Market Dip

Below we look at the complete absence of market dips in this admittedly dippy yet profitable market.

A New Market Record: No Market Dip

As market indices continue to break new record highs each day, thus elevating investor confidence to greater highs and greater returns, we here at Signals Matter are certainly enjoying the ride.

But even as the returns stack up, we avoid hubris and keep a steady eye on risk as well as return. One risk—and breaking record—worth noting today is the fact that our stock market hasn’t had a 5% dip in over 395 trading days.

That’s a market record—never before seen in all of recorded market history.

How We Got to a Dip-less Market? A World of Central Bank Dips

But this record-breaking absence of market dips is what happens when the world’s central banks collectively print $20T in fiat currencies since the dot.com bubble, most of that tally coming after the 08 Crisis…

Folks: that’s an astonishing amount of market steroids, and frankly, given the fact that we’ve never seen intervention (and free market distortion) of such levels before, it’s very hard to use traditional risk tools to make any sense of these dizzying markets.

We know as well that not only was money being created with a mouse click from the BOJ and ECB to the FED, it was also being priced at zero-bound interest rates, meaning all those publically traded companies on the world’s exchanges (most notably here in the US), put themselves into a cheap borrowing spree never before seen.

Bond Bubbles…

We see the results of this borrowing spree in the current bond bubble, the biggest bubble of all…

As interest rates slowly climb (we are seeing the first signs of this as the yield on the US 10YT passes 2.6%), this debt expansion will inevitably experience a debt slide. When? That’s why we watch our signals rather than pontificate predictions…

Cheap Labor, Price Deflation and Fake Inflation

But if credit expansion’s effect on the bond markets is not ringing any immediate alarm bells, we remind our realists (bear or bull) that this central bank-driven distortion of easy credit has even deeper implications than just the yield curve.

The massive flood of cheap/borrowed capital allowed areas like China and India to pull millions of their illiterate poor out of backwater villages and place them into a massive cheap labor pool. This labor pool flooded its way into distribution, manufacturing, mining and shipping industries—creating massive excess capacity as well as cheap costs of labor.

That’s why no iPhones (or just about anything else “All-American”) are made in America

Such distortions pushed prices down on everything from oil to toothpicks, and yet the genius academics at the world’s central banks kept faking concern about not enough “inflation,” thereby justifying their addiction to printing even more money and cranking rates to below zero for years and years.

The Inflation Lie

I’ve written elsewhere about the inflation lie. The central banks have head-faked the markets for years using bogus scales for measuring inflation in order to make sure “reported” inflation never exceeded the yield on their sovereign bonds

In a world where debt and money printing has replaced GDP and earnings growth (as opposed to PE multiple growth), the charlatans at our currently lauded central bank don’t want the markets to wake up and realize that real (as opposed to “reported’) inflation-adjusted returns on our bonds (the US government, after all, survives on debt, not income) are negative.

More importantly, years of central bank control (as well as eradication of) “free market forces” has created the biggest market bubbles we’ve ever traded. And the bubbles, moreover, keep rising.

Ray Dalio, for example, thinks being in cash today is “stupid”—these markets (bubbles), he insists, are going to continue, so jump on board!

Hmmm. We get this. We too are riding this market wave—but with a plan, not an arrogant smile, and certainly not because we think being in cash is “stupid.” As we’ve written elsewhere, each investor must balance his/her own sense of market uncertainty and risk. Whether you are “all-in” or “all-cash,” neither choice is “stupid”…

Investors today must keep a watchful eye on trends, trend reversals and just plain out crazy earnings multiples. We’ve already written about the mania and the CAPE warnings, which are no warnings at all in a mania

And we’ve pointed out how a Russell 2000 (the barometer of small and mid-size American and Main Street companies) trading today at 1600 puts those securities at 135X reported earnings. But even those bogus earnings are largely inaccurate, and thus the multiples are even higher than nosebleed.

No “Guidance” from the Fed

The Fed describes such stock prices as “slightly elevated.”

Slightly elevated? Who are we kidding folks. That’s massively elevated. And stocks, we sadly admit, can go higher, much higher, as our bewildering look at the DOW recently suggested.

Indices continue to melt up on the rising tides of speculation and momentum based trading that is 100% dangerous and 100% attributable to the central bank liquidity cocaine handed to us by our so called “best and brightest.”

Need I remind you, however, that those “best and brightest” were clueless in their forecasting of the prior bubbles they created, from the BoJ of Japan’s fated 1989 Nikkei crash to the more recent sub-prime mortgage and market catastrophe of 2008, which the Fed created yet never saw coming.

It’s no different today. The same culprits creating the same distortions are showing the same complete inability to forecast or assume responsibility for the consequences to come. Trust us: The Fed will never yell “fire” in the very market theater they themselves have “torched.” Never. Such honesty is bad for business and book deals.

What Do Investors Do in this Mania?

So, what are we investors to do in a market without market dips? What are we to make of such record-breaking market highs and market distortions?

For us at Signals Matter, the answer lies in having a clear head, a realistic perspective (bull or bear) and most importantly: a plan.

That’s right—a plan. No matter how bizarre these crazy markets have become, no matter how distortive, over-valued and past the point of traditional risk management and macro common sense, we respect that we are in uncharted waters of opportunity and risk.

But We Have a Plan

In markets that have no fundamental basis for rising, we have to ride this rising momentum wave as carefully and opportunistically as we can—but always with an eye on a long list of reversal triggers, which our subscribers know well and which we monitor with parental care.

So, yes, we’ve profited heartily in this market without market dips, but given all the dips who manage the world’s central banks, we aren’t laughing. These markets have gone from sublime to ridiculous, and we must treat them with caution, even as the returns keep coming in…

As we say, ride this wave as long as it delivers—but be careful out there, and have a plan.