There’s that moment that one believes they are watching the start of something far greater than what others perceive. Some see this or that and shrug like the many times before thinking; “It’s all just consequential living in our “new normal.” However, for many paying attention, certain happenings don’t fit right at the altar of happenstance.
You may not be able to articulate exactly why one feels this way. Yet, in your gut something just feels odd. Yes, even more odd than the markets themselves over the last few years. (if such a thing is possible.)
I like many are watching all that’s taking place in the markets, as well as the political. Making heads or tails out of most of it is at times bewildering. Yet, that’s what we have to do as entrepreneurs.
One way or another we have to go with what we believe might take place and try to plan accordingly as to unseen disruptions that can take place at a moments notice. We can be right, wrong, what ever. What we can’t be is willfully ignorant. So, on that note I’d like share what’s making me think. (This is postulation. Not prediction.)
On May 22nd I penned an article about what one should pay attention to following a speech being delivered by Federal Reserve Chairman Ben Bernanke. (full article here) I concluded it with the following statement:
“Watching the reaction in the Russel 2000 (aka The RUT) both during and after the chairman’s speech might be the first tell as to what we might expect over the coming months in the markets.”
What came next was not only intriguing, but – informative. As I proposed in that article the thesis was to watch how “hot money” would react. What I didn’t take into account was just how much disruption might be taking place in markets globally where reactions could be far larger and quicker than in our own at the present moment. Which by all accounts infers the ripple effects of QE (quantitative easing) are now morphing into tidal waves elsewhere in the global financial markets. This is a dramatic change with consequences indeterminable or better yet – unstoppable (in my view) by the powers that be.
Below is a chart of the Russell® 2000 Index (aka RUT) leading into the chairman’s eagerly awaited speech. The left side represents the markets anticipation in an hourly chart. As you can see the index hit new lifetime highs at the open. The right side shows the market’s reaction during the day to what he said – or, didn’t say.
As impressive a reactionary sell off as this represents at first blush, it’s not where you should continue to focus. Just as in magic – your focused attention on the wrong area can lead you to miss what’s really going on.
As I stated previously, watching the reaction to this index both during and after the chairman’s speech might give us a “first tell” of what we might expect in the markets. I expressed it’s all in reference to “hot money” or speculative, or any other term one wants to use. (a favorite of the “smart-crowd” is yield seeking)
This form of capital doesn’t care about you, me, business, share holders, governments, and more. It only cares about one thing – itself and any offspring (profit) it can produce. Period.
It’s money – not a living being to be reasoned with. Self preservation is all that’s cared about. Confusing it with anything else can be perilous to both your health as well as financial future. And yes, am I insinuating “hot money” is akin to say a virus? Yes, yes I am. If I’m wrong, then why is the word “contagion” so prevalent as a market definition?
Want a real life example? Enter the Asian markets. Both Japan’s Nikkei™ as well as the Chinese Hang Seng™.
These two markets are at the forefront of what’s known as “hot money” inflows. It can work both for, as well as against, if it deviates too far from the “Goldie Locks” scenario. And, as of May 22nd – everything there changed with a brutal force of consequences.
Japan’s market (aka Nikkei) has been heralded in the financial media as of late with the introduction of what’s referred to as “Abenomics.” The Nikkei much like our markets took off in an unprecedented Japanese Central Bank fueled money printing bonanza. Stylized after our own Central Bank’s model.
All the so-called “smart crowd” across the financial media couldn’t say enough about how this was going to do nothing but help solidify the reasoning for buying the markets because “they’re fairly priced if not under valued.” (All based on some convoluted amalgamation of acronyms, jargon, and down right stupefying of the so-called “fundamentals.”)
Here’s my sophisticated rationalized market analysis of all they’re saying: “Mo-money means, Mo-money!”
With that said, I offer an exhibit for why I constantly pound my keyboard (minus any buzzers or whistles) stating “they haven’t a clue.” And, why you need to watch for yourself as to make decisions in your own enterprises.
Below is a chart of the Nikkei futures market. The left side shows the market on a tear following Japan’s Central Bank interventionist monetary policies. The right? Shows you the peak on what day? Yes, May 22nd. What follows is when the real “hot money” begins looking for cover.
The above shows alchemy at its finest as far as markets are concerned. Just as turning worthless metal into gold is a fool’s errand, more so is turning fundamentals into “funny-mentals.” Fools gold is fools gold no matter how one tries to sell it. Period.
All those gains based on Central Bank policies nearly evaporated overnight when the Central Banker of Central Bankers says – or – doesn’t say something the “hot money” wants to hear.
As I’ve stated many times, “There is no market without Ben Bernanke.” The above is manifest of that point. You don’t have such violent reactions across world markets lining up as precisely as the above demonstrates if this “down-draft” as the media likes to say is caused by anything fundamental. The only fundamental fact is this: “If Ben’s in – they’re in. If Ben’s out – they’re out.”
Remember in 2008 when our own indexes fell multiple percentages day after day with no let up? That’s what the Nikkei is now experiencing. Over a 20% decline in about a week. Last time we experienced the same, we were in free fall from what was believed a “fundamentally” based bull market bonanza.
Unlike today, during 2008 there was so much happening in the economy that when the fall out first showed its hand it could easily be glossed over as a hi-cup or something else as to try and make sense of the market fluctuations. However, now? It can almost be pointed at with certainty where the Chairman himself experienced one.
Think I’m off base or making assumptions where there are none? Fair enough. So let’s throw into the mix that dynamo of unmitigated love by all the so-called “smart crowd” where the “fundamentals” are not only to be marveled. Rather, we should throw out the old because – this is the “new model.”
Two things happened in China lately. First: The Hang Seng market out of nowhere began declining in multiple percentage moves. The moves down were blamed on a multiplicity of topics. However it seems a little odd does it not that the real declines begin when? Yep, May 22nd. (Are you noticing a pattern here?)
Once again, moves like this would be called “horrific” or “stunning” across the financial press had they occurred here. But, it hasn’t so….keep whistling right?
As if the first was bad enough the second point is where things are really both telling as well as troubling in my view. This week the Chinese government had a failed bond auction. It seems there wasn’t all the “hot money” around to buy up everything like there had been.
One may attribute this to the Chinese Central Bank deciding not to “participate.” with its own version of monetary policies. But, (and it’s a very big but) does it not make one wonder why such a thing seems to happen exactly at the time Ben’s policy is under scrutiny on whether it will continue or be subject to the much maligned “taper” policy implied by the press?
All of the sudden (like magic) there seems to be a “liquidity” shortage. Or, in plain parlance – no money. What happened? (I say again -magic?)
All of the sudden when our Fed chairman hints there might be less “hot money” excuse me, I mean a tapering of QE – markets around the globe panic? I’m not a “financial analysts” (although, I did stay at a Holiday Inn® once) something seems worrisome in the bigger picture.
Then to top all of this off it was announced Thursday we are basically going to go head to head in some form of proxy war again in the Middle East. Whether you agree or disagree with the policies is irrelevant to this discussion. (so please – save the emails) The only thing that is relevant are the facts. And one of those facts is both Russia and China are more aligned in policy than we are. (as witnessed through stated policies and meetings throughout the media)
As we once again begin to flex our military in another regional battle does monetary policy flexing via Central Banks become just as volatile as armed conflict?
Lest we forget Central Bank’s are currently far more involved and influencing control of economies and markets than anytime in prior history. What exactly may result in the financial markets for the future is anyone’s guess. Yet, that’s all it will be – a guess. For this is uncharted territory.
For how it began will not be as important near term as how it may end. While as entrepreneurs only one thing is known to us:
We need to pay attention as to adjust accordingly if need be.
Regardless of which way it may go.
© 2013 Mark St.Cyr