• Podcast

    Sven Henrich: Did The Coronavirus Just Infect The Markets?

    One thing's for certain: the market's long period of exuberance is over
    by Adam Taggart

    Tuesday, February 25, 2020, 12:48 PM

Is the coronavirus the pin that will end the 10 year-long Everything Bubble?

Quite possibly, cautions Sven Henrick, technical analyst and lead market strategist for Northman Trader.

For too many years now, the financial markets have been conditioned that “dips don’t last”. Confident that the Fed will always provide the liquidity needed to push assets higher, investors have come to believe that risk doesn’t matter.

Well, covid-19 is exactly the kind of unexpected exogenous shock that central banks are powerless against. No amount of intervention by the Fed, the ECB or the PBoC will slow the spread of the virus, or force-start factories idle from workers quarantines.

So, what to expect from here? In terms of damage to market prices, we haven’t seen anything yet, predicts Sven.

And today’s failed recovery is a sign that the previously-bulletproof market ‘exuberance’ of the past decade is now losing out to ‘fear’.

Combine further spread of the virus with continued de-celeration of global trade, then “all bets are off” warns Sven.

Click the play button below to listen to Chris’ interview with Sven Henrich (44m:45s)

Then, if concerned by the market risks Chris and Sven address, consider scheduling a free consultation & portfolio crash audit with Peak Prosperity’s endorsed financial advisor:



Chris Martenson: Well, everyone, to this Featured Voices podcast brought to you by Peak Prosperity. I'm your host, Chris Martenson. And it is February 25, 2020.

Yesterday, stock markets around the world finally caught up to the risks and realities that the coronavirus pandemic presents to corporations, the global economy, earnings and all the rest. And the DOW fell more than 1,000 points. It was a really rough day for equity markets everywhere.

Look, we don’t have a lot of time to squeeze into today’s podcast, so we're going to just jump right in. We’ve got Sven Henrich back on. Sven’s insights can be found at northmantrader.com. Also on Twitter using the handle @northmantrader, all one word, northmantrader.

Sven is founder and lead market strategist for Northman Trader. He’s been a frequent contributor to CNBC, Wall Street Journal’s Market Watch, and is well known for his diligent technical, directional, and macroanalysis of global equity markets. Can’t think of a better person to have on this morning.

Sven, welcome back.

Sven Henrich: Hey, Chris, how are you?

Chris Martenson: Good. Good. As I told you before we started recording, I'm alert and watching things like a hawk. Sven, the markets tanked yesterday. Why?

Sven Henrich: First of all, let me just say that the market has been on an incredible run since the Fed just went absolutely hog wild on liquidity injections when they started responding to the repo overnight funding crisis. And, as a result, you know, we’ve have what might be described as a global blow off topic if you will.

I mean equity prices exceeded far above any fundamental basis of the economy. In fact, if you look at some of the larger GDP indicators, last week, actually, the NDX tech and the S&P made new all time highs. The market ended up with a valuation of 158.9 percent above GDP. That’s higher than it was during the tech bubble in 2000.

And there's a number of other indicators you can look, for instance sales, all those type of things that point out to an extremely highly valued market that comes at a time when obviously earnings have been slowing down dramatically in 2019.

And this whole notion was that we were going to have this big reflation trait into 2020, right, because Central Banks are intervening left and right, and center and all this liquidity is going to get the economy going.

What happened, what was really interesting, the tail end of 2019 while markets kept rallying, the bond market could not confirm the rally at all. We had weakening in the yields all along, and that happened before this whole coronavirus situation occurred.

And so in response, markets just kept going on this massive liquidity run ignoring everything. Ignoring the bond market previously; we were ignoring the coronavirus previously, and so we got to extreme high technical extensions, and those were ready to crack. I’ve been writing about this the last few weeks how the rally was continuing to narrow ever smaller participation. It was basically held up by five stocks, right, the big five tech stocks.

And then finally it cracked. It finally got a trigger, and so we had a massive reversion yesterday. For example, the DOW, even the S&P basically gave up all its gains in 2020. And so this is what happens. You get far extended, a trigger happens, the technicals of building and the run up to this, right, you got all these diversions that don’t seem to matter until they do, and they finally mattered yesterday. And so we had this big crack and kind of a flush out – an initial flush out I would call it – of the excess that has been building.

Chris Martenson: I want to talk about that initial flush out, but to back up a bit, you talked about this great reflation that had happened, and it started with the Fed intervening in the repo markets. That was back in September, August and September of 2019.

That really jammed things for a bit, but, you know, thinks started to weaken a little, and coming into January, you know, it was kind of topping it looked like to me. I’d love to get your impression of that.

But what amazed me was around January 31st, this is went the coronavirus news is really hitting. And from there the S&P climbed over 200 additional points to hit those all-time new highs you just talked about in the face of obvious and increasing coronavirus issues.

Was the market just completely ignoring the coronavirus issues and feasting off of Fed liquidity, or did something else happen there? How do we explain that?

Sven Henrich: To really keep it simple, stupid, as one would say, just look at the Fed’s treasury holdings and their repo activity. The pushback into treasury bills was so aggressive. It was more aggressive than we saw in 2009. In fact, as of last week, they Fed’s asset holding in treasury bills buying was just $14 billion shy of the all-time highs.

So remember, in 2018, and to me this is kind of the big macro-story all together. We have ten years of intervention, and the Fed tried to basically taper a little bit to try to normalize, right. They started to reduce their balance sheet, and they were able to do that when the US tax cuts came and it provided all this additional liquidity with buybacks by companies saved a lot of money in taxes, and they pushed a lot of these savings into corporate buybacks.

So they were able to do this for a little while, but then it blew up in their face in Q4 of 2018. We had this big 20 percent correction. And then, obviously, they were forced to go right back into it. It started with the job owning in the early part of 2019. Then we had three rate cuts, all of which were sold initially, by the way.

The markets did not really take off until the Fed announced it’s what they claim to be not to be QE but was really very aggressive buying of treasure bills. And then, on top of that, that repo program that was being accelerated.

And guess when the first week was when they started tapering that repo program? It was this week to last week. Basically, you know, we still had last week when the S&P and NDX made new all time highs still on this very narrowing path. We still had big repo operations.

You know, I’ve been Twitter fighting with one of the Fed governors on Twitter. You know, there's so much denial going on in terms of what is – do these liquidity operations have any impact on equity prices?

I'm fascinated because for weeks and weeks and weeks what we’ve seen is no matter where the market opens up, either down or up, in most cases up because we’ve been running on overnight up gaps. Before the market opened the Fed conducts its repo operation, and even last week we still had some big maybe repo operations: $60, $60, $80 billion. These are short term liquidity, the liquidity provides, at very least, it provides a psychological boost to traders who say the Fed’s in and so we can buy anything we want.

And so you see every morning this massive ramp up in stocks. Guess what happened on Friday? On Friday, they had the smallest repo operation in all of 2020. It was only $26 billion. And markets tanked. The support just simply wasn’t there.

So if you look at the market in context of ignoring the news, for example, from the coronavirus, as it did in January – we had that little dip, but we still had these massive liquidity operations. And then all the sudden things started to slow and started to kind of fall to the wayside with the larger market not participating. And then all the sudden you have a reduction in liquidity, and then you get the news of this virus spreading globally. Boom.

Then you had the trigger. And the lack of support that was built in this market with all these overnight gaps have that effect that we saw yesterday. It was a complete flush out.

Chris Martenson: That’s fascinating.

So what I'm wondering though is who’s doing all this buying? So I read some news last week that in the face of all this liquidity, of course, you know, stocks are going up – you mentioned the big five. So Amazon part of that. Amazon is just climbing and climbing and climbing. And we find out that Jeff Bezos harvested $4.1 billion, sold $4.1 billion of stock into that. Well, somebody paid $4.1 billion. Who is that, Sven, who’s doing all the buying?

Sven Henrich: Well, look, you have on the one hand you have asset managers that need to catch up. You know, you have the FOMO effect basically.

I mean, look, the reality is because the market is so skewed in favor of just a few stocks, you know, all these hedge funds underperforming. This has been kind of this absurd message that the Fed inadvertently sent to the market. If you're hedged, you're underperforming. If you protect yourself, you're underperforming. If you're not in a few key stocks that are outperforming and you diversified across the universe, you're underperforming. So you're always kind of trailing the index. Even Warren Buffet is trailing the index. It’s a really challenging environment.

The second part is last year – and you may have noticed there is a lot of the retail trading companies have gotten away with commissions. There's been quite a few anecdotal information as of late that retail has really been jumping on the wagon here, especially when you look at coops and volumes and so forth. So there's a lot of retail that has participated in this and has been chasing some of these stocks, and you see this really unhealthy behavior where they chase Tesla to the moon or space or what have you. I mean, absolutely vertical chart.

Also, Apple. Apple has, you know, basically doubled from the lows in 2019 – remember in January 2019 they had a big revenue warning. And the stock has experienced the largest market cap expansion of any stock in history ever. I mean, it was absolutely fascinating. And they just chased these stocks up into ungodly valuations and overbought. So no surprise that we're finally seeing a reaction, whatever that’s the final reaction we’ll see.

Chris Martenson: I don’t know about the final reaction. I think Apple lost three or four percent yesterday off of those massive all time, you know, sort of highs you’ve talked about.

But Apple has been warning – and I want to get into the supply chain issues here very quickly – you know, they’ve got a lot of exposure to China. They’ve got their Foxconn plants over there. We have all these stories which are so massive they're hard to get our arms around. Thirty percent of Chinese people are back at work, leaving seventy percent who aren’t. But that’s just the first order of effect.

The second derivative we don’t know how many factories have to supply the factories and supply the components to Foxconn. Like that’s just too complicated to really unravel right now.

But we do know that Apple’s very, very highly exposed to that. Do you think that three or four percent off their stock price yesterday, that represents a fair risk adjustment given what I just talked about?

Sven Henrich: Well, you know, we’ve all been trained by Central Banks, basically, and it’s been successful up to this point, to ignore all bad news because nothing ever matters. Dips don’t last, right. I mean, this has been kind of this risk perception has been altered for that reason.

And so there's an ingrained Pavlovian reflex to say, you know, virus, whatever, who cares? Ebola, who cares? It just doesn’t matter. It goes away. And so far that’s been correct, and the world has been really lucky. If you talk about viruses, for example, right. I mean, we’ve been in this world where we’ve had incredible medical advances, and viruses can be contained like SARS or Ebola is obviously not transmitted by air or what have you.

But the underlying thread has always been what if we have this mostly most overpopulated world ever if you get a virus that actually is much more difficult to contain, what is the impact? And I don’t think anyone’s really thought that through in any shape or form.

And to the extent that what was promised to be a short term virus that is contained is actually not such, as we are now seeing as it’s spreading into Italy, Iran, and South Korea. We really don’t know. And if you listen closely to the World Health Organization, the WHO – they came out yesterday and said we really don’t know how it is transmitted, and we don’t know how to combat it yet.

I mean, you hear, obviously, some pharmaceutical companies are trying to come up with a vaccine, and I hope they do. I don’t think any one of use wants a pandemic. But the fact is we don’t have any clarity at this point how long this is going to take.

And we're seeing multiple economies, big economies on the globe, already on the verge of recession. Germany had zero percent GDP growth in Q4. That was before any coronavirus even hit. So Germany’s in trouble. UK is in trouble. France is in trouble. Italy in trouble. South Korea is now in trouble, and, of course, China is in trouble.

So to the extent that you even think that a company like Apple, which is massively internationally exposed, can have little impact on that, I think that’s a fantasy.

Chris Martenson: Yeah, I would agree. And, you know, I'm getting – in my position here I get a lot of emails from people explaining what the supply chain issues are for them. And here’s one thing that sort of emerged. Almost all of them – some people have just gotten their money straight back from orders they’ve placed in China. There's like hey, we're not even going to tell you when we're going to fill your order; here’s your money back – which is very unusual.

And if people are getting any sort of a promise that hey, we think we can get to your purchase order by x, June. Everybody’s being told June. And, of course, so many people have gotten the June response that it feels a little bit like a CCP message to me. It’s across fabrics, electronics, chemicals – it’s kind of June.

So to me, if you get out into June – you know, we already had that big Bloomberg article yesterday talking about how there are five million Chinese firms that have only 30 days cash on hand. And after 30 days it gets to be real trouble. Last I checked we're in February. So March, April, May, June. That’s four months away before potentially the cash could start flowing.

This feels to me like something that printing and shoving money into the markets just can’t overcome, but the Fed’s going to try, right?

Sven Henrich: They're all going to try and we see that already. The market started to – and this is hilarious – yesterday – actually, last week on Twitter I asked how much market pain they're basically willing to deal with before they start to cut rates again. And already yesterday the markets started pricing two more rate cuts in 2020, and there was even calls for rate cuts now before the March meeting.

This market continues to be so dependent on Central Bank intervention it’s almost pathetic – well, it is pathetic at this point I have to really say. The notion of free marketplace, discovery, normalization of rates and balance sheets, I think that ship has long sailed now.

You see markets reacting to the job owning. In fact, last night we got the political job owning from Larry Kudlow and President Trump. They are worried about a dropping market because, you know, I keep saying the economy is not the stock market, but the stock market is the economy.

The worst thing that can happen now is an ageing business cycle where growth is already structurally slowly – it has been slowing for quite some time – and they obviously keep trying to prevent a recession by filtering ever more liquidity. But the worst thing that can happen now that they’ve created these massive extensions in markets above the underlying economy, a larger selloff would actually be the trigger that would bring about a global recession, right. So much of the asset financial values and confidence is tied up with stock markets.

So you lose the stock market, you lose the confidence, and with the confidence you lose the spending, and you get the recession.

Take Germany as an example. All-time highs here just recently, last week, and the economy is growing at zero percent or much less this year. I mean, there's just no rhyme or reason. It’s basically all the stone at the end of the day with the TINA effect from lower yields.

And I think the big question is what signal is the bond market, has the bond market, been sending for the last several months? And at some point, either the bond market or the stock market is going to be right, and there's a big, big disconnect going on right now.

Chris Martenson: So I'm wondering from technical standpoint, what technical levels are you watching? Did any technical damage get done yesterday that you would see some attempts to try and repair today? So pick an index. Where do you start? What are you looking at that seems important right now?

Sven Henrich: Well, basically focus on the S&P and the big animal, if you will. There was some damage done. But basically we just hit the January low, so they had to have support there for now. We got short term very much oversold. Business was a big flush yesterday. So a bounce here makes perfect sense. The question is what happens after this bounce?

Remember, we had a bunch of up gaps on the way up. Several of them got filled yesterday. Now we're having gaps on the other side.

Important to mention here is the VIX. It had a major breakout. Been talking about this since January that there was a breakout coming. We had that breakout yesterday. And, of course, there will be attempts to put that animal back in the box, if you will, to crush the VIX.

However, if that next bounce fails to make new highs, you know, we're looking at a more sizable retracement possibly into the 3,000 realm, maybe even a little bit below. Depends on how this plays out.

Keep in mind, this whole run up here actually was very similar to January of 2018, right, for calling the tax cuts. We had this massive jam up, very tight patterns, very little prices discovery, and suddenly something broke.

So to me the year basically now is binary, and it’s all about control. And the virus will have a large say in this as well. Central Banks will keep intervening. They will keep cutting, and they will keep printing. There's no question about that. The question to me is efficacy and the virus in context of the larger slowing economy will have a big impact.

If the virus can get contained in let’s say in the next three/four weeks, so we see a marked decrease in infections and they may even get a vaccine. I don't know if they can or not. Then you can make your case, okay, we're going to have a nice retracement, get this into let’s say a 3,000 realm roughly, 3,030, 2,975, something like that. You could have a bottom for the year, and all this liquidity will flush into the US election and we can get another run to new highs.

But frankly, if they fail to contain this thing and the supply chain, to your point, gets extended, I think we're looking at a global recession. I think then all bets are off.

And so if you see a sustained move below 3,000 on the S&P this year, then I think things could get rather hairy, and we can go back to some of the levels that we saw in 2019 or below.

Chris Martenson: Yeah, and this has been why I'm tracking the coronavirus so carefully. This is what I'm doing on a daily basis simply because I don’t think it’s – first, it’s uncontainable at this point. It’s slipped all containment. So now it’s a management issue, and there's a three body problem that the authorities have to solve.

One, the only way to actually contain it is to do what they’ve done in China which is basically lock people in their houses. Either you do that willingly or unwillingly, but that’s what you do. And that for sure will help to slow the spread of the disease.

But guess what? Then people aren’t working. That’s your second body problem. Hey, you still need to produce food. You still need to keep your economy going because that could be worse if the economy really collapses. It could be worse than actually whatever results from the virus. You got to balance those two things against each other.

But the more you put people back to work the more you risk the third body problem which is this. Which is that if it gets too out of control in an area it swamps the hospital system and then you have much, much worse outcomes, much higher case fatality rate.

So we have to balance keeping people locked away, letting them back to work, but not letting this things get out of control too much so that it swamps the hospital system. It’s a very trick thing, and I don’t think anybody alive has had to balance those before.

So to me that’s enough uncertainty that I would think that reasonable traders and investors would say that’s risk. I would like to not expose myself completely to that risk and be all in.

So I think it’s going to take time for the markets to actually digest that message because it’s new. It’s subtle.

Sven Henrich: Yeah. I mean, I think we're dealing with two narratives here right now. There's the one school of thought that says okay, well, all right, we recognized all of 2019 earnings were flat and not great, so we ignored all that because the Fed was printing. Okay, so now we expect that the Q1 bounce. Well, that’s not happening either, so let’s just ignore that for now too. That’s five quarters in a row. And we're hoping, okay, this virus will solve itself, and then we're going to have this big rebound in the second half.

So I think that’s kind of the school of thought that tells some people to stay in stocks and just ignore everything again.

The issue is if this does not get contained and also that’s why I think listening to companies and warnings now is incredibly important, and companies are warning. Apple was one of them. And they ignored that too, right, remember Apple dropped. It went right back up. Well, that was a mistake.

You're starting to see dip buyers getting punished. For weeks and weeks you could buy anything, and it just went up, and it didn’t matter. But last week they ignored the Apple warning; Apple bounced, and then they got hit hard yesterday again and actually broke trend.

So to me, a market that is as highly valued as it is now with such high forward multiples that have been priced to perfection can ill afford that anything beyond Q2s or beyond, yeah, beyond Q1, Q2 is going to be impacted..

I think so far everybody’s ignored the reality of what this virus actually implies. It was just not discounted. And I think the Italy news this week and the South Korea news I think shook things up dramatically. And then we’ll have to see how this evolves in the next few weeks. I think it’s key.

You see President Trump. He says, you know, it’s all going to be solved by April. Well, okay, that’s the expectation that’s now set. And what if it’s not?

Chris Martenson: There's another subtle narrative in here that was important which for a while it looked like, for whatever reason, this virus might have been contained to Asian ethnicities, but the outbreaks in Iran and Italy just shattered that. So there's now an idea that oh, this actually is a worldwide thing, could go anywhere. Now it’s down to the containment.

You got the President being hopeful about it, but we're going to have to watch and see.

So you just mentioned really important about the corporations. Follow them, follow what they're warnings are. We're seeing lots of them. I can barely keep up with the corportate warnings.

You mentioned retail buyers as them kind of getting back in the pool and swimming around. But as we all know, corportate buybacks we a hugely important part of this overall dynamic of – hugely important. You need buyers in order to make stock prices go up.

I'm wondering what you think about – here’s what I don’t like about credit bubbles. It’s so easy on the way up, but as you mentioned, if the stock market goes down that could feed right into the actual economy in synergistic sort of – these things play off each other.

Corporations were doing a huge amount of the buying, and all of the sudden, if they're looking at a supply shock, sort of, a warning, they're going to, I believe, get conservative with their buybacks, and that would remove one of the largest, if not the largest, sources of buying. Do you agree with that? And if the corporations back off, who replaces them?

Sven Henrich: Well, I mean, this is the thing, right. You have everybody long exposed. I don't know if you saw this, but last week or the week before the actual short interest in SPY, you know, the ETF that tracks the S&P was one of its lowest levels ever. So be clear, this drop that just happened, I don’t think the market was positioned for it at all.

And to your point about liquidity from buybacks, companies ultimately are rational entities, right. And they do buybacks. You can see it benefits them and if they have access to cheap debts the can certainly financial that. If they get a big tax cut they can financial that.

But once you start talking about impact on profit margins in a big way – you know, we saw this in 2007. Buybacks stop on a dime. They have been increasing buybacks all the way into 2007 and obviously that’s been supporting stock markets as well. And then they stopped immediately, and obviously we saw what happened then.

At the end of the bull market it always looks the rosiest, and everything looks the most invincible if you will. And things get ignored like the housing building crisis was ignored back then too. It’s always the unforeseen trigger that you don’t see, and then behavior changes quickly.

We haven’t seen that behavior change yet. Certainly not at four, five percent down, but we saw some of that last week. It’s subtle at this point, but I think it’s notable. You know, all the sudden we saw some bearish patterns in the short term charts and all the sudden they worked, you know.

Last Thursday – I’ll just point this out – I highlighted this on Twitter because I thought it was really interesting. On Thursday, it was a little down, and then the NASDAQ rallied, and it built a tiny bear flat. Not a big deal you would think, right. And all of the sudden, out of the blue, came a subtle program. And everybody was like where did that come from? What news triggered this? And they were desperately trying to figure out if there was a news item that triggered it, and some attributed it to some sort of coronavirus news report.

But it really wasn’t that. There was a technical pattern that was already bearish and flushed. And then it built another – that rally that followed the initial drop on Thursday built another bearish wedge. This was when everybody declared oh, they're buying the dip again and everything is in the clear. No. It flushed again on Friday, and then of course on Monday we got the flush.

All the sudden I see a shift in behavior in the market, and we’ll need to see if that follows through, or if this is just another one day wonder and they're trying to rally this back to new highs. I'm somewhat doubtful that unless they get the all clear on the virus, I'm very doubtful that we are going to get new highs from here anytime soon. I think we're going to have to flush through all this.

And let me just maybe add this final point. To see all-time highs happening in the February-March timeframe is not unprecedented. There's actually two specific examples of that. One was 1937 if we want to go back that way. We also had a massive rally in 1936 until 1937, and it ended in March. And then, of course, we have the infamous 2000 example.

What’s really interesting about 2000, and I think everybody should be aware of that – we obviously had the tech bubble. What precipitated or what really gave the tech bubble its final blow to the upside? It was the Fed. It was Alan Greenspan. Back then it was not a repo, but it was concern about what might happen with Y2K. Are you old enough to remember this, Chris?

Chris Martenson: Yes, I am.

Sven Henrich: Everybody had a bunch of concerns. Every computer is going to blow up, and power stations are going to go out. Nobody knows what’s going to happen.

So the Fed, in anticipation of Y2K, in late 1999 added a whole bunch of liquidity, and that liquidity magically made its way into the stock market. Retail got on board. Everybody chased every vertical stock on the planet, and then boom it was over in March.

And the Fed ended up reducing liquidity. It pulled it back because obviously Y2K didn’t cause any damage and so everything was fine. they pulled back the liquidity and all the excess became unwound.

And this is kind of ironically historic in what we're seeing now. Why is the Fed, in September, adding a bunch of liquidity with treasury bills buying and repo, and they caused a massive asset bubble as far as I'm concerned as a result of that? And now they're trying to carefully extract themselves by trying to taper the repo and the treasury bills buying around April they say. I don’t quite trust them on that because, again, as soon as markets drop they want to do whatever they need to do to save it.

Chris Martenson: I understand that. I get that and at the same time the bull case I get it. Hey, the Fed’s throwing money into the market, and that’s always been correlated very highly despite what your Fed governor spat is going there Twitter. Despite what they say, market traders all know this that one of the best correlations here that’s out there is looking at Central Bank balance sheets and then global financial asset prices. So I get that, right.

But on the other side, on the bear side, you might say well, wait a minute. We're watching the Fed have to pour more and more and more money in on an overnight basis to get less and less and less of a return. I think we’ve a tire with a leak in it. And at some point you have to wonder if you're not going to get a completely flat tire out of that, and that’s just the nature of things.

I think the Fed goofed. I think they should have had emergency measures from October 2008 into maybe spring 2009 and dialed it back and let things get on their way. And if certain things like Citi had to go belly-up as a consequence so be it. We’ll survive that.

But now they’ve given us – Sven, my model is instead of falling off of a five foot high step ladder we're now thirty feet up an extension ladder. And I just see massive air pockets under here if this thing gets rolling. Would you agree we're a little maybe overextended from valuation, debt, all sorts of measure? It feels just really extended to me.

Sven Henrich: It’s a process of diminishing returns. And I question the whole issue of efficacy last year. Personally, I have to say I was amazed to see this liquidity run here in Q4 into the beginning of this year.

And you have to wonder, at the end of the day, how much of this was intentional and how much of this was forced on the Fed. They didn’t choose repo. They didn’t choose the repo crisis.

For you listeners, in September there was one night all the sudden overnight rates spiked, massively spiked, and they had to emergency intervene because there were liquidity issues with some of the overnight funding, and they’ve been running the program ever since.

And to this day, even today, it’s over subscribed. There's a lot of demand. And if you will, the jump in equities has been kind of the unintended consequence or side effect. So to the extent that this was forced upon them, they’ve now produced a bubble, and they don’t know how to extract themselves from it.

And at the same time, we look at the actual economy and we don’t see the effect. The effect hasn’t been there for a long time. Europe is still on negative rates. Germany is at zero percent GDP growth. The structural picture has never changed. We are in a slowing business cycle, the slowest recovery we’ve ever had.

But we have to spend more and more and more debt just to kind of mask the underlying issues. I mean, we're trillion dollar deficit, right, and we cant even get two percent GDP growth here.

All this is paid for, and to your point, they should have stopped a long time ago. But every single time there were troubles in markets Central Banks have stepped in. They're not willing to take the pain because they're afraid of the beast that they themselves have created.

So that’s why we had QE2 and QE3, and then in 2016 we had global Central Banks was $5.5 trillion of intervention between 2016-2018. So they keep just exasperating the disconnect between asset prices and the side of the economy. At the same time, while all this is producing this ever wider wealth inequality as 10 percent of people own 90 percent of the stock market, right.

And so yeah, you have the Jeff Bezos and the Mark Zuckerberg’s and others that are just reaping massive benefits. I mean, my classic example is Bill Gates. Even he’s whining about it saying I shouldn’t be able to make this much money. You know, he’s one of the richest guys on the planet and he’s actually retired. And he’s giving more money away then anyone we know on the planet, right. He’s doing a lot of philanthropy, but he can’t help getting richer because he still owns Microsoft stock and other shares of course as well. And these asset prices just keep going wild to his and other people’s benefit.

And then you look at the global political picture and you see more discontentment and politicization and fragmentation of society to the point where no democracy can actually get anything done on a structural basis. So it’s very concerning. Working on this train that keeps running, but it’s getting heavier as we keep going uphill.

Chris Martenson: I totally agree. And a whole separate conversation, but the social impact of what the Central Banks have done with the Federal Reserve at the head have been deplorable in my mind because they’ve been engineering a very, very unfair, unjust wealth gap in pursuit of something which they can’t actually articulate. It’s like we're going to keep printing and making stocks go higher until what? I don't know what the what is in story.

So Sven, I know you time is short here today. Last question if you have the time. A lot of people listening to there's may still have money in the markets, and I'm just wondering given where you see things upside versus downside, should people who are fully invested or more invested than they're comfortable, be taking money off the table here, maybe protecting gains, stepping aside and watching for a while? How would somebody play this?

Sven Henrich: Well, I'm not someone that gives financial advice. Let me be clear. We just look at this through a technical lens. But I will say this. From a macro perspective, I think from my perspective here in the 2020, there is a chance they can still kick the can one more time, if you will, maybe into 2021. I think a lot has to do with how this virus plays out.

But we are at historically stressed valuations. We're in an environment where five, six, seven, eight, nine stocks control very large portions of the indices. We have a bond market that’s not confirming a reflation trade to growth. And we have trapped Central Bankers who are now, and this is I think the biggest part of what I call the recklessness of it all, right – Central Banks originally were supposed to be lenders of last resort. They were supposed to be there when things really go bad.

And now they’ve morphed into a self-anointed classification of we are going to always intervene at any sign of trouble, and we're never going to let the system cleanse itself. To my perspective we're in a massive asset bubble. I'm not one to tell you that we talked last week or we're going to talk a few months from now; I'm just saying from a risk/reward perspective, if they ever lose control over there's construct that they have created, we have massive, massive downside risk in equities.

And let’s go back to something I mentioned at the very beginning. 158-159 percent market cap to GDP. Put this in historic perspective. In the ‘80s and ‘90s this was around 60 to 80 percent. We had the tech bubble that peaked around 145 percent. We had 2007 bubble that peaked around 137 percent. So we are massively extended beyond any history where we’ve ever been especially in a slow growth environment.

So you got two things to consider here. Either this continues, something that has never before happened before will continue indefinitely, or there's going to be some sort of reversion right sizing of this.

And even if you go down to – which is also historical high – let’s say 120 percent of GDP, market cap to GDP, you're still looking at a massive downside risk in market. And keep in mind, in 2009 we went down to about 60 percent. So these things can change quite traumatically.

To the extent that the top five stocks, tech stocks, remain over-owned and continue to be bought, I think you can keep the valuations up. But anything breaks on these, there's a lot of people that all own the same stocks, and they may find the exit door rather thin.

Chris Martenson: I agree. And the idea that the Central Banks and the Fed in particular have painted themselves into this corner where they have a narrative that has to be maintained which is that they are going to intervene, which is they’ve got it, the put exists, that they can print, that they can make everything better.

So I think, to paraphrase what you said, all of stocks have been priced for perfection, and it’s not a perfect world. We have this thing called the coronavirus which is my definition of almost a perfect black swan. Totally unexpected. Nobody’s faced it before who’s alive. We don’t know how this is going to ripple through. Can’t compare it to the 1918 Spanish flu because at that time most people lived on farms still. This is a completely different world, and we don’t have any models for it, and that is something you just can’t print your way around very easily.

So if the perception is that the Fed is now out of its element and is facing something that it can’t control, I think that busts the whole narrative and people are going to have to spend some time getting used to a lot of volatility until we figure out what the correct narrative actually is.

But I think the old one is really in danger of just being shredded by one of those machines that takes the cars apart. That’s what it feels like to me.

Sven Henrich: Let me just add this point here to my point about this being reckless when the Fed was supposed to be the lender of last of resort.

They have now very little ammunition left on the rate cut – they only have six rate cuts left before they're back to zero. In 2000 and in 2007 it took over 500 basis points and cuts to stop the bleeding.

And to the extent that they went full in in 2019 because of the slowdown to try to kick the can, you know, they again reacted to the markets sensational appetite for easy money. And they're just others willing to take the pain ever. They're so afraid of the beast that they’ve created that they are beholden to markets.

And so now, if the coronavirus, for example, is actually turning out to be that emergency, that trigger, that actually requires you to have an army with ammunition, well, the Fed has left itself with precious little ammunition. And that’s the irresponsibility of it all.

Look at the ECB. Negative rates and they cut again, you know, and they’ve restarted QE. What new stimulus can they bring? The answer, and I think they know that, is very little and hence why you see Central Bankers across the globe basically begging governments for fiscal stimulus which is code for add more debt.

Well, great, so now we are in the most indebted economy, global economy, ever. We are at the lowest rates with the least amount of ammunition, and you hope that something like the coronavirus is just a temporary thing.

Well, the concern is that something like that is not a temporary thing and we have a real crisis, and we're completely left unprotected in that sense. They will try to keep kicking the can, but every time they do, every time the Fed cuts rates, for example, they will have even less ammunition to deal with the ageing business cycle.

So the future, unfortunately, as it looks right now, is permanently ever more debt. We have trillion dollar deficits for the next decade, at least. That’s prior to any recession because none of these models assume a recession ever. And so I think the world is mightily exposed. At the same time, as long as stock markets are high, you can maintain that confidence.

That’s why I'm saying everything is about the stock market and everybody is trying to protect it in any shape or form possible.

Chris Martenson: That was so perfectly well said. And we're going to end it right there. Sven, that was amazing. And I just love talking to you, and I love following you on Twitter. And you just very generous with your insights and with all of your analysis and things like that.

So thank you so much for your time today. I know you’ve got to get to the markets because they're about to open here. I really appreciate it. I'm sure everybody listening has really appreciated this as well.

So again, tell people how they can follow you, please.

Sven Henrich: You can catch me at @northmantrader on Twitter, and of course, the website northmantrader.com. And Chris, thanks very much. I’ve very much enjoyed speaking with you.

Chris Martenson: Thanks again, Sven. Good luck with all your trading and with life going forward.

Sven Henrich: You got it. You too. Take care.

Worried about what the financial markets will do from here?

Adam Taggart: Hi folks, this is Adam Taggart. Chris and ii are the cofounders of peakprosperity.com.

Given the macro and technical risks that Chris and Sven addressed in the podcast, we think it’s extremely important not to have your investment portfolio on autopilot these days. We’ve long recommended that you work with professional financial advisor who understands the nature of the risks involved with today’s markets and to position your wealth accordingly for safety.

If you're having trouble finding a good advisor on you own, consider talking with a financial advisor that Peak Prosperity endorses. For over a decade they’ve worked with people just like you who are concerned about preserving capital during a time of dangerously overvalued markets.

You can talk with them for free, no strings attached and no commitments required. To schedule a free consultation, just go to www.graylockpeak.com. We think you’ll find this a useful resource.

Thanks for listening to this podcast.

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