Suddenly everywhere you look, one after another, a story is making its way into the main stream press (albeit a trickle but that’s a tidal wave in comparison) that we may be, in fact; experiencing a “bubble” in stock prices. All I can say is the line made famous by Jim Nabors as Gomer Pyle, “Well surprise – surrrr-prise!” But there’s a whole lot more going on here and it too is bubbling up more and more for all to see.
The once magic trick performed by the Federal Reserve via QE is turning from a one time grand spectacle of illusion used to levitate the markets; and is quickly being laid bare and exposed for its street corner value of tricks. That fact is becoming unavoidable. Even those who still believe in unicorns and rainbows (cue CNBC™) are finding it harder and harder to hold onto the magic. Anyone with just a smidgen of common sense knows what’s being presented as “a miracle of economic intervention” has been nothing more than a grand escapade only made possible through the use of monetary smoke and mirrors.
Everyone now knows how the tricks are being done. And those who continue espousing that this market is based on “fundamentals” as well as “fairly priced” (cue the media’s next in-rotation “everything is awesome” fund manager) are being hard pressed to control the snickering if not out right fits of laughter by others as they continue trying to make their case. e.g., “This past earnings season was a bona-fide beat!”
In reality we all know its only been possible through the use of extraordinary record stock buy backs made possible by a ZIRP, along with such an adulteration of GAAP via Non-GAAP: it’s a wonder why they even need calculators any more. These numbers (in my opinion) have more in common with illusion and magical thinking than anything based in reality – so why even bother. Be honest, just go for it, and declare, “We’re making all this shit up!” because: it just isn’t fooling anyone anymore.
Now the real issue from here for both the Fed. as well as Keynesians everywhere will be in trying to maintain some form, as in: “illusion of control” going forward. Surely there’s more magical thinking and sleight of hand needed now more than ever to keep up this grand deceptive appearance or “wealth effect” we were all told we’d be experiencing by now. After all, unemployment just hit 5.5% and the markets are at record levels. “Where’s the pony?”
Who needs an economy based on fundamental monetary principles when you can report economic numbers like this? Unless you’re one of the over 92 million souls unable to find work. The Keynesian answer to this? You just apply today’s version of Keynesian economic math and principles to any statistic that gets in the way of the illusion. Then “poof” just like magic, another irritating issue to the “everything is awesome” narrative is gone. No cape required for that one.
Yet the Fed. Board of magic seemed to have an issue with the illusion of “control” as it faltered a bit on Friday. Having more in common with an assistant dropping the magician’s hat: and the rabbit falling out comatose in front of all the children seated in the front rows.
Earlier during the week it seemed as if the next stage of theater was set for the captive audience. The “audience” that is demanding ever “Moar” stimulus as to continue the illusion seemed to get just what they demanded when with a wave of the wand “patient” magically morphed into “data dependent” right before our eyes. And the timing seemed so serendipitous. (that is if you believe in magic) For right on cue the Atlanta Federal Reserve released a report showing GDP expectations on par with what’s left behind in a magician’s hat after a round of pulling pigeons. It was nasty to say the least.
Personally I found the timing of this switch in verbiage having more in common with a street corner game of 3-card Monty than anything resembling meaningful economic policy. I mean; wasn’t it just “uncanny” how all of a sudden, out of nowhere, just when you thought the Fed. was facing the need to act (e.g. raise interest rates sooner rather than later per the “patient” meme) GDP expectations mystically went from “everything is awesome” to dismal with the Atlanta Fed. posting expectations of 1.2%! Thereby signalling the need of later (probably much later) rather than sooner interest rate adjustment to match the new “data dependent” meme. Once again I found myself thinking, “Well surprise, surrrprise!” What a coincidence of timing. It’s like – magic!
Just like a Vegas show at precisely the right moment the magician comes out and diverts attention just enough to make you think you didn’t see (or read, or hear) what you just saw. Within the same week its announced you’re “data dependent” and suddenly before you can blink an eye all that great data; is now terrible if not down right frightful. But, don’t be scared, it’s only necessary to help with the act. For remember, it’s all just good clean magic. However, this trick has gotten old – and doesn’t fool anyone any longer.
Just what we’ll get from here as in “the next trick” is anyone’s guess. But simple sleight of hand parlor tricks such as “free money” for stock buy backs have now but all been used up. For proof just look at the now swollen debt balance sheets of these miracle earnings beat corporations. And with the sudden emergence of Fed. forecasts proclaiming a crumbling in GDP expectations when everyone in the “everything is awesome” camp has been touting Shangri-La was just around the next earning corner, their going to have a harder, and harder time convincing themselves the fallacy will come true. Let alone share holders. But magic is all about belief right?
Suddenly on Friday it seems there’s a real issue for efficacy with the tools of magic used for the Keynesian sleight of hand. The “data” now exposes – and is ruining the illusion, rather than helping to facilitate the tricks. Instead of making a rabbit appear or disappear from a hat; the stage is suddenly getting overrun with not only rabbits, but pigeons and more. And they’re dropping their mess everywhere simultaneously. You can see the equivalent by looking at any chart showing current economic output.
Friday’s jobs report was: a true spectacle to behold. Smashing expectations for both an increase in jobs as well as a sizable decrease in the unemployment rate. So much so it’s now reached its nearest point of the Fed.’s statistical “full employment” since the crisis began. (don’t laugh just remember it’s a magic show) And with that the markets seemed to take that “good news” as frighteningly terrible – and sold off never looking back in a near 300 point sustained sell off. How can this much good be so bad for the markets you say? Easy.
A posted monthly Jobs Report showing the unemployment rate at 5.5% trumps a forecast for a possible dismal GDP report out of one branch or Fed. bank. The unemployment rate holds the magicians feet far closer to the stage lights having to raise interest rates sooner, rather than later. And it become obvious to the audience (i.e., Wall Street) this magic act may in fact becoming – old hat. And one could hear the chant for “More tomatoes!” growing louder, and louder as the trading screens were getting lambasted with more, and more red as the day wore on.
Friday saw a sell-off in the markets that for all intents and purposes was unlike many we’ve seen over the past few years. In a world where previous market data had been corrupted to mean “bad was good, and worse was better.” Good data is now more inline – with catastrophic. And any bad data mixed in might mean: even worse. Why?
Well the magicians have declared that not only will QE not be resumed (at least as of today) but the messaging for the raising of interest rates now has more in common with the Tower of Babel than it does with anything resembling a clarification of intent from the Ivory towers of the Federal Reserve. The messaging is more muddled than ever.
Without QE the markets have shown they are struggling. However this time what’s worse is: they’re all struggling at record heights. And now with the threat of interest rates rising back onto the table with such a stunning Jobs report, just when the Fed. showed they would use what ever bag of tricks or sleeve movements to push the issue back out of plain sight. (e.g. patient is replaced by data dependent) the curtain was lifted, the lights came on, and the assistant (the BLS) tripped handing the magician the knife blade first. And the once captive audience to the magical display of illusion began panicking and throwing a tantrum. (as in a near 300 point sell off after their latest communique)
Just how far has the ability to mesmerize the markets with Keynesian styled parlor tricks gone of the rails? In my opinion it’s beginning to have more in common both in results, as well as frequency: as an oil tanked laden train. The issue here is: this one is coming down from the top of the mountains, loaded to the gills with bubbled cargo, coupled together with a line of rail cars filled with financial derivatives at near infinitum – with no engineer, no brakeman, and no more track. I bet even Casey Jones is looking down thinking “Dang!”
The metrics showing how well the economy is doing have plummeted. The U.S. Dollar which by all accounts for the Fed.’s interventionist policies should at the very least be lower (much lower) and is screaming higher to heights not seen in decades. Bonds are being pushed higher and higher causing the very thing the Fed. wants desperately to raise by its own volition i.e., interest rates – ever lower. And now with other central banks around the globe unleashing their own QE or threatening (as in China) everything, and I do mean everything that wasn’t supposed to happen – is happening – both in frequency, as well as velocity. All of which is diametrically adverse as to what the Fed. has signaled shouldn’t happen. Funny thing that “omnipotence” illusion, no?
One now has to wonder exactly what will we see next coming from the Fed. as well as Keynesians everywhere. Will there be a sudden emergence of monetary policy onto the world stage in the form of a David Copperfield? Or are we going to get the newest extended version of a Sorcerers Apprentice?
By the looks of the pigeon stains accumulating it might be more of the latter than the former. But just remember, close your eyes and repeat after me: “It’s only magic. What could possibly go wrong?”
© 2015 Mark St.Cyr