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The Bull(y) Rally

Something unnatural is going on
Friday, April 12, 2019, 1:46 PM

"A bully is always a coward."

~ Thomas Chandler Haliburton

The current market rally is like a playground bully; shoving to the ground anyone in its path.

But like all bullies, the braggadocio belies an underlying cowardice.

Those in charge of the status quo must be absolutely terrified to resort to the unnatural lengths they are going to right now to keep the current rally intact.

Unnatural Acts

In reaction to the brief market correction that occurred at the end of 2018, emergency measures were enacted to get stocks moving higher again.

Notably among the scramble to rescue the markets, the Fed pulled a very public and embarrassing policy U-turn, abandoning its short-lived program of planned interest rates hikes designed to start 'normalizing' its balance sheet after a decade of flooding the economy with stimulus. Quantitative Tightening, we hardly knew ya ...(sniff)

In response to the efforts of the Plunge Protection Team, the Fed, its siblings in the global central banking cartel, the cheerleading media, and the Trump administration, the markets roared back strongly at the start of 2019. 

So strongly, in fact, that 2019 has seen the best start to the year for stocks EVER IN HISTORY.

At this point, the major indices have recouped all of their losses from their December lows and are now back touching their all-time highs.

So...mission accomplished, right? Surely the financial swat team deployed at beginning of the year can stand down and go celebrate over a few well-deserved brewskis?

Not if you're watching closely. In fact, the efforts to prop up stocks continue to become more frequent, more overt, and more extreme.

Daily Fed Jawboning

As mentioned, the Fed has executed a complete 180-degree policy turnaround in light of the market's feinting swoon last year. Suddenly, it can't appear dovish enough:

Fed comments over past 6 months

And to convince investors how serious it is about keeping the punchbowl spiked, last month it trotted out not just the current Chair, but the past two as well, to tell the nation not to worry.

You might think that would be sufficient to drive the point home. But hardly a day goes by now without some Fed spokesperson appearing in the media to implore the public to keep the faith. Yesterday, that chore fell on the shoulders of Richard Clarida, the Fed vice-Chair, who went on CNBC to tell us "the economy's in a good place" and that he sees no risk of recession.

If everything's going so great, why the need to nervously sell that story to us every day?

It's similar to when my high school daughter suddenly starts telling me how "fine" the family car is. Pretty soon, I'm off the couch and into the driveway, checking for scrapes, bent fenders, and bloodstains.

Pumping By The Trump Administration

It sure seems that the new Fed song-sheet was written by the Trump administration which, for good or ill, has made the S&P 500 the benchmark by which it wants its performance judged.

Presidential economic advisor Larry Kudlow is taking the Fed's current dovishness and running with it for all he's worth, recently making the incredibly bold/reckless prediction that there will be no more rate hikes in his lifetime (Kudlow is 71).

Not to be outdone, President Trump is not only calling for an end to hikes, he's cajoling the Fed to re-start Quantitative Easing.

Reflect on that for a moment. Ten years into the longest economic expansion in history, when the market is at all-time highs and the unemployment rate is at all-time lows, the President of the United States is calling for measures that are the monetary equivalent of using a de-fibrillator on a dying patient.

What the hell are they so afraid of that they're willing to overtly campaign for such emergency triage?

Reality Vs Deception

Regular readers of this website are well aware that the despite the ongoing parade of sound bytes in the media to convince us that all is fine, the macroeconomic situation is grim and deteriorating fast.

The outlook for global economic growth looks dismal. The IMF just cut its outlook to the lowest level since the 2008 crisis. Q1 US GDP looks like it will be lucky if it clocks in 1.4%.

Retail investors are fleeing stocks, despite the tremendous rebound in prices. Without the $1 trillion dollars in buybacks last year, stocks would be nowhere near today's prices. In fact, Goldman Sachs has warned that any of the currently discussed proposals to restrict buybacks risks crashing the entire market.

Q1 earnings season is just starting and looks certain to disappoint across a wide swath of sectors

Taken together, how do all of these justify today's market prices?

Simply put: they don't.

Again, regular readers of this site are familiar with the recent warnings we've been posting about the radical compression happening with the prices of the major stock indices. Such compression is a highly reliable indicator that a breakout move is coming.

Could the markets break higher? Sure, but what will compel them to? What new burst of optimism is not already priced in with the current euphoric assumptions already underlying today's ludicrous prices?

We've been closely tracking the work of Sven Henrick, who recently posted this trendline chart of a 'quadrupal confluence' suggestive of "a massive technical reaction that will take place there at a point where key individual stocks would be massively overbought and disconnected from the underlying economy":

Sven Henrick chart showing compressing S&P 500 trendlines

If the indices break down below this rising wedge (a bearish technical indicator in itself), Sven fears a 30% correction is possible. (For the record, he puts a 5 to 7% chance the indices break out above the wedge)

The Appeal Of Income & Hard Assets

So when the market is at such a treacherous point, what alternatives make sense?

Stepping to sit on the sidelines in cash is not a bad option here. Just consider putting it in a solution like TreasuryDirect, where it can be well treated and earn 20x or more interest than what your bank will pay you.

But as we've written about a lot recently, the speculative game we've been trained to play over the past few decades, investing in stocks (often in companies without earnings and/or pay no dividends) and counting on them to appreciate substantially, may indeed be ending for a long time

In the coming new era, protecting the purchasing power of your wealth and building it though inflation-adjusting income will become increasingly essential as a strategy.

Which is why we've been hard at work recently issuing more educational content on hard assets, especially those that produce income. Our goal is to get you up-to-speed now, so that you can position yourself prudently before the market breakdown warned of above happens. After it does, only those who were smartly positioned in advance will be able to purchase great-value investments at much lower prices than today.

Two recent resources in particular are worth engaging with if you haven't already.

The first is our newly-issued Primer On How To Buy And Store Gold & Silver. It's completely free and is a must-read for anyone who's new or inexperienced with purchasing precious metals.

The second is our in-process webinar series on real estate investing. Real estate offers a time-proven path to building wealth from inflation-adjusting (and often tax-advantaged) income. You can access past episodes here (two-hour Episode #1 is free to watch).

Here's a short 4-minute clip from a recent episode demonstrating how practical and useful the material is (in this case explaining the importance of the Gross Rent Multiplier and how to calculate it):

Our main point here is the current market juggernaut can't continue at this rocketing trajectory. And the unnatural acts required to keep things elevated are going to fail at some point, likely very soon judging from the compressed chart trendlines.

The time for prudent action is now, before the breakdown. For certain get yourself educated. And if your studies reveal that immediate action is required, don't delay.

~ Adam Taggart

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16 Comments

Grover's picture
Grover
Status: Platinum Member (Offline)
Joined: Feb 16 2011
Posts: 923
Dance While The Band Plays

I think you're missing a point. The US stock market is the least ugly horse in the stable. Look at the Euro and the countries that use it. Britain should (and likely will) exit. Italy is tired of accepting "refugees" and then being told that it is Italy's problem. They will Italeave. Other "Club Med" countries are experiencing their particular issues. Eastern block members are limiting immigration. Those who have welcomed refugees are seeing the social consequences of inviting those who don't want to assimilate to the local culture. It is breaking the social system they've attempted to build over many years. Then, there are "big" others like Japan and China. Japan is a bug in search of a windshield. China keeps hiding their real economy with "official numbers." Is Russia a serious contender with 1/10 the GDP of the US? Who else can fill the US's shoes?

The Euro was conceived in compromise. European Union officials don't have fiscal control - only monetary control. That's the equivalent of eating dessert before eating vegetables. What would your children do with that option? It is doomed to failure. The questions are how soon will it fail and what will the consequences be?

Mathematics shows that our (US) federal system will fail. The question is how soon? Social Security and Medicare are experiencing exponential rises in benefit expenses due to the aging Boomers. The tax receipts aren't keeping up. There's still an illusion of money in the funds. How soon will those outlays exceed the entire federal income (taxes)? The best guess I can find is by the mid 2020s. How will our so-called-leaders react? At the same time, the current federal debt is over $22 trillion and increasing by $1+ trillion per year. When will investors of government bonds determine that to be too large? Given the current trajectory, it will happen sooner or later. What are the likely results when investors abandon bonds? Obviously, interest rates will increase ... but what else?

As I said earlier in this post, the US market is the least ugly horse in the stable. Until all the worts and scars become evident, I expect stocks to increase beyond what traditional metrics would deem prudent. We already see major companies that continually lose money and still have astronomical stock values. As long as bigger fools are buying, those (and other) stocks will continue to get even more out of balance.

The big question is when will bigger fools run out of money? Capital inflows drive the market. If more money is flowing in, stocks rise. When capital flows reverse, stocks drop. So, when will outflows exceed inflows? What conditions are likely to trigger such an event? It obviously isn't traditional metrics or we wouldn't be at such nose bleed levels now. There must be another metric that drives investor actions.

Grover

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5935
capital flows

Armstrong always talks about international capital flows and how they can drive prices in ways that can seem counter-intuitive to the domestic-focused analyst.  Given how bad Europe is doing - Germany in recession, BRexit uncertainty, and how the ECB will likely continue charging you for your savings in perpetuity - money flows to the US.  In spite of the Fed stopping QT, in spite of the Fed stopping its rate increase campaign, the situation overseas (Europe, Japan) is much worse, so money flows here.  That's driving US asset prices higher, stocks as well as bonds.

My guess is, the capital flows into the US have likely increased after Mueller came up with the "no collusion" conclusion because of an increase in confidence in the US as a reasonable place to park money.

Once confidence in the US government (and presumably, all the major governments around the world, since they are all more or less in the same pickle) starts to fade, he suggests that the flows into equities will be even stronger, since money will be fleeing sovereign debt.  He calls it a "private wave", resulting from that collapse of confidence in government.  Money has to go somewhere - so it will buy stocks, and sell bonds.

If this does happen, that will blow everyone's mind, mine included.

What causes this confidence-collapse?  That's the million-dollar question.

FWIW, I think Trump was half right - continuing rate-increases would have tipped us right over into recession.  I don't agree with his QE request but I do think stopping the rate-increases was the right call.

I'm not suggesting we buy stocks here at peak SPX.  I am saying there could be an explanation for what's going on that may be more complicated - and perhaps larger - than just the activities of the Fed.

rob@2disc.com's picture
Status: Member (Offline)
Joined: Apr 4 2008
Posts: 13
Proof that Money Priinting Will Fail is Still Lacking

The comment thread at https://www.peakprosperity.com/blog/114445/has-%E2%80%9Cit%E2%80%9D-finally-arrived still needs to be resolved. Upshot there is that with near zero interest rates, Fed debt to prop assets can go for decades more. People flee Fed bonds when fear that interest ONLY can’t be paid, and near zero rates make that a long, long time from now. Also a 30% decline in the S&P brings it back to about early 2016 levels, which is nearly double what it was when many people sounded the sell alert in 2011.

~Rob Laporte

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5935
money printing failing

Money printing will "fail" when the confidence in government collapses.  That is - money printing boosts assets while confidence in government remains.  Money printing causes hyperinflation when confidence in government collapses. That's my current theory anyway.

The key question is, what will cause a collapse of confidence in government?

springbank1's picture
springbank1
Status: Member (Offline)
Joined: Feb 15 2012
Posts: 13
Very good article...

Great summation of the current state of play.  A chart we have all seen many times over the years, which tracks Fed, ECB, BOJ, PBOC aggregate balance sheet size with MSCI world equity market levels, is evidence of the reason (or a reason) behind the melt-up.  An interview I'd love to see on PeakProsperity would involve examining the exact transmission mechanisms whereby central bank money printing leads to the Dead Sea-level equity buoyancy we are currently witnessing.  I'm not sure who the appropriate guest would be for this.  Former bank regulator?  The intuition to me isn't entirely clear.  With regards to FedReserve, in QE-type mode they would be exchanging their thin air cash with member banks in for treasury or similar securities that the banks are holding.  But isn't vast majority of the cash held for IOER purposes?  The intuition of how it ends up in ETFs, etc. is not rock solid - for me at least.  FWIW, I am in the camp that believes our central bank or one or more of its partners actively manages the S&P through VIX smashing via futures and / or e-mini purchases.

I do think this current earnings season will be very interesting...Guidance obviously way down for Q1 from 6 months ago will lead to "beats" that the press and others will Trumpet (pun intended).  However, guidance may pressure these nose-bleed levels.  I think a tell could be some of the high-flying semis, NVDA, XLNX, etc.  When NVDA reported a horrible quarter in the summer of 2018 with poor guidance, the stock briefly fell maybe 10% or so..Within days, it was back to ATH.  We know what happened in Q4, peak to trough for NVDA of well over 50%, when in fact no new information / guidance was made public.  If we see story stock companies report poor Q1 and poor guidance and the shares briefly fall after-hours or next day, only to ramp back to all-time highs in short order, it will be clear, to me anyway, that this is likely the "end of the end" -- ie, multi-year (decade?) market top within 6 months...

 

 

springbank1's picture
springbank1
Status: Member (Offline)
Joined: Feb 15 2012
Posts: 13
On timing..

It's interesting to note that currently the market (using S&P 500 as a proxy) is trading around 2.25x sales...Long-term (like 100 year plus) historical average of around 0.9x...P/S is better for long-term comparisons than other metrics given changes in GAAP / accounting over time. Using the long-term average stocks would need to fall about 65% just to get to the mean..Will it happen in nominal terms?  Don't know..I do know the political and social ramifications of maintaining the status quo, with the absolutely historical and insane net wealth disparities in the U.S., cannot be papered over with balance sheet expansion and 0% nominal rates...It would be interesting to try to calculate wealth concentration if we project forward 10 years based on the last 10 years...Would we have maye like 200K people who control over 99% of the country's net assets?

rob@2disc.com's picture
Status: Member (Offline)
Joined: Apr 4 2008
Posts: 13
In reply to DaveFairTax,

In reply to DaveFairTax, agreed on the variable of faith in a Government. Of course gov bonds are at high risk of failure if a government fails by revolution or whatever. The US trajectory is headed that way, but again, that's a decades matter, and most of us invest over years. 

In reply to SprinBank1, I too would love to learn more about the precise paths that Fed money printing takes. The BOJ outright buys ETFs. As an aside, that raises the intriguing idea that in theory a county could print money and buy, for example, Of course the victim country would prevent that, but were is the line drawn? 

Mark_BC's picture
Mark_BC
Status: Platinum Member (Offline)
Joined: Apr 30 2010
Posts: 543
Maybe I'm not putting enough

Maybe I'm not putting enough effort into understanding how the market works but can someone explain to me in simple terms why the Fed, since it has the unimpeded privelege of counterfeiting as much money out of nothing as it wants, cannot just buy all the stocks to prevent a crash? It is the goal of the bankers to own everything anyways so wouldn't this be their plan? The stock markets could go up indefinitely other than the periodic fake engineered crashes that allow the insiders to get rich off their options trades. Isn't that essentially what the ESF is for? Market "stabilization"? Who knows what that has morphed into inside the Fed computers over the last several years. They don't have to tell us how the electronic markets are set up. Inflation would not necessarily be stoked because hardly any real people are in the markets anyways since the stock markets are now mostly symbolic of how great the economy is doing. Inflation would be offset by the deflation caused by the destruction of Main Street in this fantastically great economy.

With low interest rates, debt need not get out of control for many more years so why can't the system keep on keepin on? Would the crash come from a loss of confidence in the dollar and other countries dumping it? Why would they? The dollar looks to be pretty good in relation to others. And the other countries are part of the same central banking cartel so why would they ever dump the dollar if they aren't told to?

I have my bets placed on some other event triggering the crash. For years the alternative community has been pointing out the physical gold deficit heading East but it never seems to run out. Maybe China and Russia are more in cahoots with the West than is portrayed and China is using its vast gold hoards to satisfy the market and prevent a crash? If that's the case then China couldn't be hoarding gold anymore but the data seems to suggest it still is. So I don't get it.

newsbuoy's picture
newsbuoy
Status: Gold Member (Offline)
Joined: Dec 10 2013
Posts: 383
Another Kind of Bully Rally

springbank1's picture
springbank1
Status: Member (Offline)
Joined: Feb 15 2012
Posts: 13
Interesting point...

"As an aside, that raises the intriguing idea that in theory a county could print money and buy, for example, Of course the victim country would prevent that, but were is the line drawn? "

Actually a really interesting point, especially given explosion in passive ETF strategies.  As owner of the reserve currency the FedRes could, in theory and with some subterfuge / rule changes, buy a very significant share of the equity of all or most publicly traded companies within a certain country.  Especially true for smaller LatAm / E European / Asian countries.   I'm sure within the FedRes, thinktank, intelligence community this has been game planned alreadly.  Reminds me of the economic hit man book...

rob@2disc.com's picture
Status: Member (Offline)
Joined: Apr 4 2008
Posts: 13
On the conversation from my

On the conversation from my remark that above is missing "IBM" ("in theory a county could print money and buy, for example, IBM"), I would love to see a clear exlication of how Fed Money props stocks. I know some ways and can imagine others, but how could a central bank buy the stocks of a country, exactly?

cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 6163
How could a central bank buy stocks? Like this....

On the conversation from my remark that above is missing "IBM" ("in theory a county could print money and buy, for example, IBM"), I would love to see a clear exlication of how Fed Money props stocks. I know some ways and can imagine others, but how could a central bank buy the stocks of a country, exactly?

The Swiss National Bank already does this.  They have tens of billions of US equities in their portfolio.  The SNB prints up money (francs) sells those francs on the open market for dollars, puts those dollars in some sort of brokerage account and buys US equities.

Everybody already knows of the BoJ, which owns majority positions in several key ETFs for Japanese shares.

Less well known are the indirect methods, which include the fact that central banks are such quantity purchasers of CME products that they get top tier volume discounts.

The CME, of course, is where options and futures on commodites, stocks and bonds trade.  Not one single central banks admits publicly to owning any CME paper products, but one does not get top tier volume discounts for doing nothing.

This would qualify as "direct" participation in my book because the higher leveraged products offered on the CME move the prices of stocks and bonds and commodities with outsized effects.

But, again, nobody talks about this in the press and no central bank has any such products listed anywhere on their balance sheet or in the footnotes.  At least that I could find.

The BIS has tons of working papers out on how central banks can best go about "influencing" currency markets to control exchange rates.  The methods include directly intervening, jawboning, and the use of proxy agents (like key wall street firms, PE groups, etc) to hide their actions.

Not very much of a hop, skip and a jump to imagine that happening for equities too.

dabenham's picture
dabenham
Status: Member (Offline)
Joined: Oct 30 2011
Posts: 23
Still No Fed Transparency!

For nearly 20 years, maybe more, one or both houses of Congress have inked Fed Reserve Transparency Act(s) similar to those linked below.  Most often initiated by Ron or Rand Paul.  Here's the latest set.

https://www.congress.gov/bill/116th-congress/house-bill/24
https://www.congress.gov/bill/116th-congress/senate-bill/148

What very little coverage these received from media, most treated it as silly or quickly changed the subject when interviewing its proponents.  The banksters, of course, lobbied against it while Fed chairmans testified before congress that they were already being transparent (just not with the books).

FUBAR.

 

rob@2disc.com's picture
Status: Member (Offline)
Joined: Apr 4 2008
Posts: 13
Thanks for Chris's Illumination

Thanks Chris for explaining mechanisms by which central banks buys stocks. Explains much. 

I've wondered whether nearly free money ends up in large banks that have hedge fund traders not as employees but essentially so, and those traders get huge sums for very cheap to play with, and winnings are somehow shared between them.

newsbuoy's picture
newsbuoy
Status: Gold Member (Offline)
Joined: Dec 10 2013
Posts: 383
The Program

OG, they wouldn't use computers next to the CME to steal your money, oh no. --Suzy Creamcheese

richcabot's picture
richcabot
Status: Gold Member (Offline)
Joined: Apr 5 2011
Posts: 252
Counterfeiting worldwide

The Fed gets away with counterfeiting as long as everybody else is also.  China is probably just as bad as the US, though their numbers are opaque enough that we really don't know. 

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