“What we’ve got here is a failure to communicate.”“The Captain” (Strother Martin), “Cool Hand Luke” (1967, Warner Bros – Seven Arts)
Ever since the end of 2018 going right into today as I type. There has been two words repeated ad nauseam across the entirety of the mainstream business/financial media (MSBFM) to give reason for both why the “markets” are rising, as well as why one should now BTFD (buy the f’n dips) not only horns-over-hooves, but to back up the biggest dump-truck they can acquire and fill it with as many stocks as possible. Rinse, repeat.
Those two words are: “paused” and “capitulate.”
What these words have been stated to mean is: The Fed, along with its Chair, had now explicitly signaled they’ve capitulated and paused both the Balance Sheet Normalization Process (QT) as well as any future rate hikes. i.e., there was now an active “Powell Put.”
The problem with this reasoning should not be lost on anyone.
Not that I’m the best conduit to explain what words mean, but this so-called “smart-crowd” should understand, at their core, the term “active” and “put” in the same sentence means a position on, not one that will be placed in the future. i.e., you only get paid if its placed and at risk of assignment. Everything else is: would’a, could’a, should’a, loser talk.
Again, all the reasoning across the entirety of the MSBFM for this latest rocket-ride up from the depths-of-despair only weeks ago is attributed to one thing and one thing only: capitulation and its subsequent meaning for action.
However, it is precisely here that focus should be paid, and here’s why:
Paused: verb, past tense: Paused; past participle: paused interrupt action or speech briefly. “she paused, at a loss for words” Synonyms: stop, cease, halt, discontinue, break off, take a break, take a breath; temporarily interrupt the operation of…
Capitulate: verb. Cease to resist an opponent or an unwelcome demand; surrender. “the patriots had to capitulate to the enemy forces” synonyms: surrender, give in, yield, admit defeat, concede defeat, give up the struggle, submit, back down, climb down, give way, cave in, succumb, crumble, bow to someone/something…
“What’s the issue?” you may be asking, because that fits nearly verbatim of how the entirety of the so-called “smart crowd” has been defining this current rally. Good question, and here’s why.
Via Wolf Richter’s, Wolfstreet™. “Fed’s QE Unwind… Remains on “Autopilot.”
The Fed shed $32 billion in assets in January, according to the Fed’s balance sheet for the week ended February 6, released this afternoon. This reduced the assets on its balance sheet to $4,026 billion, the lowest since January 2014.
In January, the balance of MBS fell by $15 billion to $1.622 billion, back where it had been in April, 2014.
…with a reduction of $17 billion in Treasury securities:
So the January roll-off continued to proceed on “autopilot,” as outlined in the Fed’s 2017 plan.
Here’s what you truly need to take away from the above: the term “paused” is not applicable with the reality of the facts now forthcoming. And if “paused” is not applicable – then neither is the term “capitulate.” (on a side note, Mr. Richter has done an outstanding chronological reporting of the entire process.)
Can you say, “Uh oh?”
Here is what I said following Mr. Powell’s January presser, from my article, “The Question Is: Did He or Didn’t He…?” To wit:
Again, via every media outlet I have perused, both mainstream and specialized, the consensus is that Mr. Powell along with the FOMC capitulated and folded to the “markets” whims making a cheap suit envious.
This may be entirely correct, however, let me ask you this: What did they actually do? Not – what he said they could do.
Again: Did they pause the balance sheet normalization process (QT) or even reduce its size from the now still running on cruise control $50Billion per month?
Hint: No. And that should tell you far more about what you truly need to know rather, than what the Fed is telling you you should hope for.
Remember, that was in reflection for what transpired through December, now you have January’s going into February – and the “markets” won’t know anything further till, at the least, late March. All the while the QT process is proceeding at hyper-speed and on “autopilot.” Again – via hard numbered, verifiable facts.
Again, from the same article:
Since there has been no declaration via the Chair that there has been any alteration to the process. And even reaffirmed that it was still going on as advertised, where the committee itself agreed and voted that it should continue on unabated means, that from now until March, almost $200Billion will be removed (generalization for example math, but you get the point) or allowed to be rolled-off until Wall Street has another glimpse into what happens next.
And “next” just might be another $100Billion (e.g., April) till the next meeting. Think about that, again very carefully.
(Quick explanation on the math and why it’s important: “$200 Billion” refers to when in October/November of 2018 the QT process began reaching the hyper-speed levels of $50 Billion per month i.e., Oct, Nov, Dec, Jan. which is where we are currently. Now you’ll have February and March which equates to another or approximate additional $100 Billion that will more than likely reported after the fact, just like the above. I hope you can see the implications of the difference with what was said, and what has been allowed to continue.)
As I’ve stated (again, ad nauseaum) what I believe we have witnessed since the now famous (or infamous, depending) “Call from Cabo” along with the most recent “capitulation” prognostications from the media and more, has been nothing else than a headline fueled, HFT, algorithmic, parasitical running of stops and short squeezing as to position for: earnings report, end of month, new month window dressing shenanigans, and last, but certainly not least, a Fed meeting that everyone including most shoe-shine boys knew there would be no raising of rates for this meeting.
The above was all contained within one seemingly manna-from-heaven time frame for doing more with less.
“What do I mean by ‘more with less?'” you ask? Great question, again, to wit:
Since December there has been a record amount of outflows that has continued, almost unabated, to where we sit currently.
And here we now are with earnings season about over and those that have reported have been lackluster at best, pathetic at worst. Trade talks that seem to be going nowhere fast, a looming deadline of even higher tariffs if they go nowhere even faster, another possible government shutdown, again, looming.
Oh, and did I mention that the Fed’s balance sheet is still on “autopilot?”
What could possibly go wrong, right?
© 2019 Mark St.Cyr
As I’m looking over some charts a repeating pattern has caught my eye which I think is worth mentioning.
I’m using the S&P 500™ futures chart as the example, but it’s pretty much the same thing across not only the other main indexes, but individual stocks as well. To wit:
The above depicts the S&P futures via 15 minute candles/bars. As you can clearly see since the December plunge the “markets” have been on a one-way-ticket up supplied by a “phone call” and a presser for verbal capitulatory signaling.
However, that one-way up has been more of a stair climb as opposed to rocket ride when viewed via this prism.
“Does it mean anything?” That’s a good question, for it might and that meaning is this…
The “capitulation” trade may have finally reached the exhaustion phase.
As you can see, these stair steps (or consolidation areas) have been pretty consistent in both time length and just how much of a bounce up happened following each. This seems to be a clear pattern of pure machine buying.
In other words, it’s not (my conjecture) people – just machines gaming each other.
The reason why this observation is important is because, if you listened to the mainstream business/financial media you would be hard pressed to hear anything other than “people are once agin buying this market because, it’s now a bull market backstopped via the ‘Powell Put.'”
The issue with that conclusion is, if that were true, then why has there been more outflows (some $40 Billion) leaving the “markets” during this up move than has come in?
Also: Friday was the one of the lightest trading volume days in recent memory and the volume for this entire rally has been particulary low. That’s not a good indication for “sticking power.”
Let’s just say this type of “sticking power” can suddenly turn into getting stuck – and hard – in the blink of an eye.
“Does this mean it will?” I can hear you asking? And again, good question, but no one knows. It’s just something that requires careful watching for those looking for clues, because all the ingredients for a quick reversal are currently on-the-table and set.
As always, we shall see. But this is one of those moments, once again, that demands one to pay attention.
© 2019 Mark St.Cyr