For the first time in what seems like an eternity the “markets” experienced a hiccup. And with it came a brief, yet far from terminal sell off. Declines of around 1 or 2% used to be viewed as average, routine, no-big-deal, and such. But that was then, and this is now. For today in a market that is viewed only as having one possible routine i.e., little to no volatility, buyers for every ask, fortified with an end-of-day ramp just to make sure if things have gone wrong, everybody gets healed by the close of the session. It’s been good to be a BTFD’er.
Then again, that was then, and this is now, And buying-the-f’n-dip every time from here on in just might be the worst learned, habituated, internalized, and institutionalized market strategy ever adopted. For the real pain of this “genius” trade will become self-evident when all those BTFD skills not only work against one, but fail spectacularly during real moments of panic selling when BTFD “genius” turns in “Catching falling knives” tragedy.
Remember: For all intents and purposes short sellers have been all but extinguished from this “market” for years. In other words: There’s no one who needs to buy to close out their position during panicky sell-offs which exacerbates turmoil. i.e., A “market” full of longs needing to sell to capture all that envisioned profit – and not a buyer needing, let alone wanting, too buy among them.
But wait – there’s more! as they say on late-night TV. And this “bargain” is something most have never thought through.
If, and when, short sellers (even at the margins) decide to re-enter these “markets” in earnest. i.e., They believe the Fed. or other central banks have lost control? Let’s just say the “dancers” become dear-in-the-headlights quicker than they can Foxtrot off. And the first taste of the “panic selling” has finally reappeared. And with it, for those paying attention, came a sight not seen in quite some time.
What was that you ask? Good question. But rather it was not “what”, but who? i.e., None other than a “panicked”, free-styling Fed. president to assure everyone to just keep-on-dancing. And just like that BTFD was once again in full swing. You could hear the music, popping of corks, and clinking of glasses everywhere.
I am arguing: Rather than “partying” at the reemergence of this form of BTFD exuberance. One should instead be cognizant of the underlying problem contained within. In other words: That a Fed. president felt the need to publicly contradict everything the Fed. is currently stating as its reasoning, and foundation metrics for raising in order to reassure the “markets” to keep-on-dancing. And the “markets” only hiccupped ~2% from all-time highs!
Again, for this point can’t be made more forcefully: A move of, a pull back from, a retracement of, however you want to phrase it, of ~2% from highs never before seen in the history of mankind warranted a Fed. president to break with the concerted, self aligning cadre of “Hawks are U.S.” to state publicly not only contradictory messaging, but rather, seeming more like “off the reservation” espousals that the Fed. itself, and its conclusions, may in-fact not only be wrong, but rather than tightening should be more inline with proposing more QE. Got that?
Mr. Bullard was doing some impressive “free-styling” and the “markets” took their cue and once again BTFD horns-over-hooves right back to those very highs, hence illuminating these two very big issues. First…
Although the act of St. Louis Fed. president James Bullard coming to the rescue and saving the “markets” whenever there’s been peril is nothing new. (see “Bullard Bottom” for clues) This time it’s less the “act” that one should consider, but rather, focus on the timing and its circumstance. This is where the real underlying issues present themselves. And this latest round is troubling not just for its implications to where the “market” now stands. But rather, to the reasoning why it stands there to begin with. e.g., Pure, unadulterated, hopium.
Since the election of Donald Trump the “markets” rocketed near vertical to the heights they are now poised. That accent constitutes some 300 points for the S&P 500™ alone, or said differently: Using simple math (e.g., 300 ÷ 2400= .125) nearly 13% of the entire S&P™ market (as well as the Dow™and NDX™ respectively) has been generated in just under the last 8 months.
The only thing fueling that move? Hopium. i.e., All in the “hope” the economics of the nation will turn and “Make America Great Again” via tax cuts, policy changes, and more. For the economic fundamentals that are supposed to support markets have long since vanished or resemble anything prior used for assumptions of good too great. Actually, just the opposite has happened where more hard data goes from bad too worse which fuels that other form of “hopium” that central banks will once again begin the IV of QE. e.g., Enter Mr. Bullard.
One can’t help but marvel how “markets” have not just shrugged-off things which only a few years ago would cause, at the least, reasons for caution. Yet, today? It seems to laugh and BTFD horns-over-hooves at every possible cautionary signal such as: Brexit, Italian political fallout; Greece, Brazil, Venezuela turmoil; China threats, Russian threats, Turkish threats, N. Korea threats; escalation in Syria, Iraq, Yemen, just to name a few; market rigging bank scandals (see LIBOR and more), saber-rattling, missile deployments, missile launches, nuclear threats, aircraft carrier deployment, reinforcing aircraft carrier deployments, more missile launches.
I’ll stop there, for that’s only within the last few weeks or months. Nothing has phased the hopium trade of reflation. Until now, and it’s just one word but the implications are legend. That word?
This word may be cheered by many of the President’s political foes. However: It should (and seems to have done just that) strike terror into the hearts of anyone believing this “market” has ever been based on anything resembling fundamentals. That said, I believe the first ones to finally realize the terrifying situation awaiting them once this idea truly becomes understood and resonates within those very markets – are the ones who were up until a month or so ago cocksure they knew everything there was to know about how to control them. e.g., The Federal Reserve. (“idea” meaning “impeachment” talk signals all legislation DOA)
This is the reason why I believe Mr. Bullard made his subsequent remarks. Personally, I do not believe Mr. Bullard expressed his opinions out of vacuum. Yes, this is all conjecture on my part, however, with that said, I believe the Fed. used this expression as some form of trial balloon as to see if its efficacy was still as prevalent (and reliable) when employed during any form of correction as previously noted.
I also believe this latest result or “trail balloon” will be not only misjudged, but also misused, resulting in just the opposite effects going forward.
Some are thinking right now, “Yeah, but the Fed. has raised twice so far and look – nothing’s happened!” Which is precisely my point. But that’s about to change, and I believe the Fed not only knows it, but when the “I” word hit the main stream press, it did what Paul Tudor Jones implied they should. e.g., “Be terrified.” Because “I” all but guarantees the idea of any reflation trade legislation passing, then signing into law in 2017 is DOA. Period.
And with that so too goes the cover for the Fed. and its reasoning for hiking. For it will become self-evident if the reflation trade does, in-fact, fall apart here that all their tough talking, and rate raising, has been a colossal misjudgment for policy error. Because for all that “data” of a so-called “data dependent” Fed. is not, and has not been there. (See Fed. president James Bullard’s own take on the economy and data rather than taking mine.)
Should the weekend effects of this latest BTFD induced “The doves are back in town” subside and the realization once again reassert itself that the reflation-hopium-trade is indeed DOA? You have some 400 points respectively of S&P, 3000 of the same for the DOW, and some 1000 for the NDX just sitting there levitating, and purchased solely, on the premise of one singe idea: That the subsequent legislation Trump promised would overcome, and cure-all sins, including – the raising of rates faster than anytime since before the financial crisis, (well over a decade ago) along with no QE, and a reduction of its balance sheet.
I believe the Fed. (much like the “market”) didn’t understand just how precarious of a position it found itself till the “I” word was bandied across the main stream press, closed-door meetings, cocktail parties, conferences, and symposiums they attend.
Up, and until that moment I don’t believe they truly comprehended just how fast what they took as a “teflon market” could turn into a “panic at the disco” fiasco.
When warning signs appear smart people don’t just keep “dancing” – they begin moving towards the exits before the rest of the crowd even comprehends what may or may not happen next. I believe we witnessed that first move. Where we go from here? Who knows. But all I’ll say to that is this…
Mr. Bullard’s freestyle should not be taken as a cue to hit the “dance floor” once again. (e.g., Another manna-from-heaven BTFD opportunity.) No, it should be taken for what it may portend: A reason to be in full-view and close proximity of any and all exits should the need arise. For if time should have taught everyone by now – Hope is not a strategy. And you have some 13% of the entirety of the main indexes levitating on just that. Not counting the 100’s of $TRILLION’s at risk via derivatives.
But not too worry we’re told. For if you listen to any Fed. official, communique, Ph.D economist, next-in-rotation fund manager, et al…
“They’ve got this!”
© 2017 Mark St.Cyr
Addendum: I originally posted this article using the math of 400 points resulting in 17% for the example in the S&P. It should have been 300 at about 13%. I mistakenly used the lower bar for July (which was about 2000 points give or take) rather than the November low by mistake when typing. The post has since been updated. Yet, whether 13 or 17 doesn’t change the content or implications I made. The Dow at 3000 points and the NDX at 1000 are correct and have not been changed. Any misspellings or other typos? Well – that’s another matter entirely.