Mauldin: "Investors Ignore What May Be The Biggest Policy Error In History"

Tyler Durden's picture

Submitted by John Mauldin

My good friend Peter Boockvar recently shared a chart with me. The University of Michigan’s Surveys of Consumers have been tracking consumers and their expectations about the direction of the stock market over the next year. We are now at an all-time high in the expectation that the stock market will go up.

The Market Ignores Monetary Uncertainty

It is simply mind-boggling to couple that chart with the chart of the VIX shorts (I wrote about the VIX craze in this this issue of Thoughts from the Frontline).

Peter writes:

Bullish stock market sentiment has gotten extreme again, according to Investors Intelligence. Bulls rose 2.9 pts to 60.4 after being below 50 one month ago. Bears sunk to just 15.1 from 17 last week. That’s the least amount since May 2015. The spread between the two is the most since March, and II said, “The bull count reenters the ‘danger zone’ at 60% and higher. That calls for defensive measures.” What we’ve seen this year the last few times bulls got to 60+ was a period of stall and consolidation. When the bull/bear spread last peaked in March, stocks chopped around for 2 months. Stocks then resumed its rally when bulls got back around 50. Expect another repeat.

Only a few weeks ago the CNN Fear & Greed Index topped out at 98. It has since retreated from such extreme greed levels to merely high measures of greed. Understand, the CNN index is not a sentiment index; it uses seven market indicators that show how investors are actually investing. I actually find it quite useful to look at every now and then.

The chart below, which Doug Kass found on Zero Hedge, pretty much says it all. Economic policy uncertainty is at an all-time high, yet uncertainty about the future of the markets is at an all-time low.

Why This Is Happening Now

At the end of his email blitz, which had loaded me up on data, Dougie sent me this summary:

  • At the root of my concern is that the Bull Market in Complacency has been stimulated by:
  • the excess liquidity provided by the world’s central bankers,
  • serving up a virtuous cycle of fund inflows into ever more popular ETFs (passive investors) that buy not when stocks are cheap but when inflows are readily flowing,
  • the dominance of risk parity and volatility trending, who worship at the altar of price momentum brought on by those ETFs (and are also agnostic to “value,” balance sheets,” income statements),
  • the reduced role of active investors like hedge funds – the slack is picked up by ETFs and Quant strategies,
  • creating an almost systemic "buy the dip" mentality and conditioning.
  • when coupled with precarious positioning by speculators and market participants:
  • who have profited from shorting volatility and have gotten so one-sided (by shorting VIX and VXX futures) that any quick market sell off will likely be exacerbated, much like portfolio insurance’s role in a previous large drawdown,
  • which in turn will force leveraged risk parity portfolios to de-risk (and reducing the chance of fast turn back up in the markets),
  • and could lead to an end of the virtuous cycle – if ETFs start to sell, who is left to buy?

On the Brink of the Largest Policy Error

The chart above, which shows the growing uncertainty over the future direction of monetary policy, is both terrifying and enlightening. The Federal Reserve, and indeed the ECB and the Bank of Japan, went to great lengths to assure us that the massive amounts of QE that they pushed into the market would help turn the markets and the economy around.

Now they are telling us that as they take that money back off the table, they will have no effect on the markets. And all the data that I just presented above tells us that investors are simply shrugging their shoulders at what is roughly called “quantitative tightening,” or QT.

I simply don't buy the notion that QE could have had such an effect on the markets and housing prices while QT will have no impact at all.

In the 1930s, the Federal Reserve grew its balance sheet significantly. Then they simply left it alone, the economy grew, and the balance sheet became a nonfactor in the following decades. I don’t know why today’s Fed couldn’t do the same thing.

There really is no inflation to speak of, except asset price inflation, and nobody really worries about that. We all want our stocks and home prices to go up, so there’s no real reason for the central bank to lean against inflationary fears; and raising rates and doing QT at the same time seems to me to be taking a little more risk than necessary.

And they’re doing it in the midst of the greatest bull market in complacency to emerge in my lifetime.

Do they think that taking literally trillions of dollars off their balance sheet over the next few years is not going to have a reverse effect on asset prices? Or at least some effect? Is it really worth the risk? Remember the TV show Hill Street Blues? Sergeant Phil Esterhaus would end his daily briefing, as he sent the policemen out on their patrols, with the words, “Let’s be careful out there.”

* * *

Sharp macroeconomic analysis, big market calls, and shrewd predictions are all in a week’s work for visionary thinker and acclaimed financial expert John Mauldin. Since 2001, investors have turned to his Thoughts from the Frontline to be informed about what’s really going on in the economy. Join hundreds of thousands of readers, and get it free in your inbox every week.

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economicmorphine's picture

This ain't the 1930s...

rccalhoun's picture

there is no economic policy uncertainty.  the fed will do whatever it can to support equity/real estate valuations. whatever it takes until it blows apart.


Dame Ednas Possum's picture

In order for the Muppeting to work properly, the Muppets need to be 'all in', especially those big, stupid pension funds. 

Epic Wealth Transfer to begin in 3, 2, 1... 

Nobody escapes. 



JRobby's picture

Still expecting QT to be a reality?

City_Of_Champyinz's picture
Ya tell me about it...I just ordered some fly tying materials.  When I opened the box last week the Arctic Fox fur that I bought turned out to be a massive 1" X 1" tiny square of material, same price of course as the stuff I used to get that was 3 times the size. Goes for pretty much everything these days...
Dame Ednas Possum's picture

Shrinkflation. It's everywhere. 


And doncha' just love the statement:  "'We all want our stocks and home prices to go up..." 

Like every member of society is a Rockefeller. 

The percentage of society owning stocks and their own home is at multi-decade lows. But let's not allow that to spoil the story...

Funn3r's picture

And no we do not all want our home prices to go up. If you don't own a home then stratospheric prices just makes buying impossible, and if you do own a home then you only win if you sell it and cash out, which people mostly do not. Higher prices certainly make it harder to move up to a larger place.

booboo's picture

Would not “until it blows apart” prompt “the fed will do whatever it takes? Talk about a hedged statement.

jmack's picture

The expectation is that regardless what Yellen or her successor says, if a 10% or above correction happens, they will change policy and start a new QE, this is all part and parcel of the "liquidity trap".

jmack's picture

Then "ramp up" if you like. same result.  The real end game here is in scenarios such as what happens when the fed's balance sheet is in excess of national debt, or in excess of annual gdp, or some other crazy number.  We are way into territory where what is currently happening will continue to happen until it cannot continue, and then it will implode, sudden like.  So what I am looking for is the tipping point. What crazy level can they take it to, that is beyond six sigma that is so crazy that no one believes it is at all sustainable? 


     Right now we are at levels that two decades ago seemed unimaginable, but now that they are achieved, we are like, ok, it feels a little crazy but we are here, and the world is not exploding so apparently it is not that crazy.  So what has to happen is you have to hit new, higher levels, but you have to hit them so fast, that you scare the shit out of a very high percentage of the  highest level of decision makers, so that pretty much everyone is scared shitless of taking it further.  So the momentum has to be there, and a high degree of diminishing utility.  I still think we are a far bit away from that, unless there is a major external stimulus, such as a north korean (read chinese) emp over  the continental US, or some such.  Also if Social Security actually starts dipping into equity in 2020 and blows thru that to go net negative in 2034 as projected, that will be a major impetus for complete collapse. which is the optimistic scenario, quite frankly.

Kayman's picture

The worst policy error(s) was in saving the corrupt banks in the first place.  They should have all been Chapter 11'd.

To add insult to injury the cancer in the financial system has been given a continuous sugar feed from the Fed.

Osmium's picture

 "if ETFs start to sell, who is left to buy?"

uhh, every central bank in the world.

Storm-Clouds's picture

The dead don’t care........

illuminatus's picture

Don't worry, Belgium will buy them all.

Thethingreenline's picture

Exactly. One hand will taper, while the other hand buys. Unless FED is audited, this shit will just go on and on.


Quinvarius's picture

I think we all know the Fed isn't going to be selling much, if anything.  All they do is lie, print, and flail.

adr's picture

The world is just flippin mad. 

Lunacy everywhere. Nothing is selling. To increase comps, major retailers are looking for products where they can add $5 to products that consumers won't notice. 

I got word that major competitors in a certain space are actually teaming up to license products under the same brand. It would be like Coke getting rid of Diet Coke and licensing Diet Pepsi made by Coke. When I heard it, I seriously double taked and said, "What? Are you guys nuts?" 

Here's another good one. Nike is guilty of massive pay to play shit in college sports. Far beyond what Adidas is guilty of. EVERYONE KNOWS IT. Payments to high school kids, payments to coaches, payments to pro teams, payments to politicians. It goes deep enough to put them out of business. There is evidence connecting Nike executives to payments to Jerry Sandusky, perhaps even "recruiting" kids specifically for his "needs".  I heard from the inside that Nike has been shredding documents and blanking hard drives like a hedge fund being raided by the SEC. 

City_Of_Champyinz's picture

“What, like with a cloth or something?".

red1chief's picture

"Do they think that taking literally trillions of dollars off their balance sheet over the next few years is not going to have a reverse effect on asset prices? Or at least some effect? Is it really worth the risk?"


No, the Fed will not reduce its balance sheet. They are just playing with words, to preserve the facade that all that debt was not monetized. 

Deplorable's picture

They promised to start tapering Oct 1st...What happened to that date?

zzzz88's picture

right now, almost everyone believes that central banks will keep printing to make almost everyone happy.

but history told us the opposite.

poverty and suffer is the best way to manipulate and control the public.

do you really think those on the top of the game will make all of us rich and happy?

do not be so naieve

any_mouse's picture

Again, Not a "Policy Error".

It is the purpose of the FED to steal the wealth of Americans and transfer to its private owners.

Do not attribute criminal behavior to "policy error".

any_mouse's picture

The owners and beneficiaries of "FED Policy" are busy buying bunkers and prepping to survive the end game, to come out and welcome a New World without the riff raff and hoi polloi.

We are, but bugs on their windshields.

The last thing you will hear, will be "Pull It!"

Yen Cross's picture

 I'm in no way suggesting that contributors are making "inaccurate" suggestions.

 How ever I'm suggesting that "financial doom porn" contributors start getting their facts STRAIGHT, as I'm begging to tire of "if's".

 Yen Cross is going to give everyone some great doom porn. Does anyone want to read it?

 I study FACTS, and those charts that other meatballs/snowflakes don't want to.

  I'm sure schmegmawave has better ideas?  Do any of you Z/H young-lings realize how completely RETARDED < Elliot Wave> theory< is in markets like this?

  Do ANY of you understand volatility vs Volume, skew portfolio weighting breadth, and how to use it to your advantage, based on risk assessment?  Who even reads or understands Cot charts, and why they're NOT leading indicators?


jmack's picture

i use peter steidlemayer's market profile as a framework alongside supply/demand for developing areas of interest, and then repeatable technical patterns over those areas of interest for tactical entries, but would be glad to hear you expound on your methodologies.

Adullam's picture

I second that. I'm always willing to learn how others make their assessments and decisions in matters of finance. I miss those kinds of comments on ZH that used to be much more common than much of what is posted now.

Citizen_x's picture

I agree, I miss those comments.  Schmegma  wave  is old school Z-hedge humor.

wintraiz's picture

I agree Yen Cross.  Best comment ever on  here.  


I have followed schmegwave for a few months now and all I know is that they keep making the right market calls.  stocks oil and gold.   Somtimes they say to wait for a day or so to see how things clear up.  I do not understand the Eliot wave theory too much.  But I don't think you understand how it is used by schmegmawave.  i am comparing the various eliot wave theorists analysts and see some variations in how they use the theory. so far it seems that schmegawave is the most objective they do not try to label a count too early but use other techncials to base short term signals.  

east of eden's picture

Boy, they all just fell into line. Yes Sir! You can continue to beat the machines for a while, but ultimately, unless you become one  yourself, you will lose.

bitplayer's picture

Mauldin is a Doofus.

slug200's picture

Those in power have 2 choices to deal with an eventual crash:

1. sit on their hands and hope that they and their love ones have died before the masses string up those in power 


2. false flag war that can be blamed for causing the crash.


What would you choose if you were in power?

History shows us and them #1 will be an eventual outcome if #2 is not undertaken.

jmack's picture

Just refer to 1913 to 1942 if you want to know how it is going to play out.  It may not repeat, but it will rhyme.

Albertarocks's picture

Look at the title on the top chart.  It says: "Households say that there has never been a better time to buy stocks".

Oh really?  That's what households actually said?  Or would it be more honest to state something closer to the truth, like maybe investors simply indicated that they think the odds that the markets will keep rising are higher than the chances that they will pull back or crash?  Because I'm pretty sure "households" know that this is sure as hell IS NOT the best time to buy stocks.  They are fully aware that there have been much better times to gamble in the markets, such as March 9, 2009.  Not one of them would have actually said "There has never been a better time to buy stocks than right now"NOT ONE!

TheEndIsNear's picture

There is something I don't understand about VIX: VIX is supposed to be a measure of volatility in the stock market, right? But doesn't making it tradeable so that it can be bought and sold like a stock totally defeat its purpose?

If the central banks or anyone can suppress the VIX by shorting it, doesn't that defeat it's entire purpose of measuring volatility in the markets?

Scuba Steve's picture

No, it was built for exactly what they needed ... for it to fit neatly into the Algos.


wintraiz's picture

algos work for short term.  not hard to figure them out

mikesap's picture

Absolutely right...


“When a measure becomes a target, it ceases to be a good measure,” ....

tribune's picture

QT is all talk they wont do it. they are just going to lie

IProtectYou's picture

Now they are telling us that as they take that money back off the table


At my age one pays only attention to what people do ...