Well, they’ve done it again. The Fed has once again managed to erase the larger market pain. This time it was not the standard correction that was erased, this time they erased a market crash as $NDX is trading at all time human history highs.
I, for one, have to say I am surprised how effective central banks have been in squeezing markets higher again. I thought after 10 years of this monetary nonsense they would finally lose effectiveness in their ability to manipulate markets. Clearly I was wrong. But then I also didn’t see $3 trillion in Fed balance sheet expansion coming in a matter of a few months.
So one has to clearly acknowledge central banks continue to hold complete control over these markets. But it comes at a price that will remain ignored for now, but nevertheless I’m aiming to highlight some of the issues I see.
In my view central banks, in their quest to conduct a successful rescue operation, are killing the patient in the process. And nobody holds them to account, except some perplexed voices like myself are trying to at least raise the issues. (See also Stock Market Straight Talk)
And it’s not over of course. The ECB will announce more stimulus and there are more fiscal stimulus efforts coming as well and in process they are literally manufacturing the largest market bubble ever.
Bottomline: The distortions have become more extreme than expected.
And these distortions can be seen and measured in a number of ways.
First off the most obvious but also most ignored: Valuations are SCREAMING danger:
Yesterday we closed at 145.6% market cap to GDP, today markets are trading at 146%.
These are not only historically extreme valuations they are also entirely incompatible with any valuation history in context of the economic backdrop we have: 20% unemployment, massively regressive earnings, you name it.
Some will justify the highest valuations with a coming “V” shape recovery. Even if you get a “V” you have to assume new record high valuations from here.
But there is no “V”. The CBO came out out with a projection yesterday suggesting it may take a decade to recover from all this:
The only V is in the stock market driven by artificial liquidity and it’s dividing the haves and have nots ever farther apart.
And the layoff announcements keep coming. See this tweet thread for some of the ones I’ve been tracking:
Every company right now is busy figuring out how to do more with less.
And once they figure who the less is those jobs are not coming back.
— Sven Henrich (@NorthmanTrader) May 11, 2020
And they keep mounting and they are sizable.
Which brings me back to a larger point I’ve been making for a while: Wealth inequality
How societies get destroyed.
The top 1%'s share of total assets has never been higher at nearly 30% while the bottom 50% barely own 5.8% in aggregate.
Chart prior to Covid.
And now many of the ones in the bottom 50% have lost their jobs. pic.twitter.com/JBtNz2cl38
— Sven Henrich (@NorthmanTrader) June 2, 2020
2020 has seen the largest expansion in wealth inequality yet. Jay Powell may deny all he wants that the Fed’s policies are contributing to wealth inequality, but that’s just a lie.
"Powell Says Fed Policies ‘Absolutely’ Don’t Add to Inequality"
That is such a bold face lie & willful denial.
The Fed will never admit this because to do so would reveal their entire policy construct to be an absolute shambles.
— Sven Henrich (@NorthmanTrader) May 30, 2020
If he hasn’t noticed, but America is Breaking Bad.
While the current protests in America were triggered by a specific event, the horrid killing of George Floyd, the protests represent something deeper: Anger and anxiety and a sense of injustice in general.
In past recessions everybody got hurt to some extent, even the top 1% at least in the form of dropping asset prices. Not this time, stocks are saved, jobs are not. And as the top 1% own the majority of stocks and the bottom 50% own virtual no stocks the correlation with the wealth inequality curve only appears to escape Jay Powell.
Now it is the bottom 50% which has predominantly lost their jobs and thanks to the Fed’s monstrous interventions the top 1% can take comfort that their asset values have been largely protected. An as perverse distortion as we’ve ever seen.
While the Fed continues to deny the obvious market participants of course know better.
As Mohammed El-Erian recently wrote:
“By contributing to higher wealth inequality and dragging the Fed deeper into “quasi fiscal” funding operations, the central bank also risks its credibility and political autonomy.”
From my perch of course they Fed has no credibility and Powell’s denial of negative rates as a policy tool is already challenged by one of the Fed’s own economists knowing there is no V coming:
And here we go.
The jawboning begins. https://t.co/Zadows5dTE
— Sven Henrich (@NorthmanTrader) June 2, 2020
So the jury is out, but I for one would not be surprised to see the Fed eventually implement negative rates. Especially if markets were to drop hard again.
As it stands we’re staring at the biggest and fastest stock market recovery in history, especially considering the context of the economic and valuation backdrop.
Sustainable? I suppose it’s in the eye of the beholder.
We can observe that the infamous megaphone pattern has once again been reached:
But the squeeze may not be over yet as we can note on the futures contract that trend line is a bit higher still, along with the .786 fib:
My view here: This liquidity, FOMO, TINA rally, whatever you want to call it, is not sustainable. It has no foundation in earnings, growth or future expected growth. It is Fed manufactured and yes I believe what I say:
The Fed is creating the largest asset bubble ever.
— Sven Henrich (@NorthmanTrader) June 2, 2020
If vertical equity prices were the intended or unintended consequences they are not producing growth or a V shaped recovery. There will be a recovery yes, but to a smaller normal. But in process the Fed has vastly disconnected asset prices from the economy and only multiple expansion can keep investors on the safe side. To me this action is not sustainable, the disconnect and distortion too large setting markets up for a nasty reversion to come.
And that reversion itself will then cause a massive dampening in sentiment. In short: They have set markets and the economy up for a deepening of the malaise as the liquidity is going to all the wrong places but the real economy.
And the protests on the streets of America they are the real economy and the voices we’re hearing are saying: We can’t breathe. And the message they are sending is: America is Breaking Bad.
But the Fed’s strategy appears to be to deny it all and to repeat the same policies that have brought us to this point, but with even more intensity. And that intensity has paid off. For the top 1%. Congratulations.
This rally is crystal blue meth. Consider with caution.
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