Over the past week I had quite a few calls from friends and others asking for my appraisal on the recent market mania. Unlike past episodes where I would only receive this volume during some out-of-the-blue selloff like those which have happened over the last two years. There was a distinctly different tone to these. It seemed there was far more questioning of the underlying, rather than anything resembling the confirmation new lifetime highs should have had with arresting any doubts.
No, I can honestly say – this time was different.
It wasn’t all that long ago (actually Feb. of 2016) where it once again became obvious (once again) “bad news is good news, and terrible news is terrific!” as to hold The Fed. from raising rates, which in-turn allowed the algorithmic HFT bots to feast and gorge on any and all shorted stocks or standing closing positions.
It was here (“here” as in trying to explain) more often than not, these explanations fell on deaf ears. In other words: the more the market recovered, the less inclined they were to remember the reasoning for it.
Don’t let that last line be lost on you. I’m of the opinion it’s far more important today than anytime previous. For it was precisely that perceived difference in tone (“difference” being wanting further details) I inferred which underscored my belief as I iterated earlier, “this time was different.”
Let’s walk down memory-lane as to give all of this a little more context.
After the initial stages of the crushing market fall which took place from late 2007, finally bottoming in early ’09 (aka The Great Financial Crisis) the markets gyrated wildly throughout 2010 after the initial rise from the abyss.
It was right here after the initial bounce (an oversold bounce which everyone both fundamentally understood, as well as welcomed) the markets began to once again show its frailty.
During this period then Fed. chairman Ben Bernanke made his now infamous Jackson Hole speech, where we got our first glimpse as to the resolve that the Fed. would abandon all economic prudence, and embark on a theoretical model of interventionism as to change the financial markets from a place of capital formation, into the greatest Keynesian experiment ever. Here are a few excerpts as reported by Bloomberg™ at the time as to help frame the picture. Remember, this is August of 2010. To wit:
Federal Reserve Chairman Ben S. Bernanke said the U.S. central bank “will do all that it can” to ensure a continuation of the economic recovery and that more securities purchases may be warranted if growth slows.
The Federal Open Market Committee “is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly,”
Risks to the approach include a lack of “very precise knowledge” of the effects of the purchases and the chance that expanding the Fed’s balance sheet further “could reduce public confidence in the Fed’s ability to execute a smooth exit from its accommodative policies at the appropriate time,” Bernanke said.
Again, just for context: At the time of that speech and report, there were another 2 main points which today highlight just how clueless Fed. forecasting truly is. Ready?
The Federal Open Market Committee on Aug. 10 put its exit strategy on hold and decided to purchase Treasury securities to keep the central bank’s portfolio from shrinking as its mortgage bonds mature. The committee set a floor of $2.05 trillion for their holdings of securities.
And here’s the gem…
“Although mortgage prepayment rates are difficult to predict, under the assumption that mortgage rates remain near current levels, we estimated that an additional $400 billion or so of MBS and agency debt currently in the Fed’s portfolio could be repaid by the end of 2011,” the Fed chairman said.
Square any of that with what you now know, and rationalize why not only did none of it happen, but the $2.05 trillion reference has now well more than doubled. e.g., $4+ trillion. And as for that “repayment” you know “just for context” as it pertains to the MBS portion. it currently sits (per the referenced report) at $1.74+ trillion. Or $1,743,541,000,000.00 to be precise. You know “just for context.”
Here was where, and when, the world got its first real glimpse of “The Courage To Print.” And print he did, over, and over, and over again. e.g., As seen by the chart below when the initial crisis was unfolding to where it stood in August of 2010 when he was making the above remarks. Then all the new and evolving iterations of QE, Twist, etc., etc. To where it now stands today. And the “markets” in sympathy (as in fueled) never looked back. Ever!
It was also where that term “bad is good and terrible is terrific” made its way into the lexicon. For every time there was anything that could affect the markets negatively, the Fed. either insured implicitly or covertly that it was at the ready to combat whatever ill there was. Which also gave rise to another moniker known as “The Fed. Put.” Want the above in picture form, you know, “for context?” To wit:
Federal Reserve Balance Sheet from 2007 to today. Chart Source: Federal Reserve
This went on nearly unquestioned (and those of us that did question were quickly labeled or denounced as “tin hatted” and other such styled pejoratives) till mid 2013 when the markets not only regained their once lifetime highs, but smashed through them on convoluted reasoning and what can only be called adulterated data. i.e., reports with spin cycles that would make a washing machine envious, and earnings reports so brazenly massaged they make Bernie Madoff appear amateurish.
It was here (i.e., mid 2013) when people (and few at that) began to openly question the narrative of exactly how can the markets rise higher than previous when the metrics fueling that rise (e.g., real estate, GDP, etc., etc.) had never returned to the previous levels, let alone, provided the other metrics to push higher into “never, ever” heights.
And if you dared argued the correlation in the rise of the “markets” and the Fed’s ever-expanding balance sheet? Pejoratives were nice in contrast to what they now called one. For the sake of civility and class – I won’t type any of them here. Even if they would be perfect, you know “for context.” On a side note, I was more amused that Ph.D holders even knew such words or low-brow phrases. But I digress.
Here is where the term “”market”” was now needed to express the dynamics. For it was now apparent (apparent to those who wanted a real explanation) as to prove the markets were anything other than a goal-seeked representation of Fed. Interventionism. For how could we surpass the previous highs when (for good or ill) the metrics as they were once understood to achieved those highs were now non present? And worse: were in actuality regressing at a frightening rate.
GDP has now been so weak; for so long; and expectations revised lower, so many times; it’s possible past positive prints will be revised to negative in upcoming reviews. That is, if they ever do “review.” And that is a big “if” today as opposed to past look backs.
Once we broke the prior heights (circa 2013) there was still no underlying fundamental reason to even remain there, let alone go ever the higher. Except: QE was still in full force. QE wouldn’t end for nearly another 18 months till Oct/Nov 2014. And with that ending – so too did the rise in the “markets.” Coincidence? Hint: hardly.
So now here we are. And precisely where is “here” this time? Once again – at never before seen in human history highs, with cattle-calls to go even higher, making the rationality many once took as a-given (i.e., things must be getting better even though they didn’t feel it themselves) and turning that rationalizing into a “Wait…What?” moment.
In my view what’s driving this now foreboding sense of “maybe it really is all smoke and mirrors” is the once welcomed phenom of the markets vaulting ever higher.
It is precisely this which is now causing reasons to be suspect, not accepting. Especially after two years of going nowhere at best – and with more than a few perilous falls, saved only by ever the more central bank intervention whether it be putting off raising interest rates (again, and again…) or the near immediate erasure of any market shocking events after more coordinated central banker jawboning. This type of action of late reinforces the unsettling question: If everything is so good…why are they still meddling?
All the above has been transpiring long enough (now some two years) where a greater number of observers have had enough time to comprehend for themselves (via their own activities and experience within the economy) that things are far, far, from a situation that would support the idea, let alone the actuality, of the markets once again rising into the stratosphere.
It no longer makes sense even to those who want to believe. And it’s getting harder and harder for them not to question, never-mind, keep-the-faith.
Again, and I can’t stress this point enough, the only thing which is changing in their narrative or viewpoint is that they are now beginning to understand or at-the-least contemplate that the markets have indeed changed into something now deemed “markets.” And even though they once assumed the markets rising as always being a good thing. They can’t help as to shake this eerie feeling that maybe indeed – It no longer represents anything they once understood.
It appears to me that the initial knee-jerk reaction from anything resembling “should I get back in?” seems to be morphing and moving more towards “should I get back out?”
And that is the antithesis of what central bankers want and need. Confidence is not growing – it’s waning. And the rate of that waning is going to do nothing but accelerate, in my opinion.
What was once viewed by central bankers as a necessary function to maintain stability (e.g., their interventions pushing the markets ever upward) will be the exact catalyst for perpetuating a growing sense of disbelief by the very people they believed would pick up the baton as the market once again makes new highs. i.e., the general public via the wealth effect.
If I’m only half right it has perilous implications for the “markets.” Especially at these nose bleed heights.
I’ll paraphrase one call I received from a colleague that sums up all of the above. The conversation went somewhat as follows. I’ll mind you that this person is someone who took great pleasure in trying to get a rise out of me when the caution I called for was erased with a face ripping rally just days later perpetuated by an endless string of short squeezes of historical (yes “historical” is the correct word) proportions erasing, and then some, previous downdrafts. And as always, I leave it up to you as to draw your own conclusions. To wit:
Them: So…what happened in the markets today?
Me: You know precisely what happened. Look, I don’t have time to be poked, I’m not in the mood. I have a few deadlines on some projects that are driving me nuts. So: what’s up?
Them: No, really: WTF is happening? I mean sure I think it’s fun sometimes to poke fun on all that BTFD shenanigans you talk about. You know I get it, but now? Something just doesn’t feel right. I know of too many companies that are cutting back. And I know they’re not alone. The crap that’s going on abroad. The Fed. not raising interest rates again and such. And we’re breaking out to new highs again? On what?
Me: You tell me…
Them: I can’t. And that’s the point. I’m now starting to think this is all beginning to feel a little nuts.
Me: Beginning? OK, forget anything that I’ve told you previous. All I’m going to say is this, Bernanke was in Japan last week and the reports are they are going to unleash never before seen “helicopter” styled intervention on his recommendation in the worlds most used carry trade currency. Remember what followed last time Japan announced they were unleashing never before seen experimental policy in Japan? (e.g., ZIRP) Now – what do think?
I’m of the opinion they are far from alone in questioning the markets recently anointed heights. And that’s a very, very, big problem that the central bankers never anticipated. Let alone contemplated. All I can say is – we shall see. And all too soon at that.
© 2016 Mark St.Cyr