By Gary Kaltbaum September 11,2016
Our overall central bank theme remains the same. For longer than we can count, we believe every asset price, every data point and every economic statistic is off of the easiest monetary policy in the history of time…and to the trillionth power. We believe central banks can never roll back their nonsense. We believe they are boxed in like mixed nuts. We believe they really have no clue as to what they have created. We believe it is a bunch of bs that they are only trying to get the economies moving. We believe there is much more leverage and debt in the system than there was in 2008. We believe this easy money has enabled debt to explode as companies keep going into more debt to buy back stock to prop up their ever lower EPS. We believe this easy money has given cover to another $9 trillion of taxpayer debt foisted upon an unwary American public by a president who promised the opposite.We believe the Fed is targeting one thing and one thing only…and that is markets. Every time markets have had trouble, these ex- tenured professors would just raise the bar or lower the bar on more printing, more easy money and lest we forget the outright buying up of markets. We believe they have distorted price and yield beyond recognition. We believe the saver has been screwed big time as the riskless income investment has been disintegrated.The fact is and as we have coined the term…everything is ok until markets say otherwise. Several times in the past, markets have said otherwise only to see central banks ramp up the easy money…which in turn, turned the markets back up. Just this year, when worldwide markets were in big trouble, Europe announced a measly trillion, Japan announced a measly trillion and China announced unlimited amounts. But if you back away for a second, even with the massive $2-3 trillion being printed every year right now, even with negative interest rates going more negative, even with most areas at 0% for years and even with central banks buying up markets, there have hardly been gains over the past 2 years and economies remain sluggish at best.. This calls into question whether we are finally into the “diminishing returns” period for markets. Time will tell.
Amazingly, depending on which abacus you are using, $20 trillion has been printed, 0% rates have been here for eight years and it is now the norm to have negative rates. We are shocked at what we are seeing in bond markets. Because of the massive interference in the free market, corporations have been able to float bonds with negative yields guaranteeing losses for investors. Savers have been forced into leveraged bond funds that will be obliterated when bond markets finally get pissed off at all the interference. Riskier bonds that used to yield 9% now yield 4%. Bonds that used to yield 5% now yield 1%. There has been a massive one-sided trade into higher dividend areas which is now being unwound. It is sheer insanity. Interest rates were always supposed to define risk in the markets. There is now no way to uncover that risk as yields cannot be trusted. We do believe one day that if they don’t stop, the market will eventually stop them.
And now we have the Fed again teasing a whopping 1/4 point hike like it is the end-all-be-all. Normally, it should not matter but when you have rigged things for so long, it is now of import. But notice…since this maniacal central bank stopped printing (at least that’s what they tell us), there has been only one hike. Yup…one hike in 22 months even though they have teased us several thousand times that a hike was coming, only to be told not yet. With the way markets are now starting to act, we give the Knicks a better chance of winning the NBA title than Yellen raising rates any time soon. But to be clear, if they do, just remember the last hike caused a 10% drop in worldwide markets. That’s how troublesome things may be underneath the surface. Think about it. A measly 1/4 point hike to a whopping 1/4 point was enough to do that kind of damage.
The blame for this recent drop is that the ECB decided to not add stimulus while another Fedhead teased a rate hike. So let’s get this straight…all that happened was the ECB stood pat for now even though they have promised more stimulus and a fedhead again said that maybe a rate hike is coming…and that’s it? We were amazed at this weekend’s headline: “RATE-RISE FEARS TRIP UP MARKETS!”
Nevertheless, our job as technicians extraordinaire is to not rationalize. It is to drown all that noise and just read the tape. As we have taught you, tops in markets are a process, not an event. In recent weeks, we have highlighted tops in utilties, reits, consumer staples, healthcare, commodities and gold/silver. The good news was that the semis stayed strong, a bunch of big cap growth names remained strong and major indices stayed tight near their highs. That has now changed.
For starters, the bond market looks like it has put in a top for now. Look no further as to why all the interest rate-sensitive areas are being whacked. On top of the areas already mentioned, housing and housing-related has topped for now. Industrials have topped for now. Leading growth names tucked their head in like frightened turtles. The Dow broke the 50 day handily. The NYSE broke the 50 day handily. The S&P broke the 50 day handily. All other major indices gave back in one day what it took weeks and weeks to achieve. Many Dow names have broke their chart patterns. Junk bonds look like they have put in a top for now. The Sox (semiconductors) rolled over badly. We say “for now” because when you are dealing with maniacs at central banks, anything is possible but we would not ignore what we are seeing.
Again, we give little chance of a fed rate hike…especially with markets now going on the defensive. Fundamentally, earnings and sales growth has been headed south at the same time valuations have been in the historically high end of range. But who the heck knows what the rest of the world decides to do. Easy money can actually get easier when these maniacs know no bounds. Just know that right now, defense looks like the best offense. If anything changes, we will let you know.