Is this stock market decline the "real deal"? (that is, the start of a serious correction of 10% or more) Or is it just another garden-variety dip in the long-running Bull market? Let’s start by looking for extremes that tend to mark the tops in Bull markets.
The Loudest Warning Yet: "This Stage Should Lead To Increased Risk... System Less Able To Deal With Such Episodes"Submitted by Tyler Durden on 08/06/2014 11:29 -0400
"Suppression of yield and vol induces investors to take on more risk (QE III). The market clings to perception of certainty regarding outcomes, despite the Fed shifting commitment modes from time or level-based to data dependent. This stage of policy should eventually lead to increased uncertainty and risk." Translation: the TBAC itself - i.e., America's largest banks - whose summary assessment this is, is now actively derisiking.
The economic "recovery" has been based on a simple premise: debt can be substituted for income with no ill effects. As real household incomes have declined, the legitimate foundation of additional spending--more income--has eroded for the bottom 90%. The Fed's substitution of debt for income has only doomed the nation to a deeper, more painful realignment of real income and expenses.
Before you jump on the Bull market bandwagon of "don't fight the Fed," perhaps you should take a look at the quality of the debt the Fed has enabled and the diminishing returns on all that debt.
Just as the Federal Reserve cannot directly force you to stick the needle of monetary heroin (debt) into your arm, it also can't force employers to pay employees more. The ultimate hubris of the Keynesian Cargo Cult (which includes the global economy's central banks) is the naive notion that they can manipulate an entire system with a few levers such that the desired outcome--and only the desired outcome--is the output. The idea that you can change one input in an interconnected system of systems and only affect the one output you want is not just naive and simplistic: it requires a level of blindness and incompetence that is off the charts.
The simple fact is that trading involves risk. Bad risk management happens every day to individual traders who blow up their accounts with one overly aggressive or poorly managed position, and it occasionally happens to those paid to risk other people’s money as well. When it happens to the pros, though, the enormous access they have to leverage exaggerates the effects. n the energy markets, that leverage is ever present as most trading is done via futures contracts and other derivatives. As a result, some of the most spectacular blowups in trading history have involved energy.
JPM Earnings Slide 8% On Drop In Trading Volume, Mortgage Production Offset By $1.5 Billion Stock BuybackSubmitted by Tyler Durden on 07/15/2014 07:40 -0400
While JPM stock is trading modestly higher in the pre-market following its earnings report which beat expectations on the top and the bottom line, it doesn't hide a troubling trend seen across all the banks that have reported so far, one we forecast would take place in an environment of plunging trading volumes and near-record low mortgage production: slumping earnings. J.P. Morgan Chase JPM +0.88% & Co. said second-quarter earnings sank 7.9% as the bank continued to grapple with weak trading revenue. Indeed, as WSJ summarized, "J.P. Morgan Chase & Co. said second-quarter earnings sank 7.9% as the bank continued to grapple with weak trading revenue."
Remember when everyone ignored this story about Espirito Santo in May: "Portugal's Largest Bank "In Serious Financial Condition" Auditor Warns." Good times. Alas, one can only kick the can of Europe's banking sector insolvency so far before everything blows up in everyone''s face all over again and Draghi has to come out of his crypt and spook everyone that he will do "whatever it takes" to ignore reality and just pretend stuff is fixed which carries Europe over for a few more months before the whole charade has to be repeated.
In a QE dominated world - in the Golden Age of the Central Banker - renminbi strengthening has been an unmitigated disaster. Chinese political stability depends on the actual production of actual things by actual people working in actual factories, and the prospects for that real economic growth are made significantly worse the longer the West persists in favoring financial asset inflation and the ossification of a low-growth status quo. While the West may be able to accept, even celebrate, unlimited private wealth – China cannot. Not if it wants to remain a politically unified Great Power. We think this is just the start of a multi-year weakening of the renminbi, a sea change in Chinese monetary policy that will inevitably create broad political tensions with the US and make Japan’s devaluation/inflation course infinitely more difficult to achieve.
Goldman Sachs listened (and read) Janet Yellen's remarks at The IMF and see them "generally in line." Despite waffling on for minutes about risk management and monitoring, no one at The Fed has mentioned the total carnage in the repo market, spike in fails-to-deliver, and record reverse repo window-dressing that just occurred. The use of the term "reach for yield" twice and "bubble" 5 times, and admission that the Fed should never have popped the housing bubble, leaves us less sanguine than Goldman and wondering if this was Janet's subtle and nervous 'irrational exuberance" moment.
Spend any time watching business media, and you could not help but notice the extreme amount of optimism about the financial markets. Despite weak economic data and geopolitical intrigue, the complacency and "bullishness" are at extreme levels. Considering that the markets have been primarily advancing on the back of continued flows of liquidity from the Federal Reserve combined with artificially suppressed interest rates; what do you think the impact on the financial markets will be? “Success breeds complacency. Complacency breeds failure. Only the paranoid survive.” - Andy Grove
Timing matters, as fundamentals have no impact in a euphoric blow-off top or in a panic-driven, bidless crash. It's possible to be right about the fundamentals and lose money trying to trade those fundamentals. It's also possible to be wrong about the fundamentals and make a boatload of money trading Central Planning interventions. Our own advice that we try to live is: "invest in yourself, not Wall Street."
Because we are living in the Golden Age of Central Bankers, and that wreaks havoc on the fundamental nature of market expectations data....
- the VIX is not a reliable measure of market complacency.
- the wisdom of crowds is nonexistent.
- fundamental risk/reward calculations for directional exposure to any security are problematic on anything other than a VERY long time horizon.
- I’d rather be reactive and right in my portfolio than proactive and wrong.
The Golden Age of the Central Banker is a time for survivors, not heroes. And that’s the real moral of this story.
Stocks have not "reached a permanently high plateau" nor will "this time be different." As with all late cycle bull markets, irrationality by investors in the financial markets is not new nor will it end any differently than it has in the past. However, it is also important to realize that these late cycle stages of bull markets can last longer, and become even more irrational, than logic would dictate. Understanding the bullish arguments is surely important, however, the risk to investors is not a continued rise in price, but the eventual reversion that will occur. Unfortunately, since most individuals are only told to consider the "bull case," they never see the "train coming."