The Choice

Investors have a choice to make.

Take the blue pill and believe whatever you want to believe. You may choose to believe that markets never go down, but for a brief moment of time, a few minutes, a few hours or a few days at best. You may choose to believe that nothing matters, you may choose to believe that a slowing global economy after a 10 year debt fueled and financed expansion is sign of good things to come, you may choose to believe that ever expanding debt levels (105% debt to GDP) or trillion dollar deficits do not matter. You may choose to believe that bad data propels stocks on a sustained basis as the Federal Reserve will cut rates at any moment. You may choose to believe that cutting rates with unemployment at 50 year lows and the lowest financial conditions in 25 years is a sign of strength, you may choose to believe that the Fed knows what it’s doing and will remain in control of markets. You may choose to believe that central banks unable to normalize their balance sheets and remaining at historic low rates (negative in many cases) are not a reflection of underlying troubles in the world economy, you may even choose to believe that over $13 trillion (or 25% of global debt) in yielding negative rates is a sign of structural strength. You may choose to believe that yield curve inversions do not matter and you may choose to believe that 3.7% unemployment is normal and will continue forever.

You may choose to believe that financial markets driven by ever more passive asset allocations into an ever shrinking universe of stocks who are in turn reducing their available floats via buybacks will continue their unstoppable ascent ever disconnecting further and further from the size of the underlying economy.

You may choose to believe that ever widening wealth inequality and political fragmentation that makes complex structural problem solving impossible does not matter. You may choose to believe it all.

You take the blue pill and the story ends and you wake up in your bed and believe whatever you want to believe.

Or you take the red pill and you stay in wonderland. You may come to realize how desperate the architects of markets are. Because architects they have to be for markets have become so large, so dominant that any sign instability present a clear and present danger to the world order. For 2008/09 scared a lot of people as the financial system came within hours of a complete meltdown. You may come to realize how that this fear still matters today as it instills a burning desire to never let anything bad happen to markets. To never let the system run on its own, to always interfere. And because of these constant efforts you may come to realize how fragile even record priced markets are, because these efforts are absolutely necessary to maintain confidence and inspire ever more buying.

You may come to realize how the Fed’s recent journey from zero bound to its current historical low 225bp cycle peak was all they could do. In 2015 and 2016 the global economy was slowing as well, panic was in the air after Janet Yellen raised rates for the first time in December 2015. One meager 25bp rate hike off of zero. And financials dropped 23% within 6 weeks. Janet Yellen stopped all promised rate hikes and with that announcement stock bottomed. But better yet, Janet Yellen caught a lucky break. Global central banks went wild, the ECB dropped rates to negative 0.4%, a level they still sit on today and the BOJ and ECB commenced asset purchases, QE on massive scale. Global central banks added $5.5 trillion in liquidity to the global financial system between 2016 and 2018. The SNB went on a wild shopping spree accumulating billions and billion of dollars worth of tech shares.

Then the Donald came and thew in a $1.5 trillion tax cut program on top of the central bank party. Call it $7 trillion in artificial liquidity in 3 years. All of it gave the Fed cover to raise rates, to attempt normalization. They tried, albeit ever so cautiously.

And markets ignored the subtle and cautious tightening while all this liquidity flushed through the system, indeed markets rejoiced, the global economy, ever more dependent on rising stock prices, recovered, the earnings recession was no more, buybacks proceeded to record levels, more than a trillion dollars in 2019 alone. $800B in 2018.

Yet despite all these trillions of added artificial liquidity the global economy started slowing, and suddenly the tightening was tolerated no more as stocks collapsed in December dropping 20% from the highs. And the system reacted. Quickly. Treasury Secretary Mnuchin made sure everybody knew about his emergency liquidity calls over Christmas, and Jay Powell was suddenly flexible, first ending rate hikes, then turning ever more dovish culminating in now signaling rate cuts for July and markets rejoiced at every single turn:

No, Jay Powell knows that recession risk is high and he and his merry Fed governors are desperate to extend to business cycle and the best way they know how to this is by inflating asset prices. And a mighty job they are doing. But they know what they are up against:

New highs in markets despite a slowing global economy. Well done. But the construct is weak, it repeats the same patterns we’ve seen before amid divergences, gaps, select participation and a myriad of technical warning signs.

Yes you may choose the blue pill and believe whatever you want to believe, or you may take the red pill and I show you how far the rabbit hole goes.

Remember, all I’m offering is the truth, nothing more:

The choice is yours.

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