Below, we look at the “everything bubble,” bond and stock correlation data and the iceberg(s) ahead…
France Calls
As I pack my bags for a quick trip across the Atlantic, I’m looking forward to some French wine and a needed reprieve from the noise of gyrating markets and the even greater gyrations of the financial media’s ever-babbling bubble heads.
A Bloody Week in the US Markets—And the Usual Media Spin
After a bloody last week in which the markets tanked successively day by day only to stage what the prompt-readers called an “epic rally” on Friday, I feel like I need, well…a BS detox. Closing just above its 200 DMA, there was nothing at all epic about the so-called S&P “rally.”
That is, the prompt readers are once again calming the retail investor class with the same memes, namely, that markets never stay down when “earnings are strong and unemployment is below 4%.”
Although neither of those points are even remotely accurate (but few of us, left, right or center, rarely go to the news for accuracy anymore), I might point out to the financial geniuses at FOX and CNBC that the NASDAQ crashed in April of 2000 when unemployment was 3.8% and earnings where “surging.”
Just saying.
Furthermore, as I’ve written here and here, the bullish media memes about unemployment and earnings (as well as GDP, inflation or even the health of Main Street) are as fictional as Harry Potter yet as scary in their propaganda spin as something out of George Orwell.
Same ol Story Folks: Debt and the Fed
As I warned as early as September of 2017 and then repeated many times since here, here and elsewhere, the market bull that raged out of the ashes of 2008 is due entirely to a central-bank supplied debt steroid.
In short, thanks to the Fed’s perfect record for creating obvious bubbles and un-forecasted recessions, this post-08 bull market, born from money printing and low rates (and the attendant stock buy-back mania that always follows) will die when money tightens and rates rise.
Rates, of course are rising, on both the short and long end of the yield curve, as the Fed manipulates (raises) the short-term Fed funds rate (much to the chagrin of Trump) and the bond market handles the long end…
Last Week? No Surprise at All
What we saw last week was no surprise to me (nor was the $700B lost on the FANG stocks in 6 trading days) or to anyone who has read the Bond Section of this media bar.
But the low dip-buyers (or just dips), most of whom are now computers rather than traders, will likely come in once again to “save the day.”
In other words, the Fed will inevitably and negligently kill this market, but not quite yet. There’s still plenty of “stupid” left in the algo trade and dip-buying business for a market that never dips too far.
Besides, the real danger (and indicator) is the bond market, not the fully-long dips (buyers) in the equities market.
It’s All About Rates
With the Fed no longer the buyer of first resort for the US 10-Year, and with the US Treasury on the precipice of issuing $1T of more debt (i.e. 10-Year IOU’s), bond supply is steadily rising while demand for it is slowly falling…which means bond prices are falling…
…which means yields (and hence rates) have nowhere to go mathematically but up.
Of course, for a market addicted to the low cost of borrowing, the worst thing that can happen to the binge-borrowers on the S&P (and the current “everything bubble”) is a rising rate market.
Indeed, watching the yield creep up on the 10-Year Treasury is to over-valued stocks what an approaching shark fin is to surfers…
The Un-Natural Power (and Long-Term Danger) of Stock Buy-Backs
For years, the post-08 markets have relied on the Fed to buy bonds (i.e. QE 1-3) and keep rates low. In turn, low rates have allowed companies (rather than carbon-based actual buyers) to buy their own stocks ($4.4T since 08) to the current tune of about $250B per quarter.
Folks, that’s a helluva a tailwind, however otherwise un-natural it may be.
Such “self-support” from companies drinking their own share-based cool aide, of course, is not natural supply and demand at work.
Unfortunately, the Fed eradicated natural supply and demand –as well as natural market cycles, price discovery or VIX pulse checks the moment it agreed to print $3.8T out of thin air and crank rates to the zero bound in the ashes of the 08 debacle which they (and the TBTF banks they support) conceived.
The ironies do abound…
Don’t believe me? Just read a little market history.
As to stock buy-backs supporting this otherwise bogus S&P, it might be worth noting that during last week’s market carnage, in which the S&P lost more than 3% and the DOW over 800 points in a single day, most of the “experts” on TV forgot to mention the buy-back blackout period.
That is, companies are not allowed to purchase their own shares in the month before releasing their earnings. Given that earnings reporting began at the end of that same week, the markets were in the tail-end of that blackout.
To me, it’s therefore no real coincidence that the markets tanked when companies were temporality not available to buy their own shares (same thing happened in February…), as this market runs on such distorted (rather than actual) support to stay above its moving average trend.
So, for you bulls out there, don’t worry, the stock buy-backs will kick in again soon, and likely break the $1T mark by year end.
But if that makes you think “all is good again,” you’d have to be the kind of investor who thinks one more martini (after having consumed 10 already) is the best way to stave off a hangover. That is, buy-backs do buy time, but that doesn’t avoid the puking to come.
In short, a market that depends on low rates (and hence stock buy-backs), as well as a one-time tax-cut and the dying residue of Fed “support” is not a market, it’s a binge drinker.
As the geniuses at the Fed begin the QT pivot (too little, too late), rates will rise, and like Hemingway described poverty, the damage to this market bubble will “start slowly, and then all at once.”
That is, the puking kicks in.
Yep, low rates have given us the “everything bubble” –boosting small caps, bonds, tech stocks, indexes, real estate and even the cost of bad art…
But hear this again: low rates started this party, rising rates will end it. Full stop.
Slow Rise, Rapid Falls—Timing the Shift?
What’s particularly scary about this “everything bubble,” however, is that just as everything slowly rose (under the slow progress of over $6T in ETF tailwinds) since 08, when this party ends, the slow yet massive weight of those ETF inflows will turn into much heavier and rapid outflows.
That is, the market will fall faster than it rose—or as Hemingway wrote, “all at once.”
Do you think you can time that moment?
No one, by the way, can. The best one can do is see the iceberg ahead and plan accordingly. For subscribers of Signals Matter, the binoculars are at their service.
So, depending on your own level of risk vs. uncertainty, you may want to consider how long you feel lucky—a year? A month? Two years?
That’s up to each of you, but I’d recommend a look at this video if you’re undecided…
Safety in Bonds? Think Again…
What’s equally scary about this everything bubble is that there are less and less places to find safety.
Bonds, for example, used to be the save haven in an equity storm. But in the grotesquely distorted markets handed to us by the dopes at the Eccles Building, stocks and bonds are both in bubble territory…which means both are dangerous asset classes.
In other words, nothing is as it used to be. For example, when the S&P tanked in 08, the stock market lost $7.2T in value, but bonds, fortunately delivered a $3T positive cushion in the same period.
But today, bonds and stocks can fall together…Their correlation numbers are getting closer together rather than further apart.
That’s bad.
In the last 3 years, there have been only 14 occasions when SPY (the S&P) and TLT (US bonds) were simultaneously lower on the same day.
Well, that happened again last week…
This month, moreover, the NASDAQ was off 11% as bond yields rose (and hence bond prices fell).
In 2008, the correlation to stocks and bonds was -0.51%; today, that figure is +0.16%, which represents the first monthly positive correlation in a decade.
Think about that. Please.
The Old Pie Chart Aint What It Used to Be…
For those of you who were sold the standard 60/40 pie-chart allocations of stocks and bonds that I warned against here, you may want to re-watch that video…
The simple truth is this: what happened after 2008 has changed everything.
Which means if you’re relying on the old ways of bond and stock diversity investing, or “buy and hold” traditions, you may learn the hard way that Fed distorted markets don’t rise or fall the way natural markets used to—and hence the risk-parity “hedged” portfolio that worked yesterday may not protect you tomorrow.
As always folks, stay informed and be careful out there…
