New All time highs almost every single day, yet market volumes have literally collapsed. On any given day, you would see an average of 2M eminis (S&P Futures, spoos) trade, and now we are seeing barely 1M trade, sometimes even lower. This has left everyone, including big banks, who are now being forced to lay off traders amid the slowdown, asking the same question: WTF is going on? Well it is very simple. The Fed, the destroyer of "free markets," has now created a monster: A market that no longer prices in any risk due to the notion that no matter what happens, the Fed or any other CB will step in and stimulate more (despite the fact that the Fed has already begun tapering). We currently have the VIX, FX and Bond volatility indexes at levels not seen since 2007. As complacency reigns supreme, no one has any fear that the markets can drop, or take a turn for the worst, and that it’s only up from here. Others are trying to call a top. Could we be topping? Maybe, maybe not. You need to remember one very important fact, calling a top during a bubble is one of the hardest things a person can do (Yes, it’s a bubble). Others ask what’s going to make this market drop? Honestly who knows, especially with the market continuing to ignore all negative economic data because of hope of more of the same easing by central banks, will fix it. They call this the most hated bull market in history, let me tell you why. Because in a 15 year period, this will be the 3rd FED bubble to blow up in people’s faces. As Bob Ivry said in his book (7 Sins of Wall Street): “For many the Bull is short for Bullshit.”
Analysts and "expert" economists all say that the rising prices in the stock market are due to better economic data and better earnings (Spoiler alert: they are wrong). Maybe it is because of the record amount of layoffs, the collapse and non-recovery in CAPEX, and the record amount in buybacks that have boosted prices, along with the daily POMO. Or, the rising prices are due to the 35 year lows in Labor Force Participation, or the -1% Q1 GDP revised print etc. That's right, -1%. After trillions have been pumped into the system by central banks around the world (roughly $10T), we have seen little to no growth. And on top of it all, economists, public companies and the central banks blame the cold weather in the winter for disappointing data. Oh ok, cold weather in the winter, that's understandable. Wait a minute, was this the first time in human history we got a cold weather in the winter with snow? No.
GDP expectations/estimates continue to be the most comical thing in this market (chart: zerohedge)
World GDP (chart: @dmwlsw)
Listening to the various financial media outlets lately, you keep hearing about the "surprise" drop in yields and the rally in bonds that was not expected by any traders/economists. What people don't seem to understand, is that with QE winding down, rates will drop. Rates will rise with more QE, not less of it. Another reason rates have dropped, is that economic data has been absolute shit, despite the jawboning that we have been/are in a recovery (It is not a recovery when the Fed is still pumping $45B/month into the system). The Fed has now inflated their balance sheet to $4.2 Trillion in attempts to stimulate the economy, and we have gotten report after report of disappointing economic data, that's why bonds have rallied. Also take a look at the spreads between German and U.S. bonds. Better yet, take a look at Spanish dept. You now have Spanish 10 years yielding less then the U.S. Yes, you read that right. A country that has 57% youth unemployment, is now yielding 2.58% vs the U.S. at 2.61%. Spain is rated BBB- and the U.S. is rated AAA. Wrap your minds around that. Yields will go lower in the long term, unless of course, the Fed completely loses its marbles, and decides to taper the taper, or boost QE.
And let's touch briefly on the whole "Market's Are Rigged" meme. Are they? YES. People used to laugh and point their fingers at anyone who even brought up the word rigged about any sector in the financial markets. Then a strange thing happened, all these "conspiracy theories" started to come true, and at a very alarming rate. From Libor, Euribor, to Gold and various other commodities, to the blatant FX rigging (assisted by none-other than the Bank of England), Bond market rigging, and the list goes on and on. Then you have the case of HFT rigging the markets, which when Michael Lewis' book hit, caused a firestorm from HFT groups. Was he right that HFT's rig markets? YES. But sadly this was not a new story, it has been going on for years. If you have participated in any form, whether it be by trading Futures, options, FX, etc., you can see the daily HFT nonsense (phantom liquidity, queue jumping, stuffing, vwap programs etc.)
Why are we in a market bubble:
1) Asset prices continue to move in one direction, Up.
No corrections. All minor pullbacks are immediately bought.
2) Various Fed officials have now come out and warned about
the 'froth' in the markets ("Froth" thanks to their own policies)
3)Tech valuations have literally left earth, with the latest being Uber valued at $18.2B
4) Levels of euphoria are at ATH's. Just Buy!!!
5) Risk never gets priced into the market.
6) Economic data has been horrible, despite massive
stimulus from CB's. Yet market continues to move higher on hopes of more stimulus.
7) Interest Rates have been held to low for too long, increasing speculation in the riskiest assets to ridiculous levels.
8) Every financial news outlet, BBGtv or CNBC,
cheer the market higher, bringing in more
suckers as smart money moves out.
Money Market Flow vs S&P 500
Let's take a brief look at the disaster in Japan, also known as Abenomics. Since day 1, this policy was destined to be an utter failure. Then, they decided to raise taxes, which just happens to be the dumbest thing possible. Just like for the U.S., one question needs to be asked about QE: How the fuck is printing money to buy bonds and MBS going to put people back to work and improve economic data? Answer: It will not and has not. And the worst part about it is, now Abe wants the GPIF to start allocating a greater amount to buying stocks. That's right, using innocent pensioners money to invest in the most risky asset class. Should end well. Japan has had ZIRP for over 15 years, and it has gotten them nowhere. My biggest fear, is that the FOMC clowns running the show will follow Japan and keep a ZIRP policy for years to come, or as we joke around by saying: ZIRP4EVA.
Japan Base Wages (chart: zerohedge)
Japan Balance of Payment Trade Deficit (chart: zerohedge)
Bank of Japan's Balance Sheet vs. Nikkei (has not had the same effect as the U.S. market)
Federal Reserve Assets vs. S&P 500
U.S Labor Data
Labor Force Participation rate
Corporate Profits vs % of Population with a Job
And then you have the meme that all is great in housing, despite the collapse in homeownership rates, the non recovery of new home sales, the all cash buyers, the collapse and non recovery in mortgage applications, the unaffordability in housing etc etc
New Home Sales/Median Price
Home Ownership Rate
Mortgage Backed Security Purchases by the FED
Existing Home Sales vs. Mortgage Apps (chart: zerohedge)
Refinancing Activity (chart: zerohedge)
Personal Saving as Percentage of Income