”We are now at a point where I’m observing excesses and imbalances in financial markets,” Kaplan told the Montgomery Area Chamber of Commerce in a virtual appearance in front of a live audience, pointing to “historically” elevated stock prices, tight credit spreads, and surging house prices.
He’s starting to sound like me. And like me he’s not a voting member on the FOMC board this year, hence he can afford to make derelict statement such as this:
“I do think, at the earliest opportunity, I think it would be appropriate for us to start talking about adjusting those purchases,” referring to the Fed’s $120 billion in monthly bond buys that, along with near-zero interest rates, are aimed at keeping financial conditions super-easy and bolstering the recovery.
Never mind that the earliest opportunity was during last week’s Fed meeting. But no, silence. Yet the Fed is finally admitting there’s some froth:
Not a moment too soon I guess. For froth is what the data is screaming from the rooftops:
Money market fund data shows everyone all in long stocks while valuations are the most extreme ever:
Sentiment as expressed by headlines:
Headlines you don’t see at bottoms pic.twitter.com/pu6DCBnTUM
— Sven Henrich (@NorthmanTrader) May 2, 2021
Backed up by actual data:
Never have investors been this long stocks. Never have they had so much of their financial wealth tied to the future performance of stocks.
And margin debt as an expression of leverage employed tells its own horror story:
The wealth gap keeps expanding as last year’s trend just got exacerbated this year:
The big keep getting bigger and as a result the concentration of the few controlling everything gets ever more narrow:
Add $TSLA to the mix and you’re north of 25% in just a few stocks again tying market fortunes to nothing breaking to the future success story of the very few.
I’ve been clear that from my perch the Fed is overdoing it and to keep printing in this environment is just policy recklessness:
There is too much liquidity in the system and it is being allocated in reckless ways, furthering the market distortions we are witnessing now. None of these growth figures we see now will be sustained and my worry is the Fed is really screwing this up, for if they lose control of inflation and/or we are ending up with a colossal crash all these happy days may make way for a structural depression. Is this beginning of the roaring 20’s as so many believe? Or are we already in the tail end of this gilded age as non stop money printing has been with us now for 12 years already? The distortions didn’t just begin in the past 12 months after all.
I don’t know who has a grasp on reality here. Maybe Kaplan who’s admitted to the distortions.
Maybe it’s Dudley, but he’s throwing out numbers that suggest an overt collapse of the debt construct to come:
Reminder: Markets completely fell apart when the 10 year hit 3.2% in 2018.
Since then the US will have added nearly $8 trillion in debt by the end of this year.
H/t. @pdacosta https://t.co/RSKKKBQgKy
— Sven Henrich (@NorthmanTrader) May 1, 2021
It certainly is not our ‘savior’ Powell who recklessly keeps pressing the print button. Powell who famously denied the Fed’s role in inequality all the while getting richer with is all long ETF portfolio while he drives by the homeless camp every day on his way to work & then virtue signals about it.
That’s the world we live in. And yes, it’s the biggest bubble we’ve ever seen:
Oh it doesn’t matter because of the global footprint of big tech?
Think again. Take out the biggest tech companies like they didn’t exist & you still end up with 173% market cap vs GDP still higher than during the tech bubble.
It’s a bubble.
— Sven Henrich (@NorthmanTrader) April 30, 2021
Which is what happens when asset classes of all sorts explode vertically month after month. See the examples of small caps and the latest hot hand in crypto land, $ETH:
Anyone having outlined the case for a correction so far, bulls and bears alike, have found themselves out bulled by a market that has defied historical correlations and measures of reason. That’s what bubbles do. You could’ve been totally correct calling the tech bubble in 2000 as unsustainable in the fall of 1999 only to look the fool for a few months, yet being correct all along. Momentum continues to run until it burns itself out and reality sinks in.
Don’t confuse a bull market with brains. pic.twitter.com/nfcsBx78Sr
— Sven Henrich (@NorthmanTrader) May 3, 2021
And yet sell signals abound in context of a technical profile that continues to show risk higher until something breaks:
For reference that upper trend line in red sits around $SPX 4287 at the moment and that trend line is rising.
Yet one of those sell signals is subtle and technical and still very much unconfirmed, that of a weekly black reversal candle on $SPX last week:
So far this week $SPX has yet to make a new high, and perhaps this signal will invalidate itself as others have under the sheer force of the unrelenting liquidity and sentiment machine. We’ll know more by the end of this week.
For now be cognizant of the fact that this market is full of ever’s: The most disconnected disconnected from the economy ever, the most long positioned ever, the most margin debt levered ever. The most uncorrected ever. That’s a lot of ever’s that hardly can afford a misstep.
The Fed’s excuse for maintaining the largest QE continuing program in history increasingly looks to be politically motivated as opposed to economic. As the economy shows sign of inflation and overheating a nightmare scenario is building: Too much liquidity having caused an outright asset bubble and outright casino effect accompanied by record over-levering of extreme long stock allocations risking a market corrective process that could go a lot deeper than anyone can fathom right now as selling could beget selling and becomes systemic once the rug gets pulled (for whatever reason).
The Fed doesn’t want to be the trigger for that hence it’ll will cautiously virtue signal with the F word rather than risk being blamed for the fall out with the T word, that of tapering.
So the Fed is trapped, held hostage by its own narrative as Mohamed El-Erian points out. The problem of course being:
And once markets drop 10%-20% they can’t reduce liquidity.
If you can’t tighten during the best of times you can’t when things slow down.
The ECB has already played that script. https://t.co/W0k6Tu3aJS
— Sven Henrich (@NorthmanTrader) May 3, 2021
These markets have been on liquidity autopilot for many weeks. Don’t forget we’ve seen even this movie before, think 2018:
16 weeks of buying were taken out in less than 2 weeks. Stuff happens. So don’t be surprised if it does again. This party is wearing thin.
For the latest public analysis please visit NorthmanTrader. To subscribe to our market products please visit Services.
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
Central Banks: Whatever it takes! Infinity!
Markets: Ok, risk is gone. Just buy. Never sell.
Black Swan: I should step in. Because i am the only one who can stop this.
It is a ponzi scheme plain and simple. They’ve told us they can print to “infinity” and will. Prepare for catastrophe. Check out this two minute satire with the famous clip of Fed member Neil Kashkari on “infinite money.”
Congrats to those who sold around 10am ET today 3rd May. I suggest you go somewhere nice and ignore stocks until at least November.
Ah, there’s froth and there’s froth. Yes, we have a good bit of silly liquidity froth making up 20 to 40% of stock valuations, that will pass soon enough. I am old enough to remember back 50 years when media, sports, entertainment folks were paid close to an average wage and most people only bought stuff they mostly needed to live – there’s that whole layer of froth which, while maybe nice to have, is not essential to a comfortable life. If we do a big reset in the next decade or so then maybe much of that froth will go too. Things get scarier after that 😉
If something happens to change the course of the markets this month I believe this may be the catalyst:
It isn’t about rates it’s about the price. That is the price that the Primary Dealers paid for their Treasury coupon holdings. They hold a lot at higher prices and they bought them with short term credit. Well they are hedged, if imperfectly. If coupons continue to fall in price, rates rising in other words, they continuing to finance losing positions become untenable.
The PD’s are little more than front men for the Fed now. The Fed should just own up and bail them out. Buy their hundreds of billions and bail them out. They won’t.
Time for you to go back to school Sven. There is no ‘printing press’ or ‘money printing’ liquidity driving the markets. It’s pure investor psychology, albeit based on perceptions of current Fed policy. So please stop with the trite, populist narrative. For a detailed explanation of what’s actually driving the markets, you can read this: https://www.hussmanfunds.com/comment/mc210502/.
Respectfully! Had I listen to you I would be busted !!! Your technical analysis is impeccable. Also stop 🛑 giving your analysis to CNBC. The federal reserve and treasury control EVERYTHING!