One could start-off much the same as is if trying to channel Dickens’ historical opening “It was the best of times, it was the worst of times.” from “A Tale of Two Cities.” For depending on where you reside in the world of investing, things are either fantastic – or down-right earth shattering.
The latest example of this would be Uber™. i.e., Fantastic if you were a VC and got out at the IPO – earth shattering if it now resides in the “growth” side of your retirement fund. You know, “To stay ahead of inflation.” But I digress.
When it comes to the dichotomy of perceptions in regards to the “markets.” I have used the analogy regarding a hurricane so many times over the last decade, I’ve lost count.
The trouble with such analogies is much like the real phenom they represent, they can change or morph regarding their severity, for a plethora of reasons.
However, although there are many different aspects in trying to calculate both the “if” factor, along with the “where.” There is a very critical distinction that makes a very big difference when you know: you’re not quantifying or qualifying an event that may or may not occur. You’re trying to quantify or qualify the possibilities of the remaining storm you are currently in. Hence, the “hurricane” reference in the title.
For this is not about “what’s over the horizon.” This is now all about where we are in the already unfolding storm. i.e., it’s not coming – it’s already here.
So, in regards to where we might be, as in, position. I’m of the opinion, we are about 3/4’s through the “eye” of the “Autopilot” hurricane that made landfall in the latter half of 2018. Meaning: the most severe portion for unleashing financial mayhem is quickly approaching. i.e., it’s not a matter of if – but when. That’s the distinction with a difference.
With that said, there is another qualifier that needs to be pointed out: The second half of any hurricane can be both the most disruptive, as well as destructive, for a host of differing reasons. i.e., situational and/or psychological.
Everyone thinks or believes the storm has passed. Hint: It hasn’t, just the leading edge.
I am of the opinion the latter part of 2018 was merely the leading edge of a much larger storm than any of the so-called cadre of “experts” paraded across the mainstream business/financial media ever understood, let alone, anticipated. Yet, they’re always on TV, so everyone assumes they must really be smart? Right? Right?! Sorry, again I digress.
I’ve used the analogy of a credit card to try and explain just what has been transpiring since Mr. Powell took
the bag over as Chair in Jan of 2018. The process of QT (quantitative tightening) or “normalization” (e.g., reducing its balance sheet) as the Fed defines it, has more in common with the perilous condition known to many a consumer as “credit line reduction” than the so-called “smart crowd” understands.
Here’s a thumbnail sketch of this phenom using very generalized, rounded-off for example only metrics, for ease of demonstration…
Maxed out credit-line $10K. Min. payment due $1K, interest rate 0%. Let’s add that was an “introductory” rate to keep the example even more relevant.
If you make the $1K minimum payment, your balance is reduced to $9K (remember, no interest charge, so all of your payment goes against total balance) so, in-turn, you can theoretically go out and once again charge up to your credit-line. e.g., you can buy another $1K of what ever you like.
But here’s where everything changes…
If I begin a process of credit-line-reduction or QT for example, and reduce your credit-line from $10K to, oh let’s say, $9K – you have a very, very, very (did I say very?) big dilemma on your hands, especially if you wanted, or worse, needed to buy something on that card.
If you only have the $1K to make the minimum payment. Once you pay your card – you have no money and no credit available. e.g., Remember, you’re now at a $9K limit so your payment leaves you without money and buying power. But this is just the beginning, and far from the end.
You either have to do one of two things: Sell something (i.e., like a stock) you have a profit on to unlock that capital. Or, borrow elsewhere – if you can. Hint: you can’t, so go back to the former.
So, after you sell, let’s say you now have $2K in hand. What do you do?
Well, here’s what QT has been doing.
No longer do you have a $9K credit line, because now, just a month later, it’s $8K – and – that 0% “introductory” rate has ended. So, not only do you have a carry charge, but rather, all that “interest free” balance is now subject to your new and applied interest rate, dating back since it was acquired.
So now your new minimum payment is $1500. “But wait..there’s more!” as they say on late-night TV.
Not only do you not have that presumed $2K from your sale, it’s now more like $500 with your new adjusted payment. And what’s worse? Next month your carry cost (interest rate) will double again (think .5% to 1%) – and – your credit-line gets reduced not by $1K, but rather, on “autopilot” of $2K per month. i.e., Credit-line of just $6K with a minimum payment of $1500 going to $1750 and your credit line will probably be less than $3K in a few months time.
Do you see the issue? Hint: The Fed didn’t. And that’s why they’ve been in crisis mode ever since Janet Yellen proclaimed there wouldn’t be another financial crisis “in our lifetime.” Hint: It’s been Crises-R-Us ever since.
This is the equivalent of what’s been transpiring across the “markets.” And the Fed’s most recent “pause” and “cut” has been nothing more than the equivalent of another analogy. e.g., applying a band-aid when a tourniquet and transfusion was called for.
To prove my thesis, may I remind you that the Fed, once again, not only pushed back the timetable for its “autopilot” surety of conviction that QT would be the equivalent “of watching paint dry.” But ended it with immediacy two months prior to its already castrated schedule.
But the damage to the “bull” has already been done. And without a complete and utter reversal of policy, re-implementing QE (quantitative easing) quickly – and in size – it’s over. Period.
The Fed’s pause and reversal on rates has been nothing more than supplying “happy talk” and and implying “the worst is behind us” declarations.
To re-emphasize: All they’ve done is mislead people that should be fortifying their homes or, moving to higher or safer ground, the false illusion that there’s no need to be concerned.
After all, as the “happy talk” that’s been recirculating expresses, “Just look at that clear sky above!” You know, just like they said when the “markets” were back at record highs.
Yet, a little thing has happened since then, and it is this:
The first indications that the rear eye-wall was near made its presence known – and 3% was knocked out the “markets” before any “weatherman” could get out from under their screens and trample over their mother to get to the nearest microphone, camera or keyboard and profess: “Nothing to see here! Just another buy, buy, buy moment of opportunity.”
Yes, it has been the perfect opportunity to buy, buy, buy these last few months. The issue is, not in the “markets.” But rather…
In the stores and real marketplaces that sell such items as hammers, nails, screws, plywood, batteries and provisions.
For the worst is probably far from behind us, but rather –
It’s right in front of us.
© 2019 Mark St.Cyr